Restaurant Industry Suddenly Tanks, Worst Plunge since the Beginning of the Financial Crisis… Plunges Like This Only Occur When Something Big Is Going On.
Submitted by IWB, on February 3rd, 2016
Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter
The restaurant industry has been unscathed by the economic slowdown. The meme is that Millennials like to spend their money on “experiences” – such as eating out, drinking at their favorite watering holes, and going places (and eating out) – rather than buying stuff, particularly stuff at brick-and-mortar stores.
These brick-and-mortar stores have been singing the blues of dismal sales, earnings warnings, layoffs, and store closings as consumers refuse to splurge. And to add insult to injury, consumers have been shifting their spending online. But the restaurant industry has been flying above the fray, benefiting from Millennials’ preference for “experiences.”
Or that was the meme. The National Restaurant Association just released itsRestaurant Performance Index for December. And it suddenly plunged.
The RPI is a composite of the Current Situation Index and the Expectations Index, both of which track restaurant operators’ responses on same-store sales, traffic, labor, and capital expenditures. “Steady-state level” is 100. Values above indicate expansion, values below indicate contraction. In the data series going back to 2003, the RPI has ranged from its peak of 103.5 in 2004 to its low 96.5 during the worst moment of the Financial Crisis.
“As a result of broad-based declines in both current situation and expectations indicators,” – as the report started out – the RPI for December fell to 99.7, from 101.3 in November and from 102.1 in October, 2.4% in two months, the worst two-month plunge since early 2008, at the cusp of the Financial Crisis.
The Current Situation Index dropped even more steeply, to 99.4 from 100.9 in November and 102.5 in October, 3.1% in two months, also the worst since the beginning of the Financial Crisis.
The Current Situation Index had hit an all-time high of 103.8 last July, at a time when the restaurant industry, while keeping a worried eye on the market turmoil and the slowdown, was still optimistic that restaurants were independent from it all, that Millennials would pull through, and that consumers in general were still hanging in there. Since then, the Current Situation Index has plummeted 4.2%, on par with the worst 5-month plunge during the Financial Crisis. Back then, the index started out at a lower point, from 102 in early 2007, dropped for two entire years, in all 6.3%, to hit 95.7 in early 2009, before edging back up.
So this is not a good sign. These kinds of plunges only occur when something big is going on.
“December’s RPI drop was due to declines in all eight of the current situation and expectations indicators, each of which fell by more than a full percentage point,” the report explained.
Same-store sales experienced a net decline year-over-year for “the first time in nearly three years,” with 43% of the restaurant operators reporting lower same-store sales, a ten-point deterioration from November, while 51% reported lower store traffic.
The one good thing was that the Expectation Index, when it dropped 1.6% from November, didn’t break through the 100-line in December. At 101.1, restaurant operators retained some optimism. But they’re always more optimistic about the expected conditions in the coming months; even during the Financial Crisis, the Expectation Index never dropped anywhere near as low as the Current Situation Index.
And yet, “elements of the economy remained uncertain toward the end of 2015,” as the report put it mildly, and the hopes for a year-over-year increase in sales plunged in December, after having already deteriorated in prior months. Only 27% of the restaurant operators expected a year-over-year sales increase, down 11 points from November, “the lowest level in more than six years.”
The restaurant industry in the US is huge: 14 million people work in it, or about 10% of all workers, according to the National Restaurant Association. With $709.2 billion in annual sales, the industry accounts for about 4% of GDP. It’s an important part of consumer spending, which makes up the biggest part of the US economy.
And it’s these consumers who’ll have to pull the US out of the mire because manufacturing, industrial production, and transportation are already in a recession and energy is in a depression.
But with announcements of corporate cost-cutting and mass layoffs gracing the headlines on a daily basis, some of these consumers, even Millennials, strung out as they already are, might be getting second thoughts about spending money they don’t have, on “experiences” they might not need, to pull the US economy out of whatever it is sinking into.
And these are the secondary effects of corporate cost-cutting now spreading through the economy. Read… So Just How Bad is the Revenue and Earnings Recession?
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