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Student loan repayments begin Oct. 1, and could impact consumers' restaurant spending.

Will the end of the student loan pause impact restaurants?

The three-year federal pause on student loan payments ends Oct. 1, impacting about 44 million borrowers.

The pandemic-inspired three-year federal pause on student loan payments and interest is ending, impacting about 44 million borrowers. Interest on those loans started accruing again last week, while actual payments will resume Oct. 1.

What does this mean for restaurants? Many of their customers will have less money to spend on things like add-ons, fancy drinks, impulse buys, or night-out splurges in general. The average federal loan debt is about $37,000 per borrower, or about $1.59 trillion in total. According to U.S. News, that translates to an average student loan payment of about $300 per month.  

That’s a big enough chunk of change to facilitate a major shift for some consumers who have so far shown a strong willingness to accept higher menu prices implemented to manage inflationary pressures. Consumer spending in July was at the highest level in six months, for instance, to the benefit of goods and services.

But few economists expect this pace to continue, and warning signs are starting to flash. Among those warning signs – record-high credit card debt, record-high mortgage rates, record high car loan debt, record high rent prices, rapidly dwindling household savings, and, yes, imminent student loan repayments. As these pressures mount, we’re starting to see traffic erosion across all restaurant segments. In July, 41% of operators reported a traffic decline, representing the fourth consecutive month operators experienced a net decline in customer traffic.

When it comes to outlook, the National Restaurant Association measures both same-store sales and traffic, and same-store sales remain strong. Optimism about future sales also remains strong, with 52% of operators expecting their volume in the next six months to be higher than it was during the same period the previous year. Curiously, however, restaurant operators are significantly less bullish about the overall economy, with just 12% expecting improvement in the next six months and 29% expecting conditions to worsen. It’s hard to tell if this is good news or bad news, as the restaurant industry is a major part of that “overall economy.”  

Q2 anecdotes may have dampened some optimism. Texas Roadhouse and Chili’s both reported less (higher ticket) alcohol purchases, for example, while McDonald’s and Wendy’s executives noted their companies are gaining share from full-service/casual dining, which is offsetting the trend of consumers buying a little less when they visit.

“You’re seeing higher income cohorts start to shift into QSR, which is good for our brand,” Wendy’s CEO Todd Penegor said during his company’s earnings call, adding that QSR “is the place to be.”

That said, Penegor added, student loan repayments could “provide a little bit of pressure against personal disposable income” and there could be “a little bit of impact there.” Meanwhile, Darden and Chipotle, which tend to attract higher income cohorts, aren’t expecting a material headwind from the end of the student loan moratorium.

“It will be a headwind. Any time you take money out of consumers’ pockets, it’s a headwind, but it shouldn’t be material because student loan payments are a very small component and it’s probably already baked into the economic forecast for GDP growth that we use for our plan,” Darden CEO Rick Cardenas said in June. “We still have a high percentage of our consumers that are above $100,000 (salary), so hopefully a student loan repayment wouldn’t impact them too much.”

For CAVA, CEO Brett Schulman noted that the company is adjusting for the confluence of consumer pressures, including the “student debt/loan repayment hanging in the wings this fall.”

“We’re mindful of those pressures, which is why we’ve leaned into our value proposition,” he said.

By our count, at least 10 public companies touted their value proposition during the latest earnings round, while the word “value” was mentioned at least 340 times. In other words, some restaurant companies may be adjusting their strategy for the student loan restart specifically, or many are just adjusting for an increasingly discerning consumer.

For what it’s worth, Deutsche Bank analysts predict that restaurants will be the hardest hit by the student loan payment restart, along with ecommerce and bars. Meanwhile, Goldman Sachs predicts it will only create a “modest drag.” The true impact will probably be somewhere in the middle. That said, one thing does seem to be getting a bit more clear – operators must be careful not to mistake a resilient consumer for a consumer bearing an increasing amount of weight.  

Contact Alicia Kelso at [email protected]

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