Restaurant operators need big picture outlook to protect turf

Nation's Restaurant News, Sept 16, 1996 by Richard L. Papiernik

Inflation is decelerating and will turn negative during recession, according to Richard F. Hokenson the chief economist for Donaldson, Lufkin & Jenrette in New York. He projected further that in 1997 we would be dropping into a "no-pricing-power" recession.

And Technomic Inc.'s Dennis Lombardi--following a recent chain restaurant industry analysis by the Chicago-based consultant--told us: "If there is a trend that makes any sense right now, it is found in those chains that are going back to the basics, that are going back to their knitting and are working to do it right."

Consumers have become "very price-point and value conscious, and that's not going to change," he said.

Meanwhile, according to the Technomic report on the performance of 85 restaurant chains, median revenue growth for 1994-1995 was up 10.9 percent from the previous 1993-1994 growth. However, it did not match the percentage performance of the previous period, which rose 13.8 percent. So we saw sales increasing at a decreasing rate.

And median profit margins slipped to 3.3 percent from 3.8 percent during those same periods because of "relentless competition in the restaurant industry," the report concluded.

The word from Hugh A. Johnson, chief investment officer at First Albany Corp. in Albany, N.Y., was to "watch out for the slippery slope" in stocks at a time when some economists are projecting that corporate profits may--and he stressed the word "may"--start falling for 1997. He said: "The idea's the same regardless of which sector or industry group the investor is concerned about. This is not a time to speculate that the next quarter's earnings will get back on track."

And after a just-completed analysis of the Pennsylvania restaurant industry, consultant Ronald N. Gorodesky of Wayne, Pa.-based Restaurant Advisory Services said the influx of new chain restaurants in 1995 gave the industry "one of its best years." That momentum plus a number of special tourist and cultural events, such as the summer-long Philadelphia Cezanne exhibit, major league baseball's All-Star Game and the Fancy Food Show in June, are "making 1996 into a banner year," according to Gorodesky.

But he contends that "1997 will be an off year in Pennsylvania" as the dearth of similarly spectacular events on the state calendar and the impact of higher wages are expected to put a chill on restaurant sales and profitability for the year.

Granted, there are dissenting views -- especially from the experts on the expected performance of the economy -- and various subtleties involved in all of the above information. But it all helps to demonstrate that running a business is more than a one-hat job and that you have to wear several hats in the restaurant business. You get only a one-hat perspective, for instance, from operating your own chain.

That's a very important hat, right. But to really do the job you should be doing, you have to know something more about the segment you're in as well as about the total restaurant industry.

Then you ought to know what's going on in retailing and in the communities where you're operating. And you ought to be aware generally of what's happening in the economy and the stock market for your segment. You may not be gathering all this information yourself, but it should be showing up in reports from members of your management team.

With a good operation you can very well be successful for a while, but if you're not keeping your multiple-hat observation antenna up, then others just may come along and eat your best daypart before you even know they are sniffing around.

That's why various reports on the economy and your industry are so important.

The top 100 and 200 lists that NRN publishes, for instance, are much more than mere rankings because they give you a look at how you stack up against the competition. If the others are growing in units and sales, for instance, and you are standing still, is there something out there that you are missing?

Gorodesky, for instance, in the Restaurant Associates report on Pennsylvania restaurants, includes a work sheet for operators to plug in their own figures and match them against segment norms.

"A periodic analysis of your restaurant's financial performance may provide some early warning signals of potential problems" he said. "Food costs or payroll may be inching up month by month. Some controllable expenses could be increasing, while others are decreasing."

The study found that average checks, adjusted for inflation, rose $1 from the previous year. Total revenue for the state's operators was up 4.4 percent from 1994 to 1995 vs. an inflation rate of 2.7 percent. It was the first time this decade that sales grew faster than inflation, and the growth was led by newer restaurants entering the Pennsylvania marketplace.

Before-tax profits showed an overall increase of 11.5 percent, the report found. But it also showed that the steak/ seafood segment's before-tax profits decreased because of higher operating costs. Gorodesky theorizes that the high sales volumes in the steak/seafood segment might be attributable somewhat to "operator's carelessness as the dollars roll in."