How does the long-term economic outlook affect the restaurant industry?

The Great Recession has hit the hospitality industry especially hard. Hotel construction loans are near impossible to come by, many restaurateurs looking to sell their businesses are stuck selling at potentially less than the total asset value, and even long standing, best in class operations are running happy hour specials and cutting into profitability. Few full time owner/ operators have the time or energy to look into economic growth forecasts for the US, and their respective metropolitan region.

Historically in our economy, very sharp downturns are followed by even sharper upturns, as businesses spend on new opportunities, consumers take advantage of lower priced services, and the economy becomes flush with cash and continues to grow. In this situation, things are different. The American people borrowed their way into prosperity during the Great Boom of the early 2000’s, and are now recovering by recouping their savings.

Current American mortgages, student loans, credit card debts and other forms of debt add up to almost 120% of our annual disposable incomes. Baby boomers, the wealthiest of Americans, are now facing the stark reality that they will have to work for more years than they planned. The effect has been, in 2008 and 2009, consumer spending fell for two years in a row, the first time that has happened since the Great Depression. The majority of economic forecasts are continuing that trend into the next couple of years.

This has created a unique outlook for hospitality investors. Firstly, the fast casual sector is exploding. Americans are still busy people, not used to cooking at home, and are seeking value in quick service restaurants. Full service chains are now having to do more with less, and smart owners are realizing that this trend is probably not temporary.

In my consulting endeavors, I recommend that my clients create an action plan for the next two years, to see where they can cut the fat. Many restaurateurs have included their line managers on such a task, and are coming up with collaborative new ways to streamline menus, reduce labor, and attract new customers.

There are also opportunities for purchase or expansion, as in any changing of the guard, many quick thinking entrepreneurs see how this is true. The reality is that capital is very hard to obtain. Small business loans have almost evaporated, and equity investors are wary. Debt or equity financiers need intricate, professional financial statements, and the right due diligence to see if the opportunity is well founded. Forming the right team for such an endeavor could pay dividends for years to come.

Restaurateurs are notoriously immersed in their properties and the microeconomy directly surrounding their stores. Economic data suggests they need be more aware of the future macroeconomic outlook, or risk becoming obsolete.