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NRA Expert: Despite Monthly Gloom, Distributors’ Optimism is Justified



{mosimage}“The health of the industry overall remains positive,” Hudson Riehle, senior vice president of Research and Information Services for the National Restaurant Association, Washington, DC, told ID in an interview after the release of the latest RPI, which registered at 98.8 in February, its fourth consecutive month below 100, signifying contraction in the index.

Noting what he described as a “boom-to-gloom-to-boom-to-gloom” mentality which currently is on the downward slope, Riehle offered additional, encouraging operator trends. He said February’s Census of Retail Sales Report confirms that the industry, in fact, posted its third highest sales volume month in history.

“Growth has moderated and February’s is up 4.6% over the prior February,” he observed, adding that a slowdown is evident and in certain operator segments it is substantial.

“It’s important to keep in mind that 4.6%, even with menu price inflation running at 3.9%, indicates a real growth rate of 0.7%. Although that isn’t as good as it was two or three years ago, it certainly by no means is negative. Consequently, the industry as a whole continues to post positive real sales growth,” he said.

Riehle substantiated the root of distributors’ optimistic expectations about their own growth this year, saying consumers, even in the worst of times, aren’t going to shy away from dining out.

“The health of the industry overall remains positive.”
“When cash on hand gets tight, as it has been, consumers change their restaurant behavior. Depending on their household income, their patronage patterns now versus six or 12 months ago can be substantially different,” Riehle elaborated. “That said, overall, Americans love restaurants. Even though in tighter economic times they many pull back a little and modify their behaviors, the fact is when recovery is under way and their cash-on-hand position improves, those consumers will revert back to their typical behaviors.”

With 48% of Americans’ food spending already being captured by restaurants, Riehle said the long-term trend has been steadily increasing.

“The industry overall can continue to support the real sales growth for this year and into the next,” he said.

Furthermore, Riehle favors all distributor initiatives that help operators survive the current doldrums.

“Distributors’ cooperation and working with operators through this period of slower economic growth is pivotal in the ultimate success of many operators,” he opined.

In recent times, operators have been enduring fundamental cost changes in labor, food and energy, posing “sizable challenges” for them. Operators and their distributor-partners must continue to find ways to manage and control costs and drive additional traffic through value-added marketing and advertising, Riehle suggested.

The latest Restaurant Performance Index reported that outlook for the restaurant industry remained uncertain in February, as its comprehensive index of restaurant activity was unchanged.

“Although restaurant operators reported positive sales for the first time in four months, they were less optimistic about growth in the months ahead,” said Riehle in the announcement. “Operators’ outlook for sales growth and the economy deteriorated sharply, which led to a record-low reading in restaurant operators’ outlook and expectations. For the first time in 29 months, recruiting and retaining employees was not the top challenge reported by restaurant operators. Twenty-six percent of operators identified the economy as the number-one challenge facing their business, the highest proportion in the history of the Restaurant Performance Index. Food costs ranked second at 19%, while ‘building and maintaining sales volume’ and ‘recruiting and retaining employees’ were each identified as the top challenge by 15 percent of operators.”

The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 98.6 in February – up 0.7% from January and its first gain in six months. Despite the gain, February marked the sixth consecutive month below 100, which signifies contraction in the current situation indicators.

Bolstered by the extra February day as a result of Leap Year, restaurant operators reported positive same-store sales for the first time in four months. Forty-four percent of restaurant operators reported a same-store sales gain between February 2007 and February 2008, up from 36% who reported a sales gain in January. Thirty-nine percent of operators reported a same-store sales decline in February, down from 49% who reported similarly in January.

“Distributors’ cooperation and working with operators is pivotal.”
Restaurant operators continued to report negative customer traffic levels in February, though the performance was somewhat better than recent months. Thirty-two percent of restaurant operators reported an increase in customer traffic between February 2007 and February 2008, up from 27% who reported similarly in January. Forty-six percent of operators reported a traffic decline in February, down from 54% who reported similarly in January.

Restaurant operators continued to report a decline in capital spending activity. Forty percent of operators said they made a capital expenditure for equipment, expansion or remodeling during the last three months, down from 41% last month and the lowest level in the history of the Restaurant Performance Index.

The Expectations Index, which measures restaurant operators' six-month outlook for four industry indicators (same-store sales, employees, capital expenditures and business conditions), stood at 99.1 in February – down 0.6% from January and its lowest level on record.

Restaurant operators remain decidedly pessimistic about the direction of the economy. Just 14% of operators expect economic conditions to improve in six months, down from 21% who reported similarly last month and the lowest level on record. Forty-six percent of operators said they expect economic conditions to worsen in six months, up from 37% who reported similarly last month and the highest level on record.

Restaurant operators are also less optimistic about sales growth in coming months. Thirty percent of restaurant operators expect to have higher sales in six months (compared to the same period in the previous year), down from 32% who reported similarly last month. Thirty-four percent of restaurant operators expect their sales volume in six months to be lower than it was during the same period in the previous year, compared to 31% who reported similarly last month.

Roughly one-half of restaurant operators have plans for capital spending in the next six months. Fifty-one percent of restaurant operators plan to make a capital expenditure for equipment, expansion or remodeling in the next six months, up slightly from 50% who reported similarly last month.

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