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Declining Economy Affecting Eateries

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The Associated Press

Published: December 6, 2008

Updated:

NEW YORK - As the number of unemployed consumers climbs, Wall Street analysts say restaurant sales, profits and stock prices are likely to drop, leading to even more layoffs in the restaurant industry.

Restaurants - like all retail companies - depend on consumers' willingness to open their wallets. Consumers with less cash often choose to eat at home rather than at a restaurant where drinks, tips and taxes all feed the tab.

On Friday, the Labor Department said employers cut 533,000 jobs in November, the most in 34 years. With the number of unemployed consumers climbing, analysts are beginning to wonder whether the worst is yet to come for restaurants.

In a note to investors Friday, Citi analyst Gregory R. Badishkanian said that even at McDonald's Corp., which has managed to keep sales rising because of its low prices, higher unemployment could cause sales to slide.

"If employment trends were to worsen," he said, "this could pose a meaningful risk to McDonald's business."

The analyst noted that economists at Citi have estimated the U.S. unemployment rate could rise to 9 percent during the next six to 12 months.

RBC Capital Markets analyst Larry Miller said in a note last month that if the rate were to hit 10 percent, restaurant traffic could fall nearly 4 percent, representing about $10 billion in lost sales. Profit at the companies he follows would drop an average of 65 percent, he said.

If sales and profits were to fall - even if not as steeply as in Miller's scenario - restaurants could be forced to cut their payrolls.

Some already are. According to the Labor Department, the number of employees in the food services industry fell nearly 18 percent between October and November.

The National Restaurant Association said it was the fifth consecutive monthly drop in payrolls - and the first-ever decline sustained for so long.

The job losses likely came from a variety of sources, said Hudson Riehle, the group's senior vice president of research. Riehle said the closing of small, independently owned restaurants as well as cuts at chains likely contributed to the drop last month. A slowdown in catering - an industry that's tracked as part of the food service sector - probably added to the decline, he said.

Restaurants are struggling with higher costs for ingredients as well as declining sales. Operating costs also surged because of increases in the minimum wage at the federal level and in some states.

"It obviously is the most challenging period for the restaurant industry easily since the 1980s," Riehle said.

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