Whether the restaurant industry finds itself a victim of any double-dip recession rests mainly on consumer sentiment and spending, according to a Tuesday research note by restaurant securities analyst Larry Miller of RBC Capital Markets.
Those consumer trends, according to RBC’s latest data, are not trending in a positive direction.
“It is possible that we are headed for a double-dip recession,” Miller wrote, “and for better or worse, the tipping point looks to be the U.S. consumer.”
RBC’s August survey of 2,517 consumers showed spending plans dropping a sharp 400 basis points from July, Miller said, and declining 800 basis points year over year. The survey, taken from Aug. 1–11, found one-third of the consumers polled saying they planned to spend less at restaurants over the next 90 days, the highest number since October 2010. Ten percent said they planned to spend more, the lowest sentiment since August 2009.
Among consumers still planning to dine out, they plan to spend less. RBC data shows dollar amounts projected for each daypart are declining, with consumers looking to spend, on average, $18.31 on dinner, down from an average of $19.26 per dinner in May, and $18.56 per dinner in September 2010.
“Getting inside the head of U.S. consumers is as challenging as ever these days,” Miller noted. “It’s clear spending plans at restaurants and consumer confidence are eroding. What’s less clear is: Will restaurant sales fall along with these metrics, as there appears to be a psychological component to the weaker readings.”
The current spending plans “look eerily similar to 2010 just ahead of the U.S. midterm political elections and the subsequent stock market volatility,” Miller said.
Restaurant sales at that time, however, powered through, which shows that consumers’ pull back can be mostly attributed to uncertainty surrounding the economy or political landscape, rather than a fundamental change in consumer habits.
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How restaurant chains may fare
Limited-service restaurants may be in a safer position than full-service establishments if a double-dip recession materializes, Miller’s research projected.
“The consumer is trading down again,” Miller wrote. “The results of our September survey show that consumers are cutting back more as the average check rises.”
Consumers’ spending plans in the casual-dining, or traditional bar-and-grill segment, fell 7 percent quarter over quarter, in RBC’s latest survey, while higher-end casual dining and fine dining spending plans each declined 10 percent, the research showed.
Still, the U.S. consumer “has not rolled over yet,” Miller wrote, as evinced by continued positive sales trends at most restaurant chains. RBC’s latest restaurant index of July weighted same-store sales gained 3.6 percent, and August increased by 4.4 percent.
Bear vs. bull possibilities
Miller offered two scenarios: a “Bear Case” and a “Bull Case.”
For the Bear Case: “Falling sales and high costs were the hallmarks of 2008. It is possible 2012 could be a repeat of 2008 if sales soften as costs remain high [food but not labor.] With cost saving opportunities largely used up, earnings’ compression might be just as severe as it was in 2008.”
In the Bull Case: “Our current thesis that we could see a long-lasting period of comp-store sales productivity [of positive 2 percent to 3 percent] would not change,” Miller wrote.
The 2008 recession was “especially unkind to restaurants, since sales slowed at a time when input costs were high,” Miller noted. “Sales fell by a greater magnitude and more quickly at casual dining — 7 percent cumulative drop — than in fast food, which was up 1 percent, cumulative, buoyed by strength at McDonald’s.”
Does history repeat itself?
Miller’s research also offered key differences and similarities between the present day and 2007-2008, when the United States entered what is now called the Great Recession. He noted that a major difference among consumers today is more security over the job market.
“The fear of job loss is lower now than in 2008,” Miller wrote. “In fact, job security and other job-related measures are currently a relative bright spot in our consumer surveys.”