Is the U.S. headed to restaurant recession, or are independent restaurants eating up more market share?
Nationally, several people who intently watch stocks have sounded an alarm that the country could be headed for a restaurant recession.
The poor market performance of publicly owned restaurants is consider a potential precursory to a broader recession because it can be a sign that people are not spending money on discretionary purchases. (See 2007 to 2009.) But that is not always the case.
Spending money on nights out of the house shows that people are confident that they will have enough income to cover more mundane purchases such as groceries, gasoline and electricity. In more simple terms, getting drinks and going to see “Bad Moms” is good for the economy.
In a column for MarketWatch, investing columnist Philip Van Doorn says chatter about a restaurant recession started last month after Paul Westra, an analyst with investment firm Stifel Nicolaus, downgraded 11 restaurant stocks. Westra said slower than usual sales growth and increasing expenses bode badly for the restaurant industry.
While Westra took a bleak stance, Van Doorn said that there are no other economic indicators that a recession is coming. In July, companies created 255,000 jobs in the United States, which was 73,000 more jobs than anticipated.
“Everything would indicate that things are doing OK right now,” agreed Darren Tristano, president of the restaurant industry research firm Technomic.
Gas prices and unemployment are down, he said, which are both good signs for restaurants and the economy in general. The restaurant market has softened, but there are plenty of positive economic indicators.
Plus, Tristano said, the stock market provides a limited view of how the restaurant industry is performing. It doesn’t take into account privately owned national chains like Chick-fil-A, which is winning the battle for chicken lovers, and independently owned eateries such as Joella’s Hot Chicken, Wild Eggs or Fernando Martinez’s many establishments.
“We tend to overvalue these public chain reports,” he said.
While publicly traded restaurants do account for a large number of stores in the United States, there are only 27 restaurant companies listed on the S&P 1500 Composite Index, but hundreds of thousands of restaurant companies in the United States.
People may be eating at home more often, Tristano said, and when they do eat out, consumers may be increasingly choosing to patronize independently owned restaurants.
“The independent market has been doing better,” Tristano said, adding that younger generations prefer to support local businesses.
Notably, in the MarketWatch column, the three publicly owned restaurant companies in Louisville come out as winners compared with their competitors.
Papa John’s International, Texas Roadhouse and Yum Brands all ranked in the top 11 in terms of rise in same-store sales and gross margins. Same-store sales is a good indicator of business growth because it only looks at sales at stores that have existed for a year or more, which helps eliminate some outliers. Gross margin looks at how much revenue has changed after cost of goods and services is subtracted out.
All three Louisville companies also reported increases in their net income margin, which factors in all their expenses — labor, food and other operational costs. While 13 other publicly traded companies had declining margins, Papa John’s International, Texas Roadhouse and Yum Brands were three of the 12 companies that experienced improvement.