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Searching for a savior

Searching for a savior

As voters and pundits weigh one candidate’s controversial views about economic fundamentals against the other’s purported plan to raise taxes, foodservice professionals are mulling the McCain-or-Obama leadership question from the vantage of front-line combatants in the besieged U.S. economy.

From small-business owners to leaders of big chains, restaurateurs are having their opinions about the White House contenders shaped by a harsh business environment that’s being roiled by potentially worsening consumer retrenchments, punishing commodity cost burdens and an unprecedented credit crunch.

With the presidential race finally entering the home stretch, those key inhibitors of profitability and growth are being magnified as never before by the overarching mortgage crisis that’s squeezing thousands of consumers out of their homes each day. Restaurateurs’ heads are spinning as they ponder the potential fallout from a threatened global gridlock in financing, multibillion-dollar erosions of corporate valuations and personal net worths, and the specter of a massive taxpayer-funded welfare system for insolvent lenders.

With the American economy seen as possibly teetering over an abyss, foodservice operators have been studying their P&Ls with growing angst while weighing the presidential rivals’ down-to-the-wire detailing of competing fiscal-reform strategies.

In Los Angeles, wealthy Republican restaurateur, venture capitalist and former two-term mayor Richard Riordan has come out for Barack Obama even while pledging ongoing loyalty to the GOP and its state candidates in California.

Riordan, principal owner of two high-grossing L.A. dining landmarks, the Original Pantry Cafe downtown and Gladstone’s 4 Fish in Pacific Palisades, also has launched Riordan’s Tavern, the Oak Room and the Village Pantry since leaving office as leader of the nation’s second-largest city and serving as secretary of education during Republican Gov. Arnold Schwarzenegger’s first term.

Obama is “the kind of leader we need to get us through these tough economic times,” Riordan was quoted as saying last month by the Illinois senator’s campaign. While attending a Sept. 17 campaign fundraiser in Beverly Hills, Riordan told reporters that “Obama is clearly the best candidate.”

Known as something of a political maverick himself, the 78-year-old Riordan added that the Democrat “is a much more open person; he’s young, he has more energy.”

Riordan told a public-radio reporter at the event that during his mayoral stint he had “soured” on John McCain over regulatory dealings involving the Los Angeles airport “where I didn’t respect him.”

McCain, a former chairman of the Senate Commerce Committee, “took the airlines’ side in some fights I had over the airport, and then wrote some letters that were inaccurate, but would not take my calls to try to correct them,” Riordan explained of the 1993 LAX landing-fee dispute. “I soured totally on him.”

As California restaurateurs struggle to do business in a state that has one-ninth of the nation’s population yet one-third of its home foreclosures, some prominent chain operators there also see McCain as the wrong choice to rebuild consumer confidence and revive the economy.

“I have a different read than most business guys,” says former California Restaurant Association chairman Jeff King, who is co-founder and chairman of Costa Mesa, Calif.-based King’s Seafood Co., a multiconcept upscale and casual-dining operator. “In this particular election, being a conservative, I’m still for Obama-Biden.”

With the economy in need of a clean sweep, that ticket represents “a new broom,” King says. “We need a totally different approach, and we’re not going to get it with the 72-year-old candidate.”

Obama, on the other hand, “will bring in a whole new economics team and public-policy team,” King adds. “I’m willing to risk the change. It could not get worse.”

By that, he means, worse than business trends this year for King’s upscale-casual and high-end places, like the Nation’s Restaurant News Fine Dining Hall of Fame inductee Water Grill in Los Angeles and the NRN Hot Concepts! Award-winning King’s Fish House casual-dining chain.

“Our sales are down 9 to 10 percent, but some guys here—big names you’d know—tell me they’re down 25 percent,” King says. “Twenty-five percent!… Right now, our economy is lost. I think Obama is a better risk.”

Howard Gordon, who was senior vice president of business development and marketing for the ultrahigh-grossing Cheesecake Factory chain during a recently ended 11-year stint in which he helped steer the company through some of its biggest expansions, now helps private clients refine their concepts to surmount the tough economy.

“I personally feel that having Obama in the White House will create a better environment,” says Gordon, president of the Los Angeles-based Gordon Group consulting firm.

“I do think the McCain campaign represents a continuation of the Bush administration,” Gordon adds, citing the current credit crisis and looming bailouts of top-heavy lending institutions as an upshot of imprudent deregulation. “It’s a culmination,” he says, “of the top people in these organizations getting off scot-free and getting away with their golden parachutes.”

Both McCain and Obama have demanded more regulatory oversight over any bailout, not the unfettered blank-check plan initially proposed by the Treasury Department. But McCain is seen as inviting skepticism on his stance because of his background as a deregulation proponent and his trickle-down plan for extending tax breaks to wealthy individuals and corporations.

Conversely, Obama’s plan to put high-income Americans back into the tax brackets they occupied during the Clinton administration while shifting the Bush-era tax breaks to people making less than $250,000 annually “will help,” Gordon contends.

“Obama favors the middle class, and they’re our customers,” he says. “If [Obama and his team] go in, the restaurant business will pick up. Upscale- casual has been hit bad—the Cheesecakes and the Chang’s. But this downtime has really allowed them to retool, and they’ll be ready to benefit.”

Gordon concedes that Obama favors a higher minimum wage, indexed to inflation, “but that would help employers retain workers,” he asserts. On the issue of equal pay for women, Gordon’s preferred policy proponent is “definitely Obama.”

Elsewhere in America, of course, many restaurateurs, including those who are fellow GOP standard-bearers, embrace McCain’s economic policies. However, even staunch McCain supporter Ed Tinsley III, who owns the K-Bob’s Steakhouse brand and is the Republican nominee for election to the U.S. House of Representatives from New Mexico’s 2nd Congressional District, has disagreements with his party’s presidential hopeful.

“While McCain and I are largely on the same page, I favor drilling in ANWR [the Arctic National Wildlife Refuge, in Alaska],” former National Restaurant Association chairman Tinsley said last month.

In remarks at the NRA’s annual Public Affairs Conference in Washington, D.C., he said, “I don’t go lock-step with [McCain]” on energy, referring to McCain’s preference for offshore oil exploration over drilling in ANWR.

While expressing firm agreement with McCain’s plan to extend the Bush tax cuts to high-income individuals and eliminate the estate tax, Tinsley told conferenceattendees that the nation’s “economic struggle is directly related to failedenergy policies.”

Tinsley also warned that “Obama and [vice presidential running mate Sen. Joe] Biden will work diligently to enforce a mandated social, government-run health care system.”

While neither McCain nor Obama has specifically addressed restaurateurs’ concerns about wholesale food inflation, both men have declared their positions on an economic policy that many operators blame as a key to the problem: subsidies for corn-based ethanol and the diversion of large amounts of the livestock feed and grocery staple into fuel production.

As stated on his campaign’s website, Obama’s position is that “corn ethanol is the most successful alternative fuel commercially available in the U.S. today, and we should fight the efforts of big oil and big agri-business to undermine this emerging industry.”

Though critics of food-to-fuel economics say almost as much energy is consumed making a gallon of ethanol as that gallon then provides, commodities analysts and economists have disputed that corn-based ethanol is as big a food inflation factor as farmers’ own rising fuel bills or the growing global demand for food commodities among emerging middle classes in China, India and Russia.

McCain, addressing a packed auditorium of foodservice operators and suppliers in Chicago at the National Restaurant Association’s annual trade show in May, made no mention of ethanol or his reversal to support it as an alternative fuel while remaining opposed to production subsidies.

However, the Arizona senator did discuss food costs, telling NRA show attendees they should be “disgusted” with Congress for stuffing this year’s $307 billion farm bill with “hundreds of pages of subsidies and tax breaks served up every five years to corporate farmers.” While Americans “struggle” with commodity shortages, and with “food prices at historic highs and farm income up 56 percent,” the government nonetheless was paying for land to be left unplowed by special interests, “many of which are heavy political contributors,” he said.

McCain praised restaurateurs for knowing “a thing or two” about work-force growth, but he warned that politicians “are planning to tax the American people by $1 trillion,” which he said would compromise the foodservice industry’s plan to create an additional 2 million jobs in the next decade.

The Republican candidate received strong applause when he vowed, “We’re going to phase out the alternative minimum tax.”

Obama also has said he’d seek to end billion-dollar subsidies for corporate farmers, and his platform, too, promises tax relief for small businesses and startups, including ending all capital gains taxes on them to “encourage innovation and job creation.” His “making work pay” plan for a $500 tax credit to almost all workers would also go to self-employed small-business owners, reducing “the burden of…double taxation” they bear in having to pay the employee and employer payroll levies on their own jobs.

The Democrat’s position statements also point to his promotion of enhanced access to capital through a Senate bill he co-authored that would expand and simplify the Small Business Administration’s loan and microloan programs for startup and long-term borrowers.

As for other incentives to jump-start the economy and assist employers and workers, both candidates would foster universal health care. McCain’s plan calls for a $5,000-per-family insurance subsidy, while Obama prescribes a “Low-Cost National Health Exchange” for small businesses, with employer reimbursements for catastrophic costs.

Both candidates also would tighten regulations on the hat-in-hand financial markets, and they favored the agreement in principle reached late last month between Congress and Treasury officials, that a Wall Street bailout should include taxpayer payback protections, at-risk-homeowner considerations and new controls on finance executives’ compensation.

But with the government poised to absorb billions in “toxic” liabilities from financial institutions to avert a widespread credit collapse, the ripple effects on lenders and equity investors could leave much of the restaurant industry struggling to stay afloat, says Bob Goldin, executive vice president of the foodservice research consulting firm Technomic Inc. in Chicago.

“Other than the strongest performers, restaurant companies looking to be acquired or to grow or stabilize in any substantial way through stock offerings or debt restructurings or new lines of credit may be out of luck,” Goldin says. “And I just don’t see who’s going to be financing franchisees or major remodels in any meaningful way for some time to come.”

Though subject to budgetary modification in the wake of a big-ticket bailout, McCain’s plan for economic stimulus essentially calls for extending the Bush tax cuts and cutting corporate tax rates, while the foundation of Obama’s tax policy is rate cuts to working-class families and increases in certain corporate taxes and capital gains levies, though they’d be eliminated for small businesses.

The independent Tax Policy Center in Washington, D.C., estimates that McCain’s tax policy would boost the national debt over a decade by $4.3 trillion, while Obama’s would add $3.3 trillion over the same period. However, Obama’s economic-stimulus budget is higher, including $75 billion for transportation and energy infrastructure and technology, though he said recently that a bailout-related revenue squeeze could delay some planned spending.

Despite the added attention presidential campaigning brings to the need for reforms, delays in addressing the nation’s economic woes are worrisome, says Bruce Grindy, chief economist for the National Restaurant Association.

“The fact that this challenging economic environment is occurring in an election year is kind of a double-edged sword,” Grindy says. “It gives everyone a chance to highlight the economic problems and talk about them, but yet nothing really gets done to solve the problems.”

Grindy points out that the “sluggish economy, job losses, high food and energy prices, and declining wealth are all combining to put households in a precarious position, and the net effect has been a slowdown in consumer spending.”

He notes that consumer prices for food are rising at their steepest rate in 18 years, while consumer prices for energy are increasing at their fastest clip in 28 years.

“At the same time, however, income growth is not keeping pace, which forces households to make tough choices,” he says.

During the 2001 economic downturn, many households tapped their home equity to bridge budgetary gaps, but “that is clearly not an option for most households this time around,” he says.

Restaurateurs now facing high gas and energy prices are having a harder time keeping their utility costs in the typical 3-percent-to-4-percent-of-sales range, and “any sharp increase in costs can have a negative impact on the bottom line,” Grindy notes.

Still, the NRA economist says, “food costs remain the biggest risk to restaurants’ bottom line in the months ahead.”

So far in 2008, the federal Producer Price Index for wholesale food is posting its sharpest rise in 29 years, Grindy adds.

But restaurateurs afraid of alienating customers have fared better, on average, than rival supermarkets in absorbing that inflation. For the 12 months ended this August, “menu prices rose 4.5 percent, which was 3 percentage points below the strong 7.5-percent jump in grocery store prices, so it’s clear that restaurants are more sensitive,” he observes.

Grindy and his colleagues at the NRA were keeping close watch this month on the ongoing reactions by the McCain and Obama campaigns to the debate over a Wall Street rescue package.

“Although the average consumer doesn’t know all the ins and outs of short-selling, their faith in the economy certainly is impacted when they hear about bankruptcies and government bailouts,” Grindy says. “And when the ripple effect of declining confidence is a pullback on consumer spending, restaurants generally don’t benefit. So restoring confidence in Wall Street will certainly be an imperative for the next administration.”

Grindy notes that both presidential candidates “appear to understand that small businesses are the backbone of the economy, and it’s our hope that they will also understand that restaurants are the backbone of small businesses.”

“To that end,” he says, “policies that provide incentives for capital spending, job creation and expansion will not only help the industry recover, but also the overall economy.”

Industry Issues 2008

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