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NRN survey reveals restaurant executives’ cautious optimism for 2011

Operators are forecasting an upturn in the restaurant industry’s performance in 2011, driven by a return of consumer spending, additional unit growth and an increase in menu prices, according to a new Nation’s Restaurant News survey. 

Seventy percent of the executives who participated in the NRN a.m. 2011 Restaurant Operator Survey expect sales in 2011 to outpace those of 2010, while nearly 65 percent said they expect profits to improve for the same period.

More than 130 subscribers to NRN a.m. — the daily e-newsletter from Nation’s Restaurant News — participated in the online survey last month and provided an early glimpse into the industry’s expectations for the year ahead. 

“The glass is absolutely half full,” said John Longstreet, president and chief executive of Quaker Steak & Lube, a 42-unit casual-dining chain based in Sharon, Pa.

The NRN survey provides fresh evidence to support what industry watchers have been seeing for several months — that sales are improving, and the industry may enjoy a year of positive results following a very difficult three-year stretch. 

“Looking forward, we expect a recovery for the restaurant industry to continue, although volatility will likely remain,” securities analyst Brad Ludington said in a report released Jan. 4. “We believe that [same-store sales] and traffic trends will begin to accelerate again in 2011, with positive traffic likely by [the second half of the year].”

Roadblocks to any speedy recovery are present, however, according to NRN survey participants. Rising commodity costs will pose the industry’s largest challenge, the results showed, followed by the high U.S. unemployment rate. 

Longstreet said only time would tell whether macroeconomic issues would help or harm the industry. 

“There is definitely, currently, a renewed sense of optimism that the economy is going to turn around,” he said. “But that’s only temporary buoyancy, and that lasts only a while if [expectations] are not followed up with real results. If people don’t get jobs, for example, it will be an issue.” 

While survey respondents were in agreement that sales and profits would rise above 2010 levels, unit growth expectations were mixed. About 38.9 percent of respondents expect to open more restaurant locations in 2011 than they did in 2010, while just a few more, or 39.7 percent of respondents, said they expect no unit growth for their brands in 2011.

With only 12 percent of survey respondents anticipating an improved lending environment this year — a must-have for expansion plans and franchisee growth — it should come as no surprise that the industry remains cautious about growth plans.

Increased commodity costs and the high U.S. unemployment rate are expected to be troublesome for restaurant operators in 2011. Nearly 39 percent of survey respondents cited higher commodity costs as the industry’s No. 1 challenge this year, while 21.5 percent pointed to the high U.S. unemployment rate as being the second most worrisome concern. 

For months the industry has seen commodity costs rise, even by a few percentage points, eliminating the benefit restaurateurs had enjoyed from cost deflation over the past few years. 

“With food inflation coming in 2011, we see either 1) demand risk from higher prices or 2) margin risk as the value chain does not pass on the cost increases to its customers,” said Morgan Stanley securities analysts Mark Wiltamuth, who covers retail food, and John Glass, who covers restaurants.

“As grocers have the largest percentage of sales from food costs (about 50 percent), we see the largest risk to this channel,” continued the Jan. 4 report. “Restaurants (25 percent to 30 percent) and packaged food companies (15 percent to 30 percent) have lower exposure, but inflation can still cause a headwind to these companies.”

Glass specifically predicted commodity inflation of between 1 percent and 2 percent in 2011, compared with deflation in 2010 and 2009. 

With rising costs posing a challenge in 2011, many restaurant operators said they are planning to raise menu prices. According to the NRN survey, 59.5 percent of respondents said they will increase menu prices in 2011. About 35 percent said they would keep prices the same as 2010, and 5.3 percent said they would lower menu prices. 

The survey found, however, that operators will walk a fine line when it comes to increasing menu pricing. Nearly 39 percent of respondents to the NRN survey said that value pricing will be the most important aspect of their menus in 2011, over food quality, use of local or seasonal items and bold flavors. 

Contact Sarah E. Lockyer at [email protected]

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