What Happened to the Restaurant Recovery?

Monroeville, Al.-The table was set for a recovery in restaurant sales; then something happened, it didn't materialize.

The economy was improving, and families started to eat out more often, which is usually an early sign of the industry's turnaround. After several years of tightening belts, it appeared consumers would start eating out more frequently.

But a double-whammy of high gasoline prices and rising food costs polarized consumers.

Recent research from NPD Group suggests consumers are of two different mindsets when it comes to spending—those who cannot spend freely and those who can—and the dichotomy between these two attitudes is going to have far-reaching implications for the restaurant industry for the next few years.

The vast majority of Americans, some 76 percent, fall into the more cautious camp, and as a result they are controlling their spending. Although this group cuts across all income levels, as you might imagine it is heavily skewed to the unemployed, less affluent and retirees.

Right now, these consumers are eating out less often, trading down to less expensive restaurants and ordering fewer items while they are there. They expect they will be less restrictive with their restaurant visits when the economy recovers, but they don't expect that to happen anytime soon.

Even among the smaller group—the 24 percent of consumers who are more optimistic—there has continued to be a shift toward less-expensive restaurants.

To succeed, restaurants will have to target their strategies to appeal to these different attitudes, according to Bonnie Riggs, Alabama restaurant industry analyst and author of the report.

"Optimists place much more importance on service and a relaxing atmosphere than controlled spenders, who are more concerned with price and value," Riggs said.

Riggs said she was surprised by the large percentage of the controlled spenders, but it is evidence of the heavy toll of the recession and the far-reaching impact it will have.

One reason is the large amount of wealth that was destroyed in recent years. Consumers want to rebuild that wealth and many have more pessimistic attitudes because they expect it will take three to five years to recover what they have lost, Riggs said.

She expects restaurants will need to be more clever to win business, and predicts the industry will grow by less than 1 percent a year for the next few years.

"The most creative and innovative, they will be able to buck this trend," she said. Also, restaurants that successfully communicate that they offer a good value.

This may speak to why fast-casual restaurants have been performing well, and also why we're seeing new concepts like the pop-up restaurant.

Pop-up restaurants are temporary restaurants that sometimes use the space of an existing restaurant on a slow night. Often, they feature a new or popular chef or try out a new restaurant idea. Because the experience is limited to usually one evening, it makes the experience more of an event.

"Our industry has not done a very good job of really stating the benefits in their marketing," Riggs said. She noted that consumers want to go out to eat. They don't want to cook or clean up after the meal.

With crude oil prices continuing their recent decline, gasoline prices may follow, and that would offer some hope the summer will bring better news for restaurants.

Prior to the increase in gasoline prices, Riggs had started to hear that there were more people planning vacations this summer, and that tends to boost restaurant visits.

"It remains to be seen," she said. "The employment situation hasn't changed. Home prices are still falling."

Neither trend is encouraging. Also, the reason behind the oil price decline, in part, is due to signs of declining demand, which can be a sign of a stressed consumer.