A tempered, but positive industry forecast

The industry—in line with the economy—is experiencing a very uninspiring recovery. But a recovery nonetheless.

Some of the top industry trend experts spoke about the health of the industry at the Restaurant Leadership Conference in Scottsdale, Arizona. While none showed elation, their news was decidedly on the bright side. Their forecasts struck similar notes:

  • The consumer is coming back.
  • Gas prices could be a problem.
  • Operators are more optimistic.
  • Capital is flowing more strongly.
  • Unemployment numbers are improving, but continue to be a drag.

According to Hudson Riehle, Senior Vice President of Research and Information Services at the NRA, total industry sales will reach $632 billion this year, up 3.5 percent from 2011, and the third year of sales growth since the dark days of ’08 and ’09. (If the industry was a country it would rank #18 in its economic output.)

Restaurant spending is an outlier among discretionary items. According to GE Capital Franchise Financing Managing Director Todd Jones restaurants are the single discretionary item that has seen an increase since 2007: vehicle sales are down, building materials sales are down, furniture and appliance sales are down.

They have also spent more at restaurants than grocery stores for each of the last 21 months, according to GE Capital.

“Essentially consumers have gone back to basics,” in their restaurant preferences, said Jones. “Same kinds of things you find on your mission statements: they want food quality, value and great service.”

Consumers are also showing a back to basics mentality with their finances, bringing more discipline to their household. While Jones pointed out that the use of credit by consumers is rising, the rates of credit delinquency are near historic lows.

And while Riehle, Jones and Technomic’s Ron Paul and Darren Tristano all pointed to rising gas prices (at nearly a $4 national average) as a potential concern, they all conceded that it will probably not have the impact it did in 2008, mainly because of households managing their finances better. But also because Americans are driving less and using public transportation more. Vehicle miles traveled remain near a seven-year low, according to Riehle.

With these cautiously optimistic trends, operators are showing cautious optimism of their own. Riehle and Jones drew on the NRA’s Restaurant Performance Index, which shows operator optimism increasing for the last 10 quarters.

That optimism is leading to greater spending, led by greater expenditures on marketing, according to Jones, followed by redesigns and equipment.

Investors are showing optimism as well.

“Markets are volatile but rebounding,” reported Jones. “And equity investors are more confident in restaurants.”

The level of liquidity available to restaurants has increased. Merger and acquisition activity has also increased. Total syndicated volume in the restaurant space increased more than 26% to almost $12 billion in 2011. Further, there was just shy of $4 trillion dollars in money markets in 2008 and ’09, but that has steadily deteriorated since then, with more money moving to equity markets, which, conversely, hit their low in ’08-’09. Private equity has come back as well, said Jones, with $5 billion in 2010 and $4.7 billion in 2011.

All the speakers touched on the unemployment rate, and while the nation continues to add jobs we are still far from pre-recession levels. “This is the most troubling chart,” said Tristano as he flashed an unemployment fever graph on the screen. The number of unemployed or underemployed sat at 14.9 percent.

While the chart’s line didn’t have as steep an angle as everyone in the audience would have liked to have seen, it pointed down nonetheless.

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