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What happens when the economy slows?

Stocks fell Tuesday amid economic concerns, which only adds to potential problems facing restaurants, says RB’s The Bottom Line.
Photograph: Shutterstock

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Stocks plunged on Tuesday. The Dow Jones Industrial Average, the S&P 500 and the Nasdaq indexes all fell more than 2%, and most restaurant stocks fell with them.

The reason was a combination of uncertainty regarding U.S.-China trade and fears that the economy is slowing.

Of course it is.

While the holiday shopping season got off to a strong overall start and consumer confidence is strong, plenty of other pieces of data suggest that the roaring economy is past peak. In addition, the economy is bound to hit a recession sooner or later—the current economic expansion is already among the longest in history.

All of which makes us wonder what will happen to restaurant systems and their franchisees if the economy really does slow and head to a recession.  

As it is, restaurant sales have been weak for three years and traffic is an especially notable problem—remaining stubbornly negative despite a host of economic data that has suggested it should be the other way around.

We’ve largely felt that the problems with industry sales are both self-inflicted (overexpansion) and the result of a shift in consumer behavior (consumers dining out less or eating at independents) and price differentials with grocers.

But it’s also a sign of the fragile underpinnings of the economy, where a large segment of the population has not benefited from the recovery and still feels concerned enough about their finances to limit spending.

We’ve seen this in other data. Younger millennial consumers are more likely to live with their parents as adults while healthy adult men have, for years now, simply left the workforce.

A slowing economy is, therefore, terrible news for restaurants. Continued economic improvement, fragile though those underpinnings may be, is the best solution to get the industry out of its three-year slump.

But if we are heading into a recession, that means there are few catalysts to pull up sales. And it means the difficult demand environment would continue into the foreseeable future.

As it is, the restaurant industry in 2018 is already showing many signs of a recession. We’ve had numerous bankruptcies by restaurant chains and some by large-scale franchisees, as well as store closures and entire brands shutting their doors.

Operators of several franchised brands, stressed by rising labor costs and weak sales and demands that they remodel or add technology, are filing lawsuits, creating associations and calling for new brand CEOs.

While plenty of chains can continue to grow, as they did during the Great Recession in 2008 and 2009, the weakened market will filter out weaker concepts and locations.  

The good news is that recessions end. And maybe the next one will cure whatever it is that’s really been ailing the restaurant industry these past three years.

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