The U.S. restaurant business is poised for its first inflation-adjusted sales growth in four years, as more people go back to work, though expensive gasoline and soaring foods costs have become increasing concerns, industry representatives said.
People are eating out more often, boosting demand at quick-service locations in particular, as employment recovers from the 2008–09 recession, Hudson Riehle, research director for the National Restaurant Association, said in a May 23 interview.
The addition of about 2 million jobs over the past couple of years, combined with rising personal incomes, bodes well for beef, dairy and pork producers and other food providers, according to Riehle, who spoke during the association’s annual trade show in Chicago.
“There’s a very strong correlation between restaurant sales and real personal incomes,” Riehle said. “It’s definitely shaping up to be the best year of the past four” in terms of restaurant sales, he said.
“There is substantial pent-up demand for restaurants,” Riehle said.
Almost 8 billion pounds of pork was sold through restaurants and other foodservice channels last year, accounting for about 41 percent of total U.S. pork consumption, according to the National Pork Board. Foodservice accounts for about two-fifths of U.S. cheese consumption, according to previous industry estimates.
Riehle’s remarks came during a busy day for the association’s show, held May 21–24 at McCormick Place near downtown Chicago. An official attendance estimate wasn’t yet available, but association officials said numbers appear to be comparable, or possibly up slightly, from 2010.
In 2010, the NRA show drew more than 58,000 registrants, up 7.4 percent from 2009, and about 1,700 exhibitors.
Restaurant operators have grown more optimistic over their prospects this year, Riehle said. In current dollar terms, industry-wide sales are projected to reach a record $604.2 billion in 2011, up 3.6 percent, repeating a previous NRA forecast.
When accounting for inflation, restaurant sales are expected to rise 1.1 percent this year, the first increase since 2007, according to the NRA outlook. Sales declined by an average of 1.3 percent the previous three years.
Still, the industry’s outlook grew cloudier recently as gasoline climbed near or above $4 a gallon. Rising fuel costs leave consumers with less to spend after they fill their tanks, Riehle said.
“There is very little good that comes with high gasoline prices, because it reduces cash on hand,” Riehle said.
Additionally, costs for grains, meat and other basic commodities have surged, squeezing restaurant margins, Riehle said. With wholesale food costs up nearly 7 percent so far this year, compared with a 4.9 percent increase in 2010, “operator margins are under pressure,” he said.
The rising cost of food is currently restaurant operators’ biggest worry, supplanting the economy as the top concern for the first time in more than three years, Riehle said, citing recent NRA surveys.
There appears to be “no immediate relief” ahead from rising food costs, Riehle added. “It does look like the (restaurant) operators will be dealing with higher food costs in the year ahead.”
Pump prices eased in May, as crude oil prices de-clined, but remain more expensive compared to recent years. During the last week of May, regular-grade gasoline averaged $3.84 a gallon nationwide, down about 2 cents from April but up 37 percent from 2010, according to auto trade group AAA.
Wal-Mart’s big-city aspirations
There’s an area about a mile from my home in Chicago’s Lakeview neighborhood that I call “Bad Luck Corner.” Centered around a three-way intersection of Broadway, Clark and Diversey streets, it’s got the nearly constant hustle and bustle found in many big cities.
But for some reason, retailers have trouble sticking there. Over the past 19 years, I’ve lost count of how many discount shoe outlets, vitamin stores, sunglasses shops and others have come and gone.
Enter Wal-Mart Stores Inc., which recently targeted Bad Luck Corner as a spot for one of the nine or so locations the big retailer says it will open in Chicago over the next couple of years. Wal-Mart’s proposed Lakeview location will partly occupy the site of a shuttered PetSmart, and at 32,000 square feet, the store would be about one-sixth the size of the typical Supercenter.
So as Wal-Mart moves ahead with its plan for Bad Luck Corner, I say to it: Good luck with that.
Wal-Mart is no PetSmart, of course. It’s not anything else, really. The world’s biggest retailer isn’t much for the subtle gesture, and its ambitious plans to add stores in some of the largest U.S. cities, including Chicago, New York and San Francisco, are well-documented. As growth in the retailer’s primary rural and suburban markets levels off, Wal-Mart is aggressively pushing into urban America with plans to open dozens of small to medium-sized stores over the next five years.
But after seeing the retailer turn in another soggy sales performance last month, I’m starting to wonder if instead of shoehorning a scaled-down shop among Chicago’s North Side yuppies, the folks in Bentonville, Ark., may be better off propping up the 3,800 or so stores they already have.
In a May 17 financial release, Wal-Mart said comparable-store sales in the United States fell 1.1 percent in the previous quarter from a year earlier, the eighth consecutive decline.
Comparable-store sales are a closely followed gauge of retailer performance, and this unhappy streak shows that Wal-Mart, like many of its customers, continues to struggle to recover from the recession that ended almost two years ago. More recently, the combination of high fuel prices and high unemployment has increasingly squeezed consumer budgets, Wal-Mart said.
Wal-Mart said its grocery business continues to do well, unlike many other categories. But a huge retailer like Wal-Mart cannot live on food alone, or at least that’s what the market appears to be telling us. Since the beginning of 2010, Wal-Mart shares have eked out a total return of just 3.1 percent, sixth worst among the 30 companies on the Dow Jones Industrial Average, according to Bloomberg LP.
Might Wal-Mart have to slow its expansion pace or close underperforming stores if sales don’t improve? Nobody that I’ve talked to who follows the company is saying that. But further sales weakness isn’t going to do much good for Wal-Mart’s share price.
To be sure, Wal-Mart is still making a pile of money, with net income up 3.9 percent in the previous quarter, to $3.43 billion. And if you’re in the business of producing beef, pork, milk or other foods, Wal-Mart, as the biggest U.S. food retailer, is tough to ignore. Wal-Mart has said most of its urban stores will have fresh-food departments, which will require steady suppliers.
Including Sam’s Club warehouse stores, Wal-Mart sold more groceries last year — almost $168 billion worth — than the combined sales of the three biggest U.S. supermarket chains (Kroger, Safeway and Supervalu).
I’m also aware of the risks of betting against a company whose global revenue, at nearly $419 billion, topped the combined GDP of Ireland and Pakistan.