Wolf Richter: Worst Restaurant Recession Since 2009 Dings Inflation

Yves here. If you look at Richter’s inflation-adjusted chart (the second one), you’ll see a stronger parallel to the crisis era  than his horizontal line placement indicates. Restaurant sales flattened out right before the recession officially took hold. Recall that in the first half of 2008, commodities prices, particularly oil, skyrocketed and hit consumer budgets. Here we have no immediate trigger for the stalling of spending, save consumers just being out of budget. And remember, this bit of belt-tightening is taking place despite consumer confidence reports being at high levels.

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

Households at lower 80% of income scale are maxed out.

“July proved to be a tough month for chain restaurants,” the report said.

Foot traffic at chain restaurants fell 4.7% in July year-over-year. Same-store sales fell 2.8%, the 17th month in a row of year-over-year declines, the longest downturn since 2009.

On a two-year basis, same-store sales fell 4.2% from July 2015, and traffic fell 8.7%.

Sales rose in only 12 markets and fell in 183 markets. California was once again the least bad region, with same-store sales down 0.7% and foot traffic down 3.6%. In other words, no region had positive results. The Midwest was the “worst region” with sales down 3.6% and foot traffic down 5.2%.

“While the economy keeps growing at a moderate pace and job gains remain strong, the consumer seems to be on vacation – literally and figuratively,” said the report by TDn2K whose Restaurant Industry Snapshot tracks sales at 27,000 restaurant units from 155 brands, generating $67 billion in annual revenue. That’s about 10% of total “eating and drinking places” revenues as tracked by the Commerce Department. The report added:

“One of the clearest indicators that households are spending cautiously is the softening of big-ticket purchases. In July, for the eleventh month out of the last twelve, vehicle sales were below the rate posted the year before. Home sales, while still trending up, are now expanding at a decelerating pace.”

Food sales were down, and alcohol sales were down. Prices were up — the average amount per check rose 1.8% in July – but it wasn’t enough to make up for the decline in customer count. The report blamed consumers that were maxed out:

“[H]ouseholds are currently maintaining their lifestyles by reducing their savings rate, and that is likely restraining spending on discretionary goods. We may have to wait until the fall or early winter, assuming wage gains accelerate by then, to see any pick up in restaurant sales.”

So everyone is waiting for wage increases for the lower 80% of the wage earners that will finally outgrow inflation. That’s all it would take to crank up the economy, and even the restaurant business. People have been waiting for years for these real wage increases. But it’s just not happening.

The report pointed out that those at the higher end of the income scale, those that can afford high-end chain restaurants, were pulling their weight in the fine dining segment:

Fine dining and upscale casual continue to outperform other industry segments. Fine dining was the only segment up in July (0.4%) and upscale casual was down fractionally. The slowdown in fast casual sales noted in the past continued in July, as did softness for quick service.

Chain restaurants are getting hit by a combination of factors, including:

  • The surge of independent restaurants, from high-end to delis.
  • “Grab-and-go” prepared foods available at every grocery store.
  • VC-funded meal replacement kits, such as Blue Apron, one of the most anticipated IPOs this year that has now totally crashed.
  • Convenience stores.
  • Food trucks.

This data is based on restaurant chains, representing about 10% of total restaurant and drinking places sales. But the numbers are starting to show up in the overall sector of “food services and drinking places,” as the Commerce Department calls it. This includes taco trucks and the like.

Sales in June, at $56.0 billion adjusted for seasonal variations but not inflation, were flat with November 2016, a period of 8 months without growth. They were down 0.6% from January but still up 1.7% year-over-year. In the chart, note the two-year period without growth during the Great Recession – and how sales have surged 49% since:

But once inflation is taken into account, the difficulty of the overall sector becomes clearer. I adjusted the sales at “food services and drinking places” (by the Commerce Department) for price changes as reflected in the Consumer Price Index for “food away from home” (by the Bureau of Labor Statistics). And suddenly the dreariness of the sector moves into the foreground.

During the Great Recession, total sales adjusted for inflation (in today’s dollars) fell about 7% from November 2007 through December 2009. Since then, sales have grown merely 22% (as opposed to 49% not adjusted for inflation).

In June 2017, sales were back where they’d been in December 2015 – that’s 19 months of no growth, with the past six months in decline:

As the TDn2K report pointed out, households are having trouble maintaining their lifestyles, and those that have savings dip into them. But over half of US households don’t have savings to dip into.

So credit card debt, at $1.02 trillion, has hit an all-time high. Auto loan balances, at $1.13 trillion, have far surpassed any prior all-time high. Housing costs are eating up an ever larger share of incomes. Healthcare costs are soaring. Households with kids in college are paying a big price. Many millennials, even those with good jobs, are buckling under their student loans, which have skyrocketed 164% over the past ten years to $1.45 trillion. And inflation-adjusted discretionary spending such as for restaurants by people at the lower 80% of the income scale is taking a hit. Something has to give. It’s the description of a messed-up economy.

Are we blinded yet by the brilliance of corporate earnings? Read…  Stock Market Warning Siren is Blaring

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  1. john

    The part about chains is particularly important b/c if I look around in Chicago, neighborhood restaurants are still booming.

    1. lyman alpha blob

      True – no such downturn in Portland ME, the latest foodie mecca. But these are also high-end expensive non-chain restaurants. Portland has gone more than a little overboard with this trend, with the concomitant gentrification continuing apace and the city largely run for the benefit fairly well-heeled tourists at this point.

      1. tegnost

        ok I read it, could you specify what numbers are taken out of context, is it that we’re collectively all 25 trillion dollars richer now than in ’07? Because if that’s it I’d remind you that there was and continues to be an asymmetric distribution, evidenced by the strength in high end dining. There may be an unstated political agenda in your own snapshot. Also, as EoW pointed out, buying cheap food at the grocery comes with it’s own significant risk and is amplified somewhat in the restaurant sector (although the finicky in my group will often give restaurants a pass on this)
        And buying organic is more expensive, check out this chart comparing organic to conventional, I only see two items that are marginally cheaper, and those are at only one of the four choices of purchase points, pea pod maple syrup and amazon honey (funny there’s no loss leader-ing going on)
        Lastly, we as a society need to patronize one anothers business’ to avoid the dreaded deflationary spiral, I think even br would say we need to be buying things from one another, no?

  2. john bougearel

    The University of Michigan Sentiment is partly indexed to the stock market. To what degree, I don’t know, only that it is substantial enough to influence the monthly numbers. That said, when one looks at the MIch Consumer Sentiment from 1980-2017, https://fred.stlouisfed.org/series/UMCSENT/, a few things become apparent. First, CS is near levels last seen in 2005-06. However, if you look all the way back to 1980, you can see the CS index fell in 2009-10 to where it fell in 1980. The CS index peaked around Orwell’s 1984 just around 100. Perhaps the stock market dotcom boom only reason the index eventually reached north of 110 in the late 1990s. Excluding the dotcom era, CS does peak out around par (100). The key takeaway for consumers, this is as good as it is gonna get in the post GFC (an ancronym from the sell side I despise)

  3. EndOfTheWorld

    I think another reason restaurants are going down the tubes is more and more people want to eat organic and non-GMO, not to mention gluten-free. There are a few organic restaurants, maybe, somewhere, but the only way to be sure about your food is to buy organic, or grow your own, and cook your own food.

    Of course you are never sure when you buy stuff labeled “organic”—-it could be a fraud like everything else in present-day America.

    1. sgt_doom

      No, there has been an economic war on Main Street by Wall Street – – anyone who is still in the dark about this is awesomely ignorant, I’m afraid!

  4. Livius Drusus

    You cannot have a consumer economy if ordinary working people don’t have money in their pockets. This used to be a key component of American thinking on economics, even among many Republicans and business owners who knew that ordinary working people need decent incomes to purchase the output of the economy. With regard to restaurants, a rich person won’t buy 500 cheeseburgers even if they can theoretically afford to do so. You need a broad “middle class” to do that.

    What more can American workers do? American workers have already sent more people in the household to work, taken on more hours of work (when they can get work) and are up to their eyeballs in debt. Something is going to have to give because this state of affairs cannot continue indefinitely.

    1. Synoia

      The robots will save the restaurants by having no-tip auto-servers….

      Hopefully the customer, the other robots, will take to gourmet electricity…

      I can see it now: What will it be? AC or DC,European, American or USB connection, 220v, 110v, 12v or 5v?

      zzzzzTTT – oh s…, I TOLD YOU to give 440v 3 Phase only AC to big fat powerful German robots…

      An throw out that arc-welder – he steals half cycles!!!

      For a thrill how would you like to see our lighting display?

  5. divadab

    Perhaps Richter’s economic analysis (households maxed out therefore spending less) is only part of the story. We and many of our friends don’t eat at chain restaurants except when traveling – preferring to prepare better-quality food at home. Chain restaurant food uses non-organic chemical vegetables and torture meat, has too much sugar and low-quality fats (often hydrogenated), and is prepared by low-paid, unappreciated workers. Why load up on this stuff when for the same money we can prepare our own food using organic ingredients? Why support an industrial food system which puts profit above all and disrespects people, plants, and animals at all levels?

    This is cultural change – and I hope it continues as people turn their backs on a system which is destructive to the health of all it touches.

  6. Jon Paul

    I barely go to chain restaurants anymore, not because I can’t afford it, but because the quality of the food has become embarrassingly poor, IMO. Even chains that I used to enjoy, like Cracker Barrel – when I go now, it just doesn’t seem to me that they are using the same quality of ingredients that they were using 15-20 years ago. I could be wrong, but that’s how it seems to me.

    Beer is kind of the same. I haven’t bought Bud, Pabst, Coors or Miller for more than a decade – partly because I lived in Germany for 2 years, and partly because the micro-brews that we have today are far superior, again IMO.

    1. tegnost

      while I am sympathetic to yours and divadabs points, I must point out that an 18 pack of rolling rock is $8, while a six pack of voodoo ranger is $10, an organic grapefruit is probably $2.50, apples and oranges each weigh about a pound, so the price per fruit is roughly the cost per pound. I go to great lengths to get to the good stores. I am on an island so it’s always expensive to get to the store, and so I go less than most, but also face the grim reality of paying for all the food and drink in one day and so cannot avoid seeing how much comes out of the bank account each week and it’s a lot. But eating out is worse, the greasy spoon in anacortes, while excellent, is still $20 for two eggs, toast, bacon and of course coffee after tipping. The outlook for the lower 80% is pretty bleak from that perspective, and as is pointed out in the article we are not currently in a recession so if this is as good as it gets….I got a kick out of the claim that restaurants are biding their time til those wage increases start happening “in the fall”. Yeah, right… as we used to say back in ratchesta (you know, in western new yawk). We’re still seeing an elite class that doesn’t do math as well as they think they do, and who may no longer say out loud that there’s going to be winners and losers (although it still bounces around in their thought streams with some regularity) but the idea that the self driving trucks that will put even more people into the precariat is still talked about as if it were as inevitable as a clintoon victory last fall masks the misunderstanding by the elite that when the bottom 80% run out of money they don’t have anymore money so can’t buy anything that costs money, and command economy policies such as the PPACA which force consumers into a not free market are the only answers these geniuses can think up.

    2. Harris

      I ate at Cracker Barrel last week and noticed that the maple syrup delivered with your pancakes went from 100% maple syrup to 50% maple syrup + 50% high fructose corn syrup.

      I expect next they will start mixing sawdust in with the pancake batter.

      1. PhilM

        They have been doing that for years. It started when the Chinese discovered maple syrup. The price in Vermont and New Hampshire doubled. Everyone’s planting maples for the long run.

        Even the good guys who run the small breakfast houses had to cut back on the real maple offering. “The kids just poured the whole bottle onto to the plate,” one told me. He was too gracious to add that their parents were just, like, “Good girl! Leave the puddle there for the help to scrape off!”

        Another loss to globalization. Forcing ourselves on the Chinese has really paid off, eh? I hope Nixon is getting new punishments everyday in whatever hell he inhabits.

      2. PhilM

        Which is not to say I do not completely agree with your disgust. I stopped eating at Cracker Barrel on my road trips the day I found that, several years ago. What’s more, when I had to stop in there last year, the food was darned near inedible. Chain quality is, as others observe here, simply foul.

        But a slice of pizza at an Italian truck stop, or a waffle at a street kiosk, still makes you groan with delight.

        America: swirling in the 1.8-liter-flush bowl.

    3. lyman alpha blob

      …it just doesn’t seem to me that they are using the same quality of ingredients that they were using 15-20 years ago…

      I bet the prices aren’t all that much higher than they were in the 90s though which begs the question, how do they manage to keep prices so low?

      I remember Mickey D’s advertising $.69 cheeseburgers about 20 years ago, which was a cheaper price than they were selling them for back in the early 80s. Once I stopped to consider what had to happen for them to sell at such a low price and still turn a profit, I decided I no longer wanted whatever it was they were trying to pass off as food.

      1. PhilM

        Mickey used to fry those fries in beef tallow, which is why we all loved them, back in the day. Now their ingredients are a step below zombie troughs.

        It is incredible what Americans will eat, and how much of it. Vile does not begin to describe it. Even the best restaurants suffer from being part of an overall degradation in the knowledge of what tastes good.

        For great food, I offer you any recipe from James Beard, made with good local ingredients.

        1. Synoia

          Vietnamese food in Little Saigon, Socal. If the food is bad the restaurant goes out of business, because of discerning customers.

  7. Wade Riddick

    “[N]o immediate trigger?”

    Try soaring health insurance premiums. Run that chart against auto spending too.

  8. Ranger Rick

    How’s domestic tourism doing? If the restaurants are having trouble the picture at the resorts must be pretty bleak.

  9. neighbor7

    “the consumer seems to be on vacation – literally and figuratively”

    “The report blamed consumers that were maxed out.”

    That’s some vacation–and some metaphor!

  10. Arizona Slim

    If I want mediocre food with indifferent service, I can provide that for myself at home.

    Same goes for good food. If I make the effort, I can also cook pretty tasty meals for myself. Only downside is having to do the dishes afterward.

    As for eating out, I came from a family that seldom did such a thing. It seems to be hardwired into my DNA.

  11. MLaRowe

    Glad to see this story. In middle America where I live (and I suspect it has one of the last remaining pockets of middle class left in the country) not eating at chain restuarants is a decent economic indicator. Of course there could (as always) be more involved than just not having the money.

    Generally my family avoids the chains because we know we cook better at home (especially in the summer with grilling). Yet the other day we wanted to eat and needed fast service so we went to a buffet style restaurant that you’ve probably heard of (I want to add this was my family’s first time to go there).

    Interestingly, I saw a family walk out when they realized that the price was higher than usual due to it being Sunday. Only a few dollars difference as there were only 3 of them -earlier I’d heard the mother say to everyone to only drink water.

    This seems to sum it up from what I’ve noticed. The already marginalized just can’t eat out anymore. No end in sight as of yet and I expect that will continue.

    Seems we need to view our national greed as an addiction. Addictions follow a curve, my family is only a small step away from being the family that has to walk out of the restaurant over a few dollars.

    Just saying.

  12. Quantum Future

    Less meat in food at chain restaraunts. Pricey and few places serve bread or tortilla chips. Service isnt great. Poor value proposition. $35 for two at these places or three great meals at home for that money.

    Plus, me and wife like watching the big screen while eating, comfy furniture, air conditioning and no traffic or grumpy people to deal with.

    The consumer is tapped out. Wages are rising and will but your talking a decade to reach equalibrium with the higher housing, medical and college costs, assuming these stay low inflation or flat.

  13. sharonsj

    Who says fast-food places have low prices? Dunkin Donuts used to be my preferred place to stop to buy something while traveling. My favorite drink was a Coolatta (a frozen shake) for $3. Dunkin eliminated the Coolatta and replaced it with a frozen coffee, which now costs closer to $4. It’s not worth the extra money. Then they got rid of all their luncheon foods; your only choices are breakfast foods, some of which are cheaper but are pretty bad. l’m screwed traveling now, because I won’t stop at the other chains, though I’m eyeing KFC. At least they can’t eff up chicken.

  14. sierra7

    If any restaurant depended on me to buy at their trough they would go broke……My ex and myself raised 7 children; there was hardly ever any extra $$ for eating out except Mickey D’s (back in the late ’50’s -60’s-70’s…….but only when we all got together with their cousins…..99% of our meals were in our kitchen…..all the kids know how to cook and eat healthy even with very busy jobs. Huge salads, lots of veggies and not so much any kind of flesh……..Today I’m well retired into my late 80’s and still cook damned near every meal I eat……..
    I do believe that too many Americans are under crushing debt; the only way to turn that around is turn off the debt……….there is no “super-saver” genie that is going to save u (them)………..I’ve always said that if you want to bring our system of extreme exploitation to curb is designate for a non-declared time a no shopping day; no driving day; etc.
    We have to return to a more community minded society and kick the consumer one in the crotch……that’s the only way we will survive. There are millions of acres of abandoned acreage in our inner cities that can be cleaned up and replanted with healthy green crops and pasture. It only requires a revolutionary spirit and the will to carry it all out. Our time is running out.

  15. DAve

    The value of the real estate underneath these restaurants has become completely detached from the level of potential income a business owner can hope to generate on that land. This can’t last.

    This is pure asset price inflation/speculation caused by a decade of ZIRP. The economy is broke.

  16. Duncan

    Im not trying to take anything away from the argument being made in your article, I agree food “luxury” is often one of the first things to be cut, but I think another large factor is just how gross fast food has gotten. The quest to squeeze every penny out of every sale has not done traditional fast food places any favors.
    Im not saying it was ever “good” and its most likely a case of rose colored glasses but 20 years ago when i was a kid there was at least a niche time when some hot nuggets hit the spot. Now every chicken product taste like cold rubber and the list of things i can even force myself to eat from taco bell is down to 1 or 2 things (which is unfortunate because its the same 5 ingredients arranged differently in every product they sell).

    Its admittedly hard to tell where nostalgia ends and objectivity begins… but the fact that I would take the crapshoot that is a mid west grocery store at rush hour over fast food after working all day speaks volumes.

    1. Yves Smith Post author

      This is not just “fast food”. Chain restaurants include places that are more upmarket like Olive Garden, Zoe’s, Benihana, McCormick & Schmicks, Outback Steaks, Red Lobster, TGI Fridays, and Chipotle.

  17. Will

    Demographics has a part to play as well. Boomers peaked and passed their peak spending age years in 2007-2010. (Hmmmmm, what else happened around that time). You cannot replace 85 million peak spending boomers with only 60 million peak spending less wealthy X’ers and expect the same economic consumption. Forget the millennials. Even though there are more millennials than boomers, most have zero wealth due to twice the debt burden and lower starting career wage trajectories at recession depressed wage labor market pricing. They’ll be at the previously assumed peak consumption age or older before they can really begin to spend. Also, psychologically, the Great Recession has permanently changed consumption habits for the next decade. Or it’s just conjecture.

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