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Restaurants: Ready to Serve

By: AccuVal Associates, Inc.

The U.S. restaurant industry is an economic juggernaut with 960,000 restaurants generating sales representing 4 percent of the U.S. gross domestic product and employees comprising nearly 10 percent of the U.S. workforce. Restaurants are the nation's second largest private employer with 12.8 million employees.

In recent years, the restaurant industry has taken a beating by the recession, declines in disposable income and renewed consumer budget consciousness. In addition, many companies and organizations have cut back significantly on expenditures for business meals. However, after three tough years for the industry, sales are expected to reach a record $604 billion in 2011 and record positive growth after three years of real sales growth decline, according to the National Restaurant Association (NRA), in response to pent-up consumer demand. Two out of five consumers say they are not dining out or using takeout as often as they would like.

However, recent economic reports are putting a lid on some of this optimism. In August, the NRA reported that its Restaurant Performance Index (RPI) hit its lowest level in 11 months. "Although same-store sales and customer traffic levels remained positive in July, restaurant operators' outlook for the economy took a pessimistic turn", said Hudson Riehle, senior vice president of the Research and Knowledge Group for the NRA. "This survey month was burdened with the debt ceiling crisis and the downgrade in the nation's credit rating, which added an additional layer of uncertainty in an already fragile economic recovery."

SUPPLY

Ingredient costs rising

Restaurants continue to struggle with rising prices of key food products and ingredients, with costs expected to remain elevated in 2011. Weather and international demand have caused rising prices for many restaurants and have reduced operating margins. Restaurants are sensitive to raising prices on menu items to offset rising commodity costs as they risk losing customers.

For 2011, the U.S. Department of Agriculture is projecting relatively strong growth in beef prices, steady prices for pork, broilers, turkeys and mixed prices for dairy products.

As new restaurants open doors, industry remains marked by fierce competition

The restaurant industry remains intensely competitive in terms of pricing, service, location, personnel and type and quality of food. The number of restaurants continues to grow in the U.S. with the addition of approximately 7,700 eating and drinking establishments in 2010.

Competition in all areas comes from national and regional restaurants chains, along with locally-owned restaurants. Convenient meals offered at supermarkets in the form of improved entrées and side dishes from the deli selection have threatened traditional restaurants.

The fast casual sector of the restaurant industry, which blends traditional fast food and casual dining, has been seeing strong growth due to increasing consumer interest. The fast casual sector has been taking market share from more traditional restaurants and fast food restaurants. Companies in this sector, such as Chipotle and Panera, have seen rising share prices and solid profits.

Potential labor shortages in medium-term

Economic weakness has helped alleviate the labor shortages that generally plague this labor intensive industry. In April 2011, only 4 percent of NRA respondents to a poll indicated recruiting and retaining employees was a challenge, compared to 33 percent four years ago.

While it may be hard to imagine now, labor will become increasingly hard to find as the economy slowly improves. In the later part of the prior decade, labor shortages in the restaurant industry were exacerbated by declines in labor force participation rates of 16-to-19 year olds.

DEMAND

Demand for quick-service food rising

Consumers looking for fast, inexpensive meals have boosted demand at quick-service restaurants, which are expected to post slightly stronger sales growth than full-service restaurants. Quick-service restaurants are projected to post sales of $167.7 billion in 2011, which is a 3.3 percent gain over 2010. Full-service restaurants are projected to earn sales of $194.6 billion in 2011, which is an increase of 3.1 percent over 2010.

Emerging markets unfolding new opportunities

As the U.S. markets have become highly saturated with restaurants, many large, domestic restaurant chains have looked internationally for continued growth. For example, Wendy's announced in the recent second quarter that it had expanded into Russia with two restaurant openings, and Darden Restaurants, Inc. (operator of Red Lobster and Olive Garden) announced it will expand its chains into Mexico under a development agreement with CMR S.A.B. de C.V., developing at least 37 restaurants in Mexico over five years. In April 2011, Arcos Dorados Holdings Inc., an operator of 1,755 McDonald's locations in Latin America and the Caribbean, completed an initial public offering (IPO) of 62.5 million shares with shares soaring 25 percent on its first trading day. Many foreign markets have huge growth and long-term profitability potential, with China looking particularly promising given its strong population and economic growth.

Location, location, location

Success of restaurants depends largely on their locations. As demographic and economic patterns change, a restaurant may become unprofitable. Declines in neighborhoods or adverse economic conditions in areas surrounding those neighborhoods could result in reduced sales for restaurants.

Healthier eating a growing trend

Healthy eating is a key trend affecting the restaurant industry with seven out of ten consumers saying they are trying to eat healthier when dining out than they did two years ago. The trend toward healthier eating is mirrored by restaurant operators, indicating guests order more healthful items and pay more attention to the nutritional content than two years ago. Healthier eating has hurt many of the less healthy chain restaurants.

In addition to nutrition, local souring and sustainability are top menu trends for 2011. Locally grown produce, locally produced meat and seafood, healthy kids' meals, sustainable seafood and gluten-free/food allergy conscious cuisine are the top trends affecting full-service restaurants in 2011. Healthy options in kids' meals, gluten-free items, spicy items, locally sourced produce and smoothies are the top trends affecting quick-service restaurants in 2011.

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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.