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Curry House Japanese Curry and Spaghetti has shuttered, closing all 9 units in Southern California
Employees learned of closure when arriving for work Monday
September 30, 2005
Bob Krummert
When skyrocketing gasoline prices first began to put the squeeze on consumer discretionary spending, logic told you, and a survey by Chicago-based foodservice prognosticator firm Technomic, Inc. confirmed, that restaurant meals would be the first thing cut from many household's budgets.
A quickie overnight survey conducted by Technomic in late August (pre-Katrina and pre-Rita) found 18 percent of consumers saying they had already slashed their spending at quick-service restaurants because of higher fuel costs. Nineteen percent said they would cut back spending at full-service restaurants for the same reason.
"It appears that the threshold has been reached where consumers are feeling the pinch of higher gas prices and are beginning to reduce their restaurant spending," Technomic president Ron Paul said. "We are also seeing softness in restaurant same-store sales, which we track monthly, further validating a reduction in consumer spending."
It's hard to argue with Paul's conclusion, but Darden Restaurants chairman Joe Lee would give it a shot. Lee, winding up a 50-year career in foodservice, told shareholders at the 1,400-unit casual dining giant's annual meeting that rising energy prices wouldn't do much damage to the company's current performance or future prospects. He said his lengthy experience in the industry told him that consumers would be much more likely to put off major purchases than to cut back on restaurant meals. "I've seen about four such cycles," he said.
These two guys, both titans of the industry, know their stuff. Are they both right? Let's look at the same-store sales results from national chains to find some clues.
Because so many of its units are strategically located near interstate highways, analysts view 535-unit Cracker Barrel Old Country Store as a proxy for gasoline-price-related sales changes. The chain's CBRL Group Inc. parent--the company also operates 150 Logan's Roadhouse steak houses--reported that Cracker Barrel's same-store sales fell 2.4 percent in September while Logan's were down 1.5 percent. Not great results, but when you factor in the lost business associated with Hurricanes Katrina and Rita, CBRL is holding its own. If there's going to be an energy-related downturn in CBRL's business, it hasn't happened yet.
High gas prices don't seem to be having a drastic effect in the QSR market, either. Speaking to McDonald's shareholders at that mega-chain's annual meeting, Ralph Alvarez, president of McDonald's North America, said it was going to be business as usual, energy crisis or not.
"We are much more of a necessity today than an optional meal," he said. "We don't see the changes we used to see." But what about forecasts that energy prices will cause most retail businesses, including restaurants, to experience a five percent shrink in their volume? "We don't see that in our industry and definitely not at McDonald's," he said.
So who's getting hurt? The ace economic analysts at the National Restaurant Association can't quite pin it down, either. But they are pretty sure that something is up.
"Establishments that are highly dependent on roadside traffic may be more affected by the negative impact of rising gas prices than local neighborhood restaurants," says Bruce Grindy, the NRA's senior economist. "Consequently, a prolonged period of higher gasoline prices does have the capability to alter historical spending patterns within the industry."
Whoa. Bruce, which spending patterns are we talking about here?
"In general," he says, "lower-income households are disproportionately impacted by rising gas and energy prices." Which is to say, those who don't make or have much money spend a greater percentage of their available dollars on gasoline than those who have more money. In 2003 (the last year for which this data is available), households with incomes of less than $30,000 spent 5.3 percent of their household income on gasoline; for households earning $70,000, that number was only 1.7 percent. (See chart at right.)
"In terms of restaurant sales," Grindy said in a note issued late this summer, "this suggests that over the longer-term, if gasoline prices remain strong, restaurants with smaller average per-person check sizes could feel a corresponding impact, if households are not able to fully absorb these additional costs." Translation: QSRs are more likely to feel the pinch than full-service, simply because a greater share of their customers' disposable income will be paid out at the pump.
Maybe this effect just hasn't shown up yet at McDonald's. But it's having a big impact on at least one foodservice segment: pizza.
The business model for full-service and quick-service restaurants is that customers come to you, and the question now is whether customers will continue to come if they're shelling out more for gas. So far, the answer is that, for the most part, they will keep coming. But the shoe is on the other foot in the pizza segment, where the business model mostly finds operators delivering food to stay-at-home customers. Gasoline price spikes have already caused operators large (Domino's and Papa John's) and small to pass along the increased cost of delivery to customers.
It's justifiable, no doubt. But the move also dramatically undercuts the value proposition that lies at the core of the pizza business. These aren't small hikes we're talking about--$1 apiece for both Papa John's and Domino's. Throw in the added hassle this brings to hiring and retaining delivery drivers and you've got a big impact from energy price hikes up and down the line. Pizza store customers, managers and the delivery drivers in between are all taking a hit.
No segment of the restaurant industry gets off easy when energy prices spike. For full-service operators, the cost of the food you buy and the utilities you use are both likely to go up. Bringing big dollars to the bottom line will be more challenging than ever. But at least your top line should emerge unscathed, because it looks like your customers should keep on coming.
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