Scott Barnett & Associates Blog
Real Talk: Recession and Restaurants

July 14, 2022
If you count the time I worked as a cook/bartender/server in college, I have seen four economic recessions while working in the restaurant business. Since I studied economics at college, I have at least some perspective on how these things affect the industry.
Between politicians, economists and the media; we don't really get anything that approaches consensus or even reality on just about any subject - least of all economics. Without getting too deep in the weeds, I will try to outline how I see the current situation.
Economists define recession as two consecutive quarters of decline in gross domestic product (GDP). The media defines it as anything that has tragic newsworthiness. Politicians only see recession when the other party is in power.

To restate an old joke, it's a slowdown when your neighbor loses his job. It's a recession when you lose your job. It's a depression when you lose your house.
History Doesn't Repeat Itself. It Rhymes.
If there are any lessons to be drawn from the past in this regard, it's the adage that history does not necessarily repeat itself but it definitely rhymes.

The closest parallel between today's economic situation and the past is the 1970's. At that time, we had inflation, a recessionary economy, a big oil shock, a Federal Reserve that had been asleep at the wheel and an ineffective President who appeared to be in over his head. Each one of those factors is also true today.

The first thing to know is that the world did not come to a stop during that time. People still went to restaurants and more than 9 out of 10 still had jobs. Where the pain for operators comes in, however, is the spending habits of people "on the margin."

When gasoline goes to $6-7 per gallon, someone might say, "I'm not going out to dinner four times a month. I am going to stay home one of those weeks." To that person, it's an inconvenience to their lifestyle and they may not even feel it very much.

To the restaurant operator, however, that scenario translates into a 25% drop in business. That is downright destructive.
A Pain Point: The Restaurant Trade-Down
The other pain point is in trade down. A customer may decide that Olive Garden is just too expensive so they will go to Fazoli's or use a coupon at some other Italian chain.

Typically, it is the family and casual concepts that get hit the hardest in the inflationary scenario. Their customers' wages lag the most and $6-7 per gallon gas takes a larger chunk out of their willingness and ability to consume.

Oddly, fast feeders are not as affected- perhaps because the convenience and habitual behavior associated with the genre insulate them to a certain degree. They are somewhat vulnerable on the per person spend side as people trim their incremental or discretionary spending.

High end and polished casual will probably lose some of the "aspirationals"- the customer that cannot routinely afford a Ruth's Chris or whatever local establishment they use for special occasions. They are another group that does not necessarily stop going. They just don't go as often.
Delivery Is a New Pain Point?
What does not have precedent in previous recessions is how the economic downturn will affect deliveries. It will be interesting to see how people react to delivery and associated price increases there. Pushback on fees from operators and customers alike was already gaining significant traction so there is a point of vulnerability. Operators typically raise their prices about 7-10 percent to offset the delivery charge they pay to a DoorDash for example.

A high-income couple in Manhattan recently told me that they were making a point of cooking more at home. These people can afford to dine out seven nights a week if they want to but the quote was, "Where does the money go?"
Rising Operations Costs
A few key areas of operations are almost destined to see rising costs. From a supplier standpoint, you can expect your credit terms to tighten somewhat- particularly if you have been late in paying in the past.

Broadliners and major protein vendors become particularly anxious in this environment. They have typically large exposures to major chains that puts them in a precarious position. Prices are continuing to rise.
The "cause and effect" aspects of the war in Ukraine have not yet been felt in their entirety. It's not just wheat and oil. The multiplier effects on other commodities, particularly proteins will be substantial.
Prior to the recession, the cost of labor was increasing rapidly, and with unemployment so low and the demand for employees so high, labor costs will continue to rise. This in turn will force many operators to raise prices. Thus begins the wage/price spiral.
Everyone Is Wondering… How Bad Will It Get?
The question economists and restaurant operators are asking is of course: how bad will this recession get? Two factors I am keeping an eye on are oil prices and potential stagflation (high inflation, slowed economic growth and high unemployment).

Every major recession for the last 50 years has been associated with an oil shock. With the recent unstable oil prices, this recession appears to be no exception to the oil shock-recession trend.

Also, the stagflation in the 1970's could easily happen again. That is truly dangerous. It robs the Fed of important tools to curb inflation and it perniciously robs people of their income. Fortunately for now, the unemployment rate remains low, keeping us out of the depths of stagflation, but the threat remains.

Restaurants have been dealt a bad hand for more than 2 years now. As in the past, the industry has generally been characteristically nimble and flexible in response. Nevertheless, it looks like things will get worse before they get better.
If you are interested in learning about how to structure your restaurant for success in an economic downturn,
reach out to me today.
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