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A possible recession isn’t spooking restaurant CEOs just yet

Chief executives of Domino’s and Starbucks both say the consumer is strong, even as economic concerns worry investors.
Photograph by Jonathan Maze

Recession concerns have increasingly worried investors of late. But restaurant executives aren’t concerned about it at the moment, at least based on recent comments from the CEOs of some of the largest U.S. chains.

Earlier this week, Starbucks CEO Kevin Johnson told Jim Cramer of CNBC that the company hasn’t seen any signs of looming economic weakness. He said that the company’s “customer connection” scores are at an all-time high, which suggests both that the chain is doing its job well but also that customers themselves are feeling good about things.

“We have not seen signs in the U.S. of anything related to a slowdown,” Johnson said. “We’re firing on all cylinders and consumers seem to be doing well.”

Restaurant CEOs have plenty of reason to be confident. The unemployment rate is 3.7%, and the economy continues to add jobs, with pay rates rising in the process.

Indeed, Domino’s CEO Ritch Allison said that employed customers with disposable incomes are fueling a stronger restaurant business.

“From where we sit, the consumer is really strong in the U.S.,” he said on CNBC last week. “The most important thing for driving demand for pizza is having employed customers that have disposable incomes to be able to afford to feed their families. We see a very strong consumer today.”

Recent same-store sales numbers bear that out. Starbucks generated 7% U.S. same-store sales last quarter, while McDonald’s generated 5.7% same-store sales growth. While Domino’s results slowed to 3%, much of that was attributed to competition from delivery and not any economic weakness.

Broader indicators of restaurant sales appear to be relatively strong.

Consumers also appear willing to spend. McDonald’s has generated its same-store sales based on convincing consumers to buy more premium items. Discounts, meanwhile, have become less important, suggesting that consumers are feeling good about their finances and are willing to spend when they eat out.

Discounts are typically vital to getting customer growth during economic recessions.

“The economy continues to be strong,” Gene Lee, CEO of Olive Garden owner Darden Restaurants, said back in June, according to a transcript on financial services site Sentieo. “Unemployment is at its lowest levels in nearly 50 years, wages are growing at a healthy rate, outpacing inflation, and consumer confidence remains high.”

All that said, there are some indications that the confidence restaurant executives are expressing is increasingly unusual among CEOs.

According to the publication Chief Executive, CEO confidence fell 6% in August to its lowest level in nearly three years. Nearly two-thirds of CEOs said the trade war is hurting their outlook.

On Wednesday, stocks opened down sharply before recovering as recession concerns worried investors.

Still, the S&P 500 index is down about 5% since July, due largely to trade worries and signs the economy is headed for a recession.

What’s more, restaurant companies appear to be slowing their pace of hiring. Restaurants have been adding an average of 12,600 jobs a month since February, based on an analysis of federal data.

Last year, they averaged another 22,600 jobs per month. That suggests the industry has quickened its pace of closures, slowed its rate of expansion or both. While the economy has been strong, industry traffic has not, and that has many believing that restaurants are oversupplied.

All that said, lenders don’t seem worried. According to a study from small-business lending company Biz2Credit, restaurants have a 51% approval rate on small business loans—higher than any other type of business.

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