Investing in the restaurant industry reveals optimism among investors—will 2017 be a better year, enough to justify the 13% stock growth over the past couple months? Restaurant industry analysts and forecasters don’t think so, expecting sales to remain similar or marginally better than 2016. So why the discrepancy?
The investment world has seen a huge lift following the election of Donald Trump, with stocks soaring to new record levels. Expecting that the economic boost will carry over both to the business success of restaurants as well as the dining habits of consumers, investors project growth in 2017. But it’s unclear whether, or how long, the market boom will last. In fact, reactions to President Trump’s immigration executive order at the end of January caused the Dow and NASDAQ to post losses. The volatile nature of the market in addition to the unknowns of a brand new administration make it difficult to predict the year-long effect on the restaurant industry.
Caution from Analysts
Analysts are looking at much more than current stock trends, and are cautious in growth estimates. While predicting growth, they expect slower growth in sales than 2017 (4% vs 5%). A number of environmental factors contribute to their relatively-flat projections.
- Deflation: as costs decrease for food and supply commodities, it benefits grocery shoppers (and therefore the profits of grocers). But restaurant prices have still tended to rise (or at least stay the same), increasing the price gap between buying groceries and eating out. For many consumers, the grocery stores will be the more attractive option. And for the grocery stores themselves, lower costs increase margins, making deep discounts—which are hard to compete with—a viable strategy.
- Discretionary Income: increasing consumer costs (such as rising gas prices, and higher health insurance premiums), and the growing sales of high-ticket items (like cars, requiring monthly financing), mean less spare cash for dining out. When other financial obligations arise, spending money on restaurant meals decreases.
- Too Many Restaurants: restaurant locations have increased in recent years—bringing new jobs, but ultimately outpacing foot traffic. This oversupply has cannibalized sales from one franchise or location to another, and slowed 2016 growth. This will only improve if interest in dining out—and the resulting foot traffic—rebounds.
- Betting on Tax Reform and Stock Optimism: restaurants or management companies need to use caution when making allocating finances based on expectations of the new administration. Yes, the stock market rose. But its future is uncertain. Yes, tax reform is promised, but until those bills are proposed and become law, business obligations fall under current law. Banking on the “not yet” could provide early returns, or could miss the mark—even catastrophically.
- Words vs Actions: even when the economy favors the restaurant industry (and spending in general), sometimes consumers just don’t behave as expected—or even as they say the do or will. Even though consumers are increasingly confident about the state of the economy, that’s not translating to restaurant spending, which is usually the first sector to see growth when recovering from a downturn.
As investors become more aware of the gap between consumer confidence and actual spending habits, their predictions are likely to come more in line with what analysts are saying. But for the restaurateur, it’s important to hear what both investors and analysts are saying, while keeping on the pulse of consumer behavior in order to make effective business decisions to achieve growth.
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