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PARALLEL UNIVERSE: Restaurant Business in Slump Because We’re All (Most of Us, Anyway) Running Out of Disposable Income

Posted by kinchendavid on August 14, 2006

By David M. Kinchen

Hinton, WV – The breathless headline in the Advertising Age story on Aug. 14, 2006 said “Restaurant Business in Worst Slump Since ‘91” and wondered why “casual dining chains” – places like industry leader Applebee’s — are “hit the hardest as $331 Billion Industry Struggles in Q2.” Q2 isn’t a rock band, it’s biz-speak for second quarter, as in second quarter of 2006.

The excellent story by Kate MacArthur asks if “sharp same-store sales declines among some of the biggest players in the $331 billion restaurant industry have analysts and marketers worrying whether the slide is a long-term trend or a short-term hit due to less disposable income.”

I’ll give my answer in one three-letter word: “YES.” Let’s see what condition our (collective) condition is in:

* Disposable income is way down, from all the accounts I’ve seen. Many people who refinanced their houses with adjustable rate mortgages (ARM) – bad idea – are strapped to the point of foreclosure and bankruptcy. I’ve read through dozens of news stories that shows this to be the case.

* Additionally, homeowner insurance premiums are sky-high, even in areas like Hinton which has few if any natural disasters. I just got my premium notice and – unlike my car insurance from the same carrier – Nationwide – which declined a few bucks, the homeowner premium is the same as last year. I suppose I should be grateful that I don’t live in Florida, Mississippi, Louisiana or California where premiums are rapidly increasing, if you can even get insurance.

* Property taxes are pounding the family budget to pieces in many areas. Utility rates for electricity and – especially – natural gas are disposing of the disposable income, at a time when most wage earners have stagnant raises, if any. If like most retirees, you’re on a fixed income with little or no cost of living adjustments (COLAs) for your pension, you’ll find a trip to Applebee’s, Ruby Tuesday or Ryan’s something you can forego.

Advertising Age Reporter MacArthur says that “casual-dining chains and independents are the biggest losers” while fast-food places like McDonald’s, Subway and CeCi’s pizza are picking up the slack.

She quotes John Glass, restaurant analyst for CIBC World Markets who reported Aug. 8 “that restaurants are facing their worst sales slump since the 1991 recession. Indeed, total comparable sales grew just 1.4% in the second quarter.”

Glass counts the ways: “This time around, the consumer faces a more volatile mix: Rising energy costs and interest rates have slowed personal consumption expenditures, while unit growth, especially in casual dining, has impeded same-store sales growth. “While we are not in a recession, we have more industry-inflicted damage this time around.”

Casual-dining chains reported a 0.2% decline in same-store sales during the second quarter, while quick-service chains reported a 1.8% gain, according to Glass, the Advertising Age story says.

“I wouldn’t want to be near casual dining right now,” said Tony Pace, chief marketing officer for Subway Restaurants’ Franchisee Advertising Fund Trust.

”Although restaurants represent only 4% to 6% of consumer disposable income, restaurant patronage is viewed as a leading economic indicator as industry trends tend to shift ahead of the economy,” MacArthur writes.

Eatin’ Good in the Neighborhood isn’t so great these days at Applebee’s, which recently said 5 percent of its customers can’t afford to eat there on household incomes below $35,000. That’s an income level I can relate to, thanks to my majoring in English instead of brain surgery!

On the flip side, industry consultant Malcolm Knapp “noted that consumers in households above $70,000 aren’t as affected by energy costs. He pointed to the strong sales of upscale dining players including Ruth’s Chris Steakhouse and Capital Grille during the second quarter. Are times good? No,” he said. But “things aren’t as bad as some of the reported numbers. It’s not true for everyone.”

Speaking of McDonald’s, I visited the most upscale Mickey D’s I’ve ever seen in the Magnificent Mile section of Chicago last month at the northeast corner of State Street and Chicago Avenue. It’s in some of the priciest real estate in the world, has plenty of brick and plants and has a nice outdoor patio. The food was standard McDonald’s and the place was consistently packed the times I visited. Of late, Chicago has shown tendencies to emulate San Francisco, Seattle and Portland, Ore. with its smoking restrictions, bans on foie gras and the anti-trans-fat campaign, but Chicagoans know a good deal when they see it and they see it under the tasteful, iconic Golden Arches just down the street from the Water Tower.

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