The industry’s near-term future is clouded by plenty of what-ifs, including these worrisome possibilities.
What if we slide into a recession?
As leading economic indicators, restaurants tend to be walloped by a downturn before other business sectors even notice customers acting squirrelly. But the forecasts aired at the end of 2019 suggest the industry may be spared a full-fledged recession, at least near-term. Consumer spending and other economic activity will likely slow in the new year, tempering gross domestic product growth to 1.8% from 2019’s gait of 2.3%, according to the National Association for Business Economics (NABE), an organization of business economists. The group puts the chances of conditions worsening into a recession during the second half of the year at 1 in 5, but it forecasts a 66% chance of one hitting in 2021.
Conventional wisdom holds that limited-service restaurants tend to be less affected by a recession than full-service places because consumers trade down. But Technomic has noted that the industry could be on unfamiliar ground in the next downturn because it’s never relied so heavily on delivery and catering.
What if the delivery boom fizzles?
Regardless of what happens in macroeconomic terms, many in the industry still harbor doubts about the long term viability of third-party delivery. Postmates had layoffs and closed its Mexico City office last year. Amazon decided to scrap its restaurant delivery business altogether. Grubhub sent a 10-page letter to investors in October to soften the news of a 96% drop in third-quarter income. Waitr pulled out of some markets. The issue isn’t revenues, but profitability.
If delivery doesn’t work for those specialists, will it work for restaurants? Domino’s is a 10-decibel shout of “Yes!”, and Pizza Hut warned that it may have to close up to 400 dine-in places, a left-handed endorsement of delivery’s potential.
The evidence all points to surging demand, but significant challenges in exploiting it. That’s why we’re looking for more engineering of the delivery model in 2020. Already, a self-delivery/third-party hybrid seems to be the new set-up of choice, vis-a-vis what Panera Bread and Outback Steakhouse parent Bloomin’ Brands announced during the second half of 2019.
What if Democrats win big in the November election?
Regardless of what restaurateurs might think of President Trump’s leadership style, they can’t dispute that he and his administration have aligned with the industry’s interests on all but a few business issues, from overtime pay to the definition of joint employer. What happens if he and his party lose the White House and Senate in the elections?
Virtually every Democratic presidential candidate has voiced support for a nationwide $15 minimum wage, universal paid leave and measures that would help organized labor, which has all but painted a bull’s-eye on the restaurant industry. Even if one of the pack should land the Oval Office, some of the initiatives most loathed by the industry would likely die in the Senate if it remains under Republican control. But that’s a big “if,” given some of the seats that are in play.
If Democrats prevail, the industry might see a rollback of some Trump initiatives that the industry has opposed, such as efforts to restrict immigration and the protectionist tariffs on imports from the European Union and China.
Not all of the concern is focused on Washington, D.C. Statehouses and city halls have shown a willingness to push through measures that died on the federal level. A number of states, for instance, have changed their overtime pay standards to entitle far more salaried employees to time and a half.
What will happen in the fall? The answer likely depends on whether you watch Fox News or MSNBC.
What if trade wars worsen?
The industry has enjoyed several years of relatively stable commodity costs, with the notable (and nearly predictable) exception of chicken wings prices. Regardless of what happens at the polls, Republicans will remain in control of the White House for at least another year. Will the industry see more duties levied on products it buys overseas, vis-a-vis the tariffs Trump has sought for imported cheeses and wines? And will suppliers seize the opportunity to jack up costs?
Those worries may be less grounded than concerns about African swine fever, an affliction that has by some estimates destroyed a third of China’s swine population. Even if a U.S. operator only uses domestic pork, the dramatic drop in demand could drive prices skyward.
What if the labor pool runs dry?
Call us Chicken Little, but the real threat to the industry’s health in 2020 may well be people, or the shortage thereof. We’re already seeing chains pick locations on the basis of labor availability. Others are shortening their business days because not enough staff is available to stay open during marginal hours. Staff and management vacancies have now become routine.
So what happens if the situation worsens? As more restaurants open and longstanding perceptions continue to complicate recruitment and retention, will the industry find itself with customers willing to spend but no one willing to take their money? Will a critical resource be in such short supply that operators will look back at 2019 as the good ol’ days?
The danger may be more real than old-timers might like to admit.
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