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Economic climb offers foothold for the future

Economic climb offers foothold for the future

Economic climb points to steady but measured progress in the year ahead

It’s been a rough ride, but restaurant industry insiders say that 2011 is looking up for those operators who have held on through the turbulence of the past few years.

While the business environment is still fraught with challenges, a variety of economic indicators, from unemployment and income to consumer confidence and sales data, were picking up toward the end of 2010, foreshadowing some improvement for an industry battered by the recession and the painfully slow recovery.

“The trend is definitely better, but not great,” said Hudson Riehle, senior vice president of research and information services for the National Restaurant Association.

Employment to improve

The national economy is expected to add jobs at a rate of 1.8 percent in 2011, according to the NRA. While that would be the strongest percentage gain since 2006, the increase would mean only an additional 2 million to 3 million jobs — although up to 
15 million people were unemployed in November 2010. 

The national unemployment rate had held steady at 9.6 percent for three months before inching up to 9.8 percent in November, the U.S. Bureau of Labor Statistics reported. Better news came in late 2010, when the jobless claims for the week ended Dec. 25 decreased 34,000 to 388,000 — the lowest figure since 2008, according to the Department of Labor.

The restaurant industry will benefit from even slight improvements in employment. International investment bank RBC Capital Markets LLC calculates that restaurant industry traffic increases by 1 percent when the U.S. economy adds 230,000 to 260,000 jobs a month, which equates to between 2.75 million and 3.1 million new jobs annually.

Some of the job growth should occur within the industry. Foodservice employment is expected to outperform the national employment rate this year, and the end of 2010 reflects this. Restaurant jobs rose 1.3 percent in November 2010 compared with November 2009, the NRA reported. Although the industry is still down 100,000 jobs since its peak before the recession, it added 157,000 jobs in the first 11 months of 2010.

The deep industry layoffs of the previous two years slowed down in 2010. People Report, a Dallas-based firm that tracks human resource practices in the restaurant industry, found that 43 percent of 70 surveyed operators were planning to add staff in the fourth quarter, and only 10 percent planned any reductions. Up to 62 percent planned to hold their management staffing levels steady, while 35 percent planned to add more supervisors by the end of the year. 

Incomes projected up

Any improvements in unemployment will lead to increases in income — another crucial factor for restaurant prosperity.

The NRA expects real disposable income to rise 3.4 percent in 2011, up from 1.1 percent in 2010 and the strongest increase since 2008.

Other analysts also are predicting growth in disposable personal income. Chicago-based market research firm Technomic Inc. expects disposable income to increase 2.5 percent in 2011 compared with the prior year, based on data from the U.S. Bureau of Economic Analysis.

RBC Capital tracked an uptick in spending plans and consumer confidence among high-income households, or those with annual incomes of $75,000 or greater. 

The investment bank assumed newly hired employees earn roughly 90 percent to 100 percent of the average U.S. income and typically spend 4.2 percent of their income at restaurants. That percentage has been consistent for decades, even during the economic downturn, RBC Capital reported in its December quarterly restaurant review.

RBC Capital found consumers planned to frequent restaurants more often during the winter holiday season, eat at higher-priced restaurants and be less value-conscious about menu items.

There may be some pent-up demand among consumers to resume pre-recession dining-out habits, said NRA’s Riehle. Two out of five surveyed high-income families report they are not dining out as often as they would like. 

“While it’s a much more cautious decision to go out to eat, their natural inclination is to dine out,” he said. “Nine out of 10 enjoy going to restaurants. This period of [economic] weakness is building up pent-up demand. As their cash on hand grows and employment and consumer confidence move up, they will increase their patronage.” 

The NPD Group also is forecasting a modest recovery in restaurant traffic, given recent trends in consumer spending at foodservice outlets. Visits to quick-service restaurants, which represent the largest portion of traffic in the foodservice industry, increased 1 percent in the third quarter of 2010, according to NPD’s CREST service, which tracks consumer dining activity. The report, released in December, showed visits to casual-dining restaurants fell 2 percent, and traffic at full-service, mid-scale restaurants declined 3 percent.

“Some of the areas most affected by the recession have stopped declining or are starting to edge back up, like families with kids and non-deal visits,” Bonnie Riggs, a restaurant industry analyst for the Port Washington, N.Y.-based market research firm told Nation’s Restaurant News. 

Upswing in confidence

Confident consumers spend money and are more likely to go out to eat. Consumer confidence was at its highest level in five months in November, reported The Conference Board, an independent economic research organization that monitors consumer attitudes and behavior.

Consumers were more optimistic about the short-term outlook than they were the previous month, according to the board’s Consumer Confidence Survey, which is based on a sampling of 5,000 U.S. households. Those anticipating an improvement in business conditions in 2011 rose to 16.7 percent, up from 15.8 percent in October. Fewer anticipated business conditions would worsen, with 12.2 percent expressing that sentiment, down from 14.4 percent the previous month. Consumers also were more upbeat about future job prospects.

“Hopefully, the improvement in consumers’ mood will continue in the months ahead,” said Lynn Franco, director of The Conference Board Consumer Research Center.

The Reuters/University of Michigan Consumer Sentiment Index reached a six-month peak in December 2010. The index was 74.5 for the month, up from 71.6 in November and 67.7 in October. The index gauges consumers’ reactions to changes in the economy. 

“The overall tenor of news about recent economic developments was, on balance, more favorable than at any time during the past six years,” economist Richard Curtin, director of the university’s Institute for Social Research, said in a statement.

Modest growth

Analysts reported the national economy is growing at a modest pace. The gross domestic product, or the value of goods and services produced by a country in a year, grew 2.6 percent in the third quarter, up from 1.6 percent in the second quarter of 2010, according to a December release by the BEA. 

The BEA reported the increase in real GDP in the third quarter reflected gains in personal consumption expenses, private inventory investment, nonresidential fixed investment, exports and federal government spending. The GDP is forecasted to increase 2.8 percent in 2010 from a negative 2.6 percent in 2009.

Forecasters were anticipating stronger retail sales in the fourth quarter after a spike in November sales. The International Council of Shopping Centers recorded a 5.8-percent jump in same-store sales, beating the council’s prediction of a 3-percent to 4-percent gain. Shoppers appeared to be motivated by colder weather and early holiday promotions. The November activity prompted the ICSC to push its holiday same-store sales forecast up 3 percent, to 5 percent. 

Higher commodity costs

Rising commodity prices may give operators reason for pause as other economic indicators are showing improvement. As 2010 was drawing to a close, prices for hogs, wheat, cheese blocks, ground beef, choice rib eye steaks, soybeans, beef trimming and corn were all up, noted Memphis, Tenn.-based Morgan Keegan & Co. Inc. in its equity research report on the restaurant industry.

Rising commodity prices are an important leading indicator for inflation, noted Nation’s Restaurant News columnist John T. Barone, who is president of Market Vision Inc. in Fairfield, N.J. The Federal Reserve is banking that high unemployment and excess production capacity may keep the lid on inflation; its 2 percent inflation target excludes food and energy, the two areas where prices are already increasing. 

The average retail price for all grades of gasoline was more than $3 per gallon in December, up from a low of $1.67 in 2008, according to the Energy Information Administration.

Meanwhile, the Consumer Price Index for urban consumers, or CPI-U, increased 0.1 percent in November on a seasonally adjusted basis, according to the Bureau of Labor Statistics. Before seasonal adjustment, the index increased 1.1 percent from November 2009 to November 2010.

The indexes for food and energy increased slightly in November. The index for food-at-home also rose after being unchanged in October, while the indexes for eggs and nonalcoholic beverages both rose notably. Although the index for gasoline rose, the index for household energy declined, and the increase in the energy index was the smallest in five months.

RBC Capital estimated commodities should rise a manageable 2 percent in 2011. Such a rate of inflation can be offset with a modest 0.66 percent increase in pricing, the investment bank reported. Inflation may be a greater problem in 2010, given low agricultural supplies and the potential for demand to rebound.

Sales expected to rise

Restaurant sales appeared to be on the mend and improving as 2010 was drawing to a close, sparking optimism among analysts that the positive trend would continue into 2011.

Morgan Keegan noted sales in the second half of 2010 were stronger than at the beginning of the year. The investment firm was encouraged by the NRA’s monthly performance index report, which had its strongest reading of the year in October. Surveyed operators reported positive same-store sales for the month. In addition, First Data’s SpendTrend report indicated spending at foodservice locations during Black Friday and the Thanksgiving weekend were up nearly 10 percent over the previous year.

Still, declines in same-store sales and customer traffic conspired to push the NRA’s November index below 100 for the first time in three months — down 0.8 percent to 99.9.

Observers nonetheless remained hopeful about the industry’s performance in 2011. Stephen Anderson, a senior analyst with Miller Tabak & Co. LLC in New York City, called the results a “hiccup, not a reversal in our industry outlook,” noting that a “plurality of operators still expects improvement in the first half of 2011.

Technomic also projected nominal growth of 1.7 percent for the foodservice industry in 2011 in a September report.

RBC also forecasted that 2011 would be the beginning of a long period of improved same-store sales. The average increase in earnings per share was higher than anticipated — 25 percent off of a modest 2.1-percent same-store sales increase in the third quarter. With new unit growth expected to be slow, operators should see steady increases in same-store sales, as consumers won’t be diverted to new units, according to RBC.

Not all analysts are expecting slow growth, however. In fact, some are predicting strong unit expansion in 2011. Population growth should support additional units, said Brad Ludington of KeyBanc Capital Markets in a note to investors. Looking at 25 restaurant concepts, Ludington’s team conducted an analysis of U.S. state populations needed to support individual restaurant concepts. The results show future U.S. unit growth for current base counts of as high as 544 percent for the Bravo Brio casual-dining chain to as low as 16 percent for the mature Chili’s Bar & Grill concept.

“The ability to grow in the restaurant industry is not dead as many have claimed,” Ludington told Nation’s Restaurant News in December.

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