This Week In Foodservice: Where the Economy Stands Going Into the Election

Despite improved consumer sentiment, the economic outlook remains rather subdued and that continues to impact the foodservice industry.

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These days even good numbers on the economy have a sour flavor. For example, Gross Domestic Product increased by 2 percent in the Department of Commerce's advance estimate for the third quarter. Forecasts for GDP ranged from +1.5 percent to +1.8 percent, so we should all be pleased, right? Well, a lot of observers are not happy.

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First, given the time we've been in the recovery from the recent recession, it would be expected that the economy should be doing a lot better. Second, the drivers behind the growth were increased consumer spending, a large uptick in government defense expenditures and an improved housing market. The problem with consumer spending is that it is not being matched by increases in consumer income. People are spending their savings, which is what economists say is an unsustainable activity. Missing from the equation is business investments as top managers have turned pessimistic on the economy.

And the sudden increases in consumer confidence would normally be seen as a very positive thing, but in this instance economists can't find any reason in the employment numbers or wage data or anywhere else to lend credence to this enhanced outlook. One expert has advanced the theory that with research showing an extremely tight election, we are hoping that our candidate will win and make some major improvements in the economy to benefit us.

In summary, most of the experts see the economy as weak and fragile. See the data below.

Economic News This Week

  • Durable goods orders shot up 9.9 percent in September. This was caused by a huge increase in civilian aircraft orders. Without the transportation segment, durable goods orders were up 2 percent. And orders for heavy machinery and other core goods declined, raising fears that companies are not investing for the future.
  • Initial jobless claims fell by 23,000 to 369,000 for the week ending October 26. Once again the gyrations in the number of new claims were blamed on a "seasonal quirk." The less volatile 4-week average stayed at 368,000 which is about where it has been roughly 6 months.
  • New home sales rose 5.7 percent to an annual rate of 389,000. Prices according to the Department of Commerce were up 11.7 percent. While indicating that the home building market has improved, the DOC noted that in 2005 there were 1.4 million homes built in the US. S&P / Case Schiller reported that home prices in 20 major markets increased 2 percent in August. This was the third straight month prices increased and rate of increase was higher than that of July.
  • Personal spending in September increased 0.8 percent while personal income rose 0.4 percent, according to the Commerce Department. The statistics mean that people are spending their savings.
  • Consumer confidence surveys were mostly positive. The Reuters / University of Michigan Consumer Final October Index dropped slightly from the "Preliminary" reading of 83.1 to 82.6. This was still good enough to be the highest number since September 2007. The Gallup U.S. Economic Confidence Index fell slightly last week but stayed in the same range that it has been in since early September. In a different study, Gallup reported that for the first time in 5 years more Americans felt better off than worse off with 38 percent feeling better off vs. 34 percent feeling worse off. Those feeling the same made up the balance. The Conference Board's Consumer Confidence Index release of results have been delayed until Thursday due to Hurricane Sandy.
  • Fear of higher oil prices seems to have diminished and suddenly supplies are up significantly. Saudi Arabia is pumping a near record amount of oil according to the Wall Street Journal in order to offset the embargo on Iranian supplies. And while skeptics point out the U.S. lacks pipelines to get the increased supplies to where it is needed, most areas have seen a dramatic drop in gas prices the last few weeks. And, notice that unlike what happens when there is a big upward movement in gas prices, no politicians are demanding that the CEOs of the big oil firms appear before Congress to get grilled.

Foodservice News This Week

  • Just because there is a hurricane doesn't mean people don't eat out. As Hurricane Sandy roared toward New York City, the New York Observer contacted a number of upscale restaurants regarding their plans. While a couple sent employees home early Sunday all indicated they would remain open as long as it was safe. Given widespread power outages and travel restrictions due to flooded streets and highways, it is probable that a lot of restaurants will have to close.
  • Chain restaurant financial results were primarily marked by soft sales number according to Merrill Lynch. Despite the concern of higher food costs caused by the summer drought, it appears that most firms were handling the increased costs pretty well. The Cheesecake Factory, Panera Bread and Dunkin' Donuts seemed to have their results accepted by the financial community while McDonald's, Buffalo Wild Wings and BJ's Brewhouse disappointed at least some stock analysts.
  • People are still tipping the wait staff even in this weak economy. Somewhat surprisingly, a Zagat survey found the amount of tips increased from 18 percent in 2000 to 19.2 percent in 2011. A professor at Wake Forest School of Business theorizes that even if people are eating out less and/or cutting back on the price of their meal, they "feel for" the waiter or waitress. Further, the professor speculates that woman eating out may be more generous tippers, particularly if they were a waitress sometime in their past.
  • The Fresh & Easy Market, owned by world retail giant Tesco, may fold according to Convenience Store News. The Fresh & Easy chain was launched in 2007 and is known for its carry out prepared food menu. Tesco has stated that the operation has yet to break even and has pushed back the deadline for profitability several times.
  • Putting calorie counts on menus is not as easy as it sounds according to a recent Forbes article. Using Little Caesars as an example, the writer pointed out that not too many people would eat a large pizza at one sitting (What is a serving size?) and the number of toppings on the pizza will change the calorie count leading to a possibly confusing amount of data.
  • Growth Chains: Burger King has signed an agreement with a franchisee in Columbia to build 100 units. LaRosa's has announced they wish to enter the Columbus, Ohio, market and are looking for franchisees to open five stores. The RaceTrac C-store chain has introduced RT6K which offers the exterior of a fast-casual restaurant, indoor-outdoor seating, "SwirlWorld" frozen yogurt and wireless internet service. Penn Station East Coast Subs opened their 250th restaurant in October with 4 more scheduled to open by the end of the year. Darden has announced they will open 11 Seasons 52 restaurants in the next 9 months. Dunkin' Donuts will open 280-300 restaurants in the US and 720 outside the US within a year. The chain also said they believe it is realistic to add 3,000 more units east of the Mississippi river. Schlotzky's has signed an agreement to open 6 units in Florida. Johnny Rocket's has signed an agreement with a franchisee to open 10 restaurants in Pakistan in the next decade.
  • Comparable Store Sales Data: BJ's Brewhouse (up 2.3 percent), Bravo Brio (Bravo down 0.5 percent, Brio up 1.1 percent), Brinker (Chili's up 2.8 percent, Maggiano's up 0.9 percent), Buffalo Wild Wings (company-owned up 6.2 percent, franchised up 5.8 percent), Burger King (up 1.6 percent), Cheesecake Factory (up 4.8 percent), Dunkin' Donuts (up 2.8 percent), Famous Dave's (up 0.2 percent), Frisch's (Flat), Grand Lux (down 2.0 percent), Panera Bread (system up 5.8 percent, company-owned up 6.2 percent, franchised up 5.5 percent).

For details and reports on other chains, lease click here for the Green Sheet.

Foodservice Supplier Financial: Reports for Cintas, Illinois Tool Works, International Paper, Lancaster Colony, and Libbey, Inc. For full report, please click here.

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