Insights Industry Insights Will Legislation Feed Additional Contraction Domestically?

       

Restaurants: Will Legislation Feed Additional Contraction Domestically?

The French Revolution of 1789 is credited with the introduction of restaurants, a result of fleeing aristocrats and too many master chefs seeking employment. Today, the restaurant industry is struggling to succeed amidst an economic “revolution”. With more than 945,000 establishments in the U.S. and over 13 million employees, the restaurant industry is one of the largest private-sector employers. With 91% of the restaurants employing less than 50 people, this industry is predominantly composed of small-businesses that are significantly influenced by a slowing economy and increasing legislation. The restaurant industry is divided into three segments: full service, limited service and institutional. The full service segment features more than 212,000 restaurants in the U.S. but is losing market share to the faster growing limited service segment.

SUPPLY

Acquisitions, reorganizations and closings occurring

The restaurant industry has seen increased M&A activity in the past few years. Private equity firms and large chain establishments have completed some mergers, most notably Arby’s and Wendy’s in September 2008. In 2007, IHOP acquired Applebee’s International, creating DineEquity, and Sun Capital Partners acquired Boston Market from McDonalds. The slow economic growth has also resulted in reorganizations and closings. In January 2009, Starbucks announced the closing of more than 900 of its stores. Vicorp Restaurants filed for Chapter 11 in April 2008 resulting in the closure of 56 Village Inn and Baker Square restaurants.

Restrictive legislation limiting industry expansion

In an effort to influence the ratio of limited service restaurants, specifically quick service or fast food, to population and socio-economic status, legislators are passing ordinances restricting further development. In August 2008, the Los Angeles city council passed an ordinance that will stop the addition of new fast food restaurants in a 32-square mile area of the city, with a population of more than 500,000. Los Angeles is not the first city to attempt to regulate quick service restaurant development; New York City attempted to pass similar legislation in 2006. Other communities, such as Ogunquit, Maine, are also trying to pass restrictions, not for socio-economic reasons but in an effort to maintain the unique characteristics of the town.

Health care reform a growing concern for restaurants

The restaurant industry is closely monitoring proposed legislation pertaining to health care. Only 48% of restaurant chains currently offer health benefits to part-time hourly employees, the bulk of the work force in the industry. Of the 94% that offer benefits to full-time employees, more than 50% of the cost of the benefit is paid by the employee. Many establishments are very small businesses – 49.6% have nine or less employees. The National Restaurant Association advises that restaurant owners are concerned about additional government imposed costs. The industry average profit margin of 4% may make it difficult for some restaurants to absorb additional costs and remain in business.

DEMAND

Restaurant sales decline largest experienced in 28 years

All segments of the restaurant industry have been affected by the current state of the economy and sales overall have shown a significant decline since January 2009 and are expected to decrease by 3.8% by year-end. As of May 2009, quick service restaurant activity had declined by 2%, casual dining declined by 4% and fine dining establishments saw a double digit decrease. According to the Nation’s Restaurant News, these declines are expected to continue through 2010. High unemployment, low consumer confidence and declines in disposable income are being blamed for the continued decrease.

International expansion driving growth in demand

Demand has grown in the international market for certain franchises within the limited service or quick serve segment of the restaurant industry. By the end of 2008, McDonalds had more than 31,677 stores of which more than 50% were located outside of the U.S. Yum! Brands, which franchises Pizza Hut, Taco Bell and Kentucky Fried Chicken, has more than 33,000 international restaurants in over 100 countries. In recent years, this expansion into international markets has accounted for increased revenue for the major industry players. While sales and revenue have declined in the domestic locations, international growth has continued.

Healthier options a growing trend

Providing healthier options for consumers is a growing trend in the restaurant industry. Aided in part by increased awareness of rising rates of obesity in children, full service and limited service restaurants are adding more nutritionally balanced options. According to the National Restaurant Association, three out of four adults are trying to eat healthier and 27% are researching food nutrition information as part of the restaurant selection. The top items driving a more health conscious menu feature more fruit and produce items, smaller portion sizes and increased seafood options.

Did you like this article? Click here to sign up for The AccuVal AdVisory™ or send us an e-mail with your comments at inquiry@accuval.net.

---

About AccuVal
AccuVal provides a broad range of valuation, advisory and asset management solutions that contribute to growth or help ensure survival. We appraise the business enterprise and shareholder equity; bonds; intangibles and intellectual property; machinery and equipment; inventory; real estate and accounts receivables in over 100 industries worldwide. Learn more at www.accuval.net.