What the government shutdown means for the restaurant industry

Oct. 1, 2013 | by Alicia Kelso
What the government shutdown means for the restaurant industry

A gridlock in Washington, D.C. officially caused a government shutdown as of 12:01 a.m. today. The move marks the first government shutdown since 1995. That lull lasted 21 days.

Economic implications of such an event depend on the length of the furlough. In 1995, government output was reduced by $4.6 billion during the fourth quarter, and by $1 billion during the first quarter of 1996, according to the U.S. Bureau of Economic Analysis.

A Moody's analyst told CNN that if this current shutdown lasts three or more weeks, it will lead to "significant economic damage," potentially reducing the GDP by 1.4 percent for the quarter.

A shutdown could further dampen an already trepid restaurant industry. The National Restaurant Association's August Restaurant Performance Index (which measures operators' Current Situation and Expectations trends), released this week, showed a decline for the third consecutive month. 

Since the government turned itself off this morning, there will likely be a trickledown effect for restaurant operators, in part for the following reasons:

Less disposable income = less dining out

A shutdown means that about one-third — or about 800,000 — government employees will be forced to stay home. Many of those furloughed employees won't get paid during that time (back pay is not guaranteed, though in 1995, they were paid retroactively), which will affect restaurant traffic and ticket as these consumers pinch their pennies.

Business loans halted

For operators looking to debut or grow, federal loans will be halted during a shutdown. Small business owners seeking a loan from the government will have to wait.

Food safety compromised

Food safety will potentially be compromised with a shutdown. The Food Safety and Inspection Service will continue its safety-related activities, USA Today reports. Also, the Grain Inspection, Packers and Stockyards Administration will continue inspections if they're paid for by user fees. However, "an inability to investigate alleged violations could hamper corrective action in the long term and could have an immediate impact on members of industry."

Also, the FDA will limit its activity to high-risk recalls. Most routine food safety inspections will be suspended.

Another effect could come from the suspension of trash collection in some Washington, D.C., areas. Businesses that depend on city trash collection will be left with an unsightly heap.

Immigrant employees unverified 

Out of a total of about 12.7 million workers in the restaurant industry, an estimated 1.4 million — both legal and illegal immigrants — are foreign born, according to the Bureau of Labor Statistics. According to 2008 estimates from the Pew Hispanic Center, about 20 percent of the nearly 2.6 million chefs, head cooks and cooks are illegal immigrants. The government's e-Verify system, which voluntarily checks employees' legal work statuses, will be shut down as the government is closed.

Public companies fight for solid ground

Wall Street doesn't respond favorably to government shutdowns — in 1995, stocks dropped 3.7 percent during the stagnation. With the impending shutdown, stocks slipped first thing Monday morning. A handful of public pizza companies — from Domino's to Papa John's to Pizza Inn — could take a bottom-line hit from this tumult.

Another indirect effect of a shaky stock market is the adoption of more conservative spending habits, as consumers' 401Ks take a dive.

A blow to optimism

Finally, as CNN also reports, the American psyche will take a big hit. For the past two or so quarters, many restaurant brands have cited a slowly recovering economy for flat sales and heavy discounting. Brands across segments, including McDonald's, Burger King and Pizza Hut, have shifted their focus to value menus to build their consumers' confidence. with a shutdown wrench being thrown into the recovery, companies will continue to navigate the challenging economy.

Read more about operations management.

Cover photo courtesy of Wikipedia.

Topics: Financing and capital improvements, Operations Management

Alicia Kelso
Alicia has been a professional journalist for 15 years. Her work with FastCasual.com, QSRweb.com and PizzaMarketplace.com has been featured in publications around the world, including NPR, Good Morning America, Voice of Russia radio, Consumerist.com and Franchise Asia magazine. View Alicia Kelso's profile on LinkedIn

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