Everything you read says that the economy continues to improve after the “Great Recession.” The markets have hit new highs – unemployment is low and the housing market is hot again.
So why are so many restaurants continuing to have challenges?
The Wall Street Journal recently reported that “the U.S. restaurant industry is in a funk” despite other sectors of the economy growing. Changes in lifestyle, income inequality, shopping habits and general lack of confidence in the future have impacted the restaurant industry. Many sources in the financial world are predicting a “correction” and speaking of the proverbial “down cycle.”
So what is the “leading economic indicator” for the restaurant industry?
No dining segment has taken a bigger beating than lunch over the past 18 months. There are a wide variety of reasons for this massive downslide, but is it a warning about an even greater shift in dining habits? Many of the restaurants that rely on lunch sales may start falling as storefront retailers who are struggling to stay relevant in this changing world of eCommerce. Decreasing disposable income and a lack of desire to go out to eat are driving this trend.
No dining segment has taken a bigger beating than lunch over the past 18 months.
Restaurant sales have always been looked upon as the canary in the coalmine for what is to come in the general economy. The workplace and many companies have also changed resulting in major shifts in dining habits. emerging. Income inequality is a real issue. QSR establishments are reporting slightly negative results, but there are deep declines within moderately priced casual theme restaurants which is signaling trouble ahead. Amongst the hardest hit are brands like Applebee’s, Ruby Tuesday’s and Chili’s.
According to market-research firm NPD Group Inc., in 2016 – 433 million fewer trips were made to U.S. restaurants at lunchtime than in 2015, resulting in roughly $3.2 billion in lost business. This is the lowest level of lunch traffic in 40 years.
In general, people are protecting their pocketbooks and even the two Martini “Power Lunch” is almost dead as the ritual of building strong personal relationships over a business lunch has given way to non-meal related meetings, conference calls or Skype. More and more people are working a portion of their workweek from home. These telecommuters are highly unlikely to go out and eat lunch the way they did if they went to the office. It is now estimated that more than 24 percent of office workers do a portion of their workweek from home. The dynamic is completely changing.
The new dominance of online shopping has driven people away from brick and mortar stores, malls and downtown storefronts, crushing an entire sector of the traditional economy. Fewer trips to the mall or to your local Main Street means fewer walk-in dining opportunities for shoppers wanting to grab lunch while they are out and about. E-commerce has pounded the brick and mortar retailers to death – are restaurants suffering collateral damage?
The NPD Group also reported that higher cost of restaurant lunches is another factor in the decline. Lunch tabs in restaurants have gone up significantly while food costs in supermarkets have gone down. People notice. Supermarkets such as Whole Foods and others have long positioned themselves as direct competitors to restaurants for all prepared meals by providing variety, quality and value. Now their high-priced consumer perceptions have fallen below restaurant dining costs.
Restaurant owners have tried to adapt in reaction to this shift in the segment, because maintaining an empty dining room during lunch can be very costly. A restaurateur pays rent for the space 24 hours a day – seven days a week regardless if it is filled or not.
The pain is spreading to suppliers. Meat giant Tyson Foods Inc. recently said a 29 percent drop in quarterly earnings was due partly to the decline in restaurant traffic, much of which can be tracked to the declining lunch sector. Produces, distributors, resellers, retailers, restaurants, each of which provide jobs and returns to their shareholders will suffer. Indirectly, this micro economic recession spills over onto everyone doing business with these restaurants and their vendors.
The steep and measurable decline in lunch sales is not merely a call to react to market changes. It is a real sign of things to come. – a shift in our industry and the overall economy. If you are listening, the canary just stopped tweeting. You should be prepared to adapt and change your business model or you might have a really difficult financial challenges ahead.
“It is not the strongest of the species that survives, nor the most intelligent, but the one that is most responsive to change.” – Charles Darwin, 1809