CHICAGO & NEW YORK — Rising unemployment, low consumer confidence and severe weather conditions kept consumers from visiting restaurants this past winter, according to market research company The NPD Group. For the second consecutive quarter, restaurant traffic dipped below year ago levels as mounting job losses hurt lunch weekday visits and supper traffic declines continued.
For the quarter ending February 2009, NPD's Consumer Reports on Eating Share Trends, which tracks consumer usage of commercial foodservice, reports foodservice traffic declined 1.5 percent from the same quarter a year ago, while total spending at commercial foodservice increased, but only by 0.5 percent.
"While not yet the worst NPD has seen, we are half-way to it. There are still restaurants attracting more consumers, but more are losing them than gaining. It's going to take product innovation, a strong value proposition, and creativity to capture share in a market that will not be growing in the near term," said Harry Balzer, chief industry analyst at NPD and author of "Eating Patterns in America."
The quick service restaurant segment experienced its first decline this quarter since winter 2003. Customer counts at QSRs were down 1 percent. Full service restaurants absorbed the steepest loss, and the rate of decline at casual dining restaurants accelerated.
One bright spot for the restaurant industry this winter was that consumers, while cutting back on weekday visits, ate out more on the weekend, reversing a trend in previous quarters.
Restaurant chains could face failure
A new study by the global business-advisory firm AlixPartners LLP shows that, given the current economy plus current conditions in the industry, up to 40 percent of America's restaurant chains could face severe liquidity crises within the next 12 months.
The study shows that restaurants are now saddled with a debt-to-equity ratio more than double what it was in 2006, that cash levels have dropped at a rate of 6.5 percent per annum since 2004 and that only in the lower-price end of the market have earnings and returns on investment been anything but worrisome.
AlixPartners studied 110 restaurant chains across four main categories: fine dining, casual dining, fast casual and QSRs. It also surveyed 1,000 consumers about their recent dining habits and expectations for future spending. Forty-eight percent of respondents said they plan to eat out less frequently in the coming year, while 51 percent predicted their average spend per meal would be $10 or less, up from 42 percent for 2008.
"While certainly there are healthy companies in every restaurant category, our analysis suggests that, without aggressive intervention, up to 40 percent of chains face the possibility of a severe liquidity crisis, which could mean failure, within a year," said Andy Eversbusch, a managing director at AlixPartners and leader of the firm's Restaurant and Food Services Practice. "Overall, we found declining growth rates and declining same-store sales in all four sectors, as well as declining EBITDA in three of the four sectors, with only quick-service restaurants bucking that latter trend."
Despite their challenges, restaurants do have a lot of opportunities today, according to AlixPartners. In addition to acquisition and market-share opportunities for stronger players, AlixPartners notes that applying "lean" principles to all restaurant operations, an approach first pioneered in manufacturing industries, may provide a lifeline for any player in this space.