Bring in the New with 2010
November/December, 2009
By Debby Cannon, Ph.D., CHE, Director of the School of Hospitality in the Robinson College of Business at Georgia State University
As 2009 comes to a close, the majority of restaurant operators and owners will most probably mutter, “good riddance” to the old year in hopes of a much better 2010. While it would not be accurate to state that every operation struggled this past year, 2009 was a financially challenging year for the hospitality and tourism industry, including the largest of its sectors, restaurants and foodservice.
Dr. Dave Pavesic, professor in the Cecil B. Day School of Hospitality in the Robinson College of Business at Georgia State University, described 2009 as one of “unprecedented financial stress.” Dr. Pavesic, a former restaurateur who specializes in restaurant and foodservice management in the School of Hospitality, noted that customer traffic and spending were down in all segments, except quick service restaurants (QSR).
As cited in Nation’s Restaurant News on September 14, 2009, in an analysis of 68 restaurant companies – in the categories of QSR, casual dining, fast casual, coffee and snack, and family dining and buffet – only six were showing positive growth in the most recent accounting period. Of those six, three showed growth from 0% to 0.9%.
The largest percentage declines, according to Dr. Pavesic, were in fine dining and higher-end casual restaurants. The higher the menu price point, the greater the decline. Capital Grille, a Darden Restaurant brand, was down 22% in the analysis of the most recent accounting period, while the other Darden concepts of Olive Garden and Red Lobster were down only 0.6%. Other high-end chains have reflected similar declines. Ruth’s Chris corporately is down 23.4%, McCormick and Schmicks is down 17.3% and Morton’s is down 26.1%.
The announcement in late summer 2009 that the Ritz-Carlton, Buckhead’s Dining Room was closing on October 1 was stinging evidence of the brutal impact of the economy on the top tier of fine dining. Citing the economy and changing dining habits, the 25+ year restaurant that put Atlanta on the map for culinary talent and extraordinary service will not, at least for the foreseeable future, be transitioned into another dining concept.
News was better for many restaurant companies in segments other than casual dining and fine dining. In the QSR segment, McDonald’s, Popeyes and Yum Brands were showing 3-4% growth globally as of the third quarter of 2009. Domestic sales growth was roughly half the global growth percentage. In the coffee and snack category, Krispy Kreme showed the highest increase at 5.9%.
In the pizza segment, Domino’s showed an increase of 4.1% with Papa John’s in second place with only a 0.1% increase. Dr. Pavesic noted that pizza chains continue to use discounting heavily and incentives like free desserts with certain orders.
In the family dining segment, Steak and Shake posted a 5% increase. This was followed by Frisch’s Big Boy and Frisch’s franchises of Golden Corral units at 4.6% and 2.3%, respectively. In the fast dining segment, Chipotle Mexican Grill posted increases of 1.7% and Panera Bread showed no change.
On a positive note for the consumer, restaurants have probably never been more creative in offering promotions and specials. According to Dr. Pavesic, the sandwich segment has been particularly competitive. “The $5 foot-long deal initiated by Subway has been picked up by just about every sandwich operation, whether chain or independent. On any given Sunday, you will find at least a half-dozen restaurants with full-color flyers promoting discounted menu items. In addition to this, the bulk direct mailers to them home are also full of discount coupons. No one wants to pay full price.”
According to Dr. Pavesic, the heavy discounting that has characterized the restaurant industry may be looked back on as a dangerous precedent. “It communicates that menus have been ‘over-priced’ and that customers were paying more than they should have been paying in the first place.”
One of the biggest challenges during the economic downturn has been that as sales have fallen, fixed expenses have remained the same. Dr. Pavesic notes that some restaurants have been able to renegotiate leases and even loan payments with landlords and lenders, but many have not been so lucky. Subsequently, rent, as a percentage of total sales, amounts to greater than 7-8% of sales, and every percentage point increase comes directly off the net-income percentage. For smaller operators and independents, the resulting cash flow problems can be a huge issue for business survival.
What is the projection for restaurant entrepreneurs thinking of entering the industry within the next year? Since banks are not loaning to many small businesses, those with savings or working capital are the only small operators who will probably be opening restaurants within six months or more. Dr. Pavesic recommends a very focused approach for potential entrepreneurs in the near future. “If you are going to open a restaurant in these times, you will need to have price points in the $9.99 to $12.99 price range. Anything higher is highly risky. Diners, sandwich shops, coffee shops, meat and two-vegetable places are the kind of restaurants with these price points.”
Survey data from the National Restaurant Association (NRA) also reflect the industry’s challenges in 2009. The NRA’s Restaurant Performance Index quantitatively reflects the business environment of this past year. This monthly composite index measures optimism and pessimism that restaurant operators have about the retail restaurant industry each month. A score of 100 is neutral. Over 100 indicates current or future expansion and a score under 100 reflects current or future retraction. While the Restaurant Performance Index was below 100 for the 23rd consecutive month as of July 2009, the results for the month of July were better than June, as well as being higher than four of the preceding six months.
As we look ahead to 2010, there are several promising changes. Most economists agree that the bottom may have been reached in regard to the economy. While predictions favor a slow recovery that may not show improvement until mid-to-late 2010, there is optimism, although perhaps guarded, about the new year.
Another positive point is important federal legislation that could help the restaurant industry nationwide. Representative Neal Abercrombie (D-Hawaii) introduced legislation this past year to increase the federal tax deduction for business meals from 50% to 80%. This increase would boost business meal sales by $6 billion per year and would create an $18 billion increase to the overall economy.
The restaurant industry currently employs an estimated 13 million people, or 9% of the U.S. workforce. It is estimated that for every $1 million in restaurant sales, an additional 33 jobs are generated.
As we enter a hopefully better year, what has been gained from one of the most difficult economic times in history? We are better managers and leaders. Businesses have adjusted to doing more with less, which includes operating with fewer people and less capital, but still delivering quality products and service. Many businesses engaged creative skills that had never been tapped for promotions, marketing, pricing and menu bundling. While there were some restaurant closings, a number of exciting, new restaurant concepts opened to join a strong portfolio of existing operations throughout Georgia. We will emerge as a stronger industry with these paradigm shifts serving us well in the future.
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