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Operations

Bracing for the impact of a recession we may already be in

3 takeaways from the Restaurant Finance & Development Conference 2022.
Recession is coming
Despite gloom ahead, restaurant operators were cautiously optimistic./Photograph: Shutterstock.

Restaurant operators who gathered this week in Las Vegas—a town that seems immune to the growing gloom of recession—shared several common themes at the annual Restaurant Finance and Development Conference:

Commodity inflation is improving. Labor costs will remain high, but workers are coming back to the industry. And a recession is coming. Or maybe it’s already here.

Variations on those themes were repeated amid the panels and keynotes at the event, which is hosted by Restaurant Finance Monitor, Franchise Times and Food On Demand. But there were several other takeaways and the general mood was one of cautious optimism.

What recession?

Economist Austan Goolsbee, a University of Chicago professor and former chair of the Council of Economic Advisors and member of President Obama’s cabinet, explained why economists are terrible at predicting recessions, even recessions that have already happened.

That said, Goolsbee’s answer to the question of whether we are in recession was: We don’t know.

Goolsbee, who was also chief of staff for Federal Reserve Chair Paul Volcker at the President’s Economic Recovery Advisory Board, said the current “religious war” among economists about the current situation stems from the unique post-pandemic climate. There are some traditional signs of recession, like high oil prices and a bubble bursting (crypto), but unemployment is also low and there is pent-up demand for services (like going to restaurants), leaving the Fed with a complicated balancing act.

The data point to watch: month-to-month core inflation rates. Three consecutive months of declines could cause the Fed to hold off on increasing interest rates. But if those numbers don’t come down, he said, interest rates are likely to continue climbing.

And one cause of recession: when interest rates climb faster than the economy can handle.

His prediction: There is a high risk of recession in six to 12 months, depending on when the Fed applies the brakes and how hard.

Tech talk

As technology becomes more integral to any conversation about the restaurant industry, the hot category was voice ordering.

Bob Baker, CFO of Checker’s & Rally’s Drive-In Restaurants, for example, on a panel shared how installing artificial intelligent voice ordering systems at about 260 of the chain’s 830 restaurants has helped achieve a 96% accuracy rate.

The system was able to learn different regional dialects and customers have responded well to how polite the voice ordering system is. The company is still working on improving speed and tweaking scripts to build add-on sales.

But when it comes to deciding where to invest in technology, several operators said avoid being tempted by the new and shiny robot thing. A better return on investment might come from “less sexy” solutions, like an inventory management system, for example, that is more likely to move the needle.

Revving the franchise engine

Given the setting, it’s no surprise, but franchise brands expressed optimism about franchise unit growth, despite lingering supply challenges.

Mike Dixon, CFO of Focus Brands, stressed the need for taking costs out of the investment model to bring franchise operators greater returns.

The chief financial executives for both Freddy’s Frozen Custard and Papa Johns said they were buying forward on restaurant equipment so they can lower the price and keep development moving.

And though franchisors do not dictate price, several brands said they were working with franchise operators to offer guidance with the hope that pricing will be less necessary.

“Some pricing models have been out there for 20-30 years and are not set up for the cost inflation we’re seeing now,” said Dixon.

Dixon said he is cautiously optimistic about what’s ahead.

“This is a cycle and we will work our way through,” he said. “The big challenge is when we will be in a recession, and how that will impact traffic.”

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