Restaurant Industry - Leading Indicator Of US Economy - Sours; As Bankruptcies Pile Up

Tyler Durden's picture

Submitted by Wolf Richter via WolfStreet.com,

“Very challenging” sales trends.

On Friday, September 30, Restaurants Acquisitions, the operator of Black-eyed Pea and Dixie House restaurant chains, converted its Chapter 11 filing to Chapter 7 liquidation. The bankruptcy court order noted the company had shuttered its restaurants and management had resigned.

The day before, Cosi Inc., a fast-casual chain with 1,100 employees filed for bankruptcy. It closed 29 of its 74 company-owned restaurants and laid off 450 people. The 31 independently owned franchise operations continue operating.

Also last week, Logan’s Roadhouse, a casual steakhouse with over 200 locations, closed more than 10 restaurants, on top of the locations it had already closed in August when it filed for Chapter 11 bankruptcy.

Eight restaurant companies representing 12 chains have filed for bankruptcy since December: Restaurants Acquisitions, Cosi, Logan’s Roadhouse, Fox & Hound, Champps, Bailey’s, Old Country Buffet, HomeTown Buffet, Ryan’s, Johnny Carino’s, Quaker Steak & Lube, and Zio’s Italian Kitchen.

Restaurants are precarious creatures. They lease costly space and have to invest in equipment and furnishings. It’s a competitive environment, with high expenses and little pricing power. To expand, they load up on debts. Some, like Cosi, always lose money. Customers are finicky and fickle. When new competitors come along, or when the economy tightens, customers thin out and creditors begin to fret and turn off the money spigot.

Some of that is normal. The restaurants come along, and old ones die.

“But the current wave of bankruptcies is definitely unusual, and rivals the chain bankruptcy wave of 2009 and 2010, when several chains filed for debt protection after sales fell,” writes Jonathan Maze at Nation’s Restaurant News, adding:

In this case, the wave of bankruptcies is largely due to a decline in sales at restaurant chains that is particularly harmful to companies that are already walking a balance-sheet tightrope. The companies that filed for bankruptcy recently were already weak.

Some are repeat offenders, including Buffets LLC (Old Country Buffet, HomeTown Buffet, and Ryan’s) which is now mired in its third bankruptcy. Many of them, battered by declining sales and rising expenses, have been losing money for a long time. But now things are coming to a head.

Restaurant bonds moved into fourth place early this year in Standard & Poor’s Distress Ratio, behind brick-and-mortar retailers and the doom-and-gloom categories of “Energy” and “Metals, Mining, and Steel.”

Other restaurants are trying to hang on by cutting costs and shrinking their footprint, which entails more sales declines, and thus continues the downward spiral.

In August, casual-dining operator Ruby Tuesday announced that – after “a rigorous unit-level analysis of sales, cash flows, and other key performance metrics, as well as site location, market positioning and lease status” – it would sell its headquarters and close 15% of its 624 or so company-owned restaurants by September.

Clinton Coleman, interim CEO of Rave Restaurant Group, which operates Pie Five Pizza Co. and the Pizza Inn buffet brand, put it this way on September 23, after reporting that same-store sales had tumbled in Q4 and that losses had ballooned: “Sales trends in the fourth quarter were very challenging for the Pie Five system, as was the case in much of the fast-casual segment.”

The restaurant industry is not a sideshow. About 14 million people work in it, according to the National Restaurant Association. With $710 billion in annual sales, it’s an important part of consumer spending and accounts for about 4% of GDP. If the industry is having problems, it’s a red flag for the overall economy.

Its difficulties are not limited to just a few beat-up restaurant chains. The National Restaurant Association reported on Friday that its Restaurant Performance Index (RPI) for August fell 1% to 99.6 and is now in contraction mode (below 100 = contraction). It was the worst reading since October 2012.

The RPI’s post-Financial Crisis peak was in the spring and summer 2015, when it dabbled with 103. Its all-time peak, going back to its inception in 2003, was 103.4 in 2004. Its all-time low of 96.5 occurred during the depth of the Financial Crisis.

The index consists of two components:

  • The Current Situation Index, which tracks restaurant operators’ reports on same-store sales, customer traffic, hiring, and capital expenditures
  • And the Expectations Index which tracks restaurant operators’ six-month outlook, including on the overall economy – more on that in a moment.

The Current Situation Index fell in August to 97.7, the lowest since February 2010. Three of its four indicators declined: same-store sales, customer traffic, and labor.

Only 30% of the restaurant operators reported a year-over-year increase in same-store sales. That’s down from 71% in February.

But 53% reported a year-over-year decline in same-store sales. This metric has been deteriorating for months. In February, March, and April, between 19% and 38% of the operators had reported lower same-store sales. Then it ticked up: 42% in May, 43% in June, 45% in July, then jumping to 53% in August.

Operators also reported a net decline in customer traffic: while 21% reported a year-over-year increase, 59% reported a year-over-year decline. August was the fourth months in a row of year-over-year net declines in customer traffic.

And optimism is beginning to wane. The Expectation Index edged down to 100.6: “While the Expectations component of the index remains in expansion territory, it too has trended downward in the past several months.”

And operators are turning gloomy about the overall economy: only 17% expect the economy to improve over the next six months, but 29% expect conditions to worsen:

This represented the 10th consecutive month in which restaurant operators had a net negative outlook for the economy.

Restaurant operators as a group are an optimistic bunch – they have to be, or else they wouldn’t do it. But they also have daily intense contacts with consumers and are thus a leading indicator of the consumer-based economy.

In the beaten-up brick-and-mortar end of the retail industry, the meme has been that Millennials aren’t buying enough goods but like spending money on “experiences” – such as eating out. If that’s true, and not just an excuse by faltering retailers, it appears Millennials are not doing enough of that either anymore. Either way, the restaurant industry has been giving off increasingly loud warning signs about the overall economy, and the state of the consumer.

And the fate of that consumer-based US economy?

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LawsofPhysics's picture

LOL!  Bankruptcies, it's what's for dinner...

Roll the mother fucking guillotines, nothing changes otherwise.

hedgeless_horseman's picture

 

"A Church's Chicken on every corner and two car loans for every American."

roxyNL's picture

looks like hipsters selling 20$ burgers will have some rough days !

UndergroundPost's picture

Americans can only stuff their face with so much ciche, booze & truffled salmon topped with bat semen. End of the end

Million Dollar Bonehead's picture

Obviously there is a shortage of qualified servants. Dear Leader Hillary will make sure that there is a more than ample supply of servant-class workers to do this kind of work. Young men from the middle east are the best workers and have the added benefit of striking fear into the hearts of the typical american servant-class worker. Remember, a frightened and docile populace is a peaceful populace. Long Live Dear Leader Hillary!! May the stars of Dagon ensure her victory on November 8th!

CheapBastard's picture

Moar bankruptcies, layoffs, firings and soaring unemployment...all due to TRUMP!

 

They need to burn and loot a few more cities to protest the Donald who is the obvious cause of this.

FireBrander's picture

Mom and pop shops started decades ago are going to shit as thier kids take over the family business; the kids want the money...not the work.

From hand made pizza dough baked in a wood oven to corporate dough in an electric conveyor oven in 1 generation...depressing...and they wonder why business is shit.

One OLD local mom and pop pizza shop NEVER, not in 40 years, sent out coupons...didn't need to; place was always busy...kids take over, cut corners, and now they send out coupons...and even at 50% off any item, I still won't go...50% off shit is still overpriced shit...seriously, there are better frozen pizza's than this place.

Falling Down's picture

Preach it, FB. I think that for a lot of locally-owned restaurants, there won't be a next generation.

Citizen_x's picture

6 dollar coffee is cutting into their tattoo funds.

dilligaff's picture

one of my step sons (30 yrs old) is broke as hell. he can't even qualify for a car loan and has bill collectors hunting him down. yet he came up with $180 for a tattoo.  Fuking retard...

dark pools of soros's picture

have you counted your watches latetly?

NoDebt's picture

At the grocery store the other day (and I live in a fairly affluent community) I noticed there was plenty of everything.  Except the instant Ramen Noodles in the styrofoam cups.  About 6' of shelf space- totally bare.

Asked one of the people stocking the shelves and they said they would get more in by myabe Wednesday, but that it generally sells out as fast as they get it.

One might conclude people just don't have the money for this "experience of dining out" bullshit.  They need cheap calories.

I'm going to ask Tyler to give me picture-posting authority.  I feel like if I actually put up some pictures of these things I observe it would be more impactful and believable.

LawsofPhysics's picture

When I was visiting Russia in the 90's it was common to have people tell me that the government propaganda in the 80's was telling all the Soviet people that the reason all american stores had shelves full of food was because most americans were too poor to buy anything.  Only the 1% could actually afford to buy things in stores...  (one of the "evils of capitalism")

Perhaps that old propaganda was really a prediction...

withglee's picture

.. the reason all american stores had shelves full of food was because most americans were too poor to buy anything.  Perhaps that old propaganda was really a prediction...

Communists have no educational courses in "shelf life". That version of the capitalist/communist pendulum swing doesn't have or need shelves.

Automatic Choke's picture

then they are idiots. instant cup o raman may be cheaper than going out, but if you are counting pennies to feed self and family you'd be buying 20 lb sacks of beans and rice, not packaged crap.

shovelhead's picture

Becoming broke doesn't automatically make people smarter.

DirtyHowi's picture

I've volunteered at the local food bank, even offered to do some "prepper" cooking classes.  nobody was interested, no body has time between the  3.75 jobs they have to work just to afford the food bank to do beans or rice, hot water, mix in cup, hand to 17th little tax deduction.  Of all the things on the shelf we always had more than enough rice and beans, it was ho-ho's, cereal and ramen that we couldnt keep up with.

KickIce's picture

Noticed the same here.

Osmium's picture

Instant Ramen may be the only meal they know how to "cook"

ToSoft4Truth's picture

Around these parts Kia has a two for one special on cars.

 

Kidbuck's picture

Need to be able to pay for that meal on the 60 month easy payment plan.

UndergroundPost's picture

Any word on how Obamacare is doing?

CheapBastard's picture
Minnesota's Obamacare exchanges are in an 'emergency situation'

 

http://finance.yahoo.com/news/minnesotas-obamacare-exchanges-emergency-s...

 

Pretty much represents the disastrous failures in other states also. I'm surprised Lest Holt didn;t ask Hillary if she was bothered supporting Obamacare since it's such a failure.

tarsubil's picture

Buffets going bankrupt and hopefully closing. Who said the collapse wouldn't have benefits?

Anti-kleptocrat's picture

... it's simple ... 0bamenomics has put our money to sleep ... 

Nunyadambizness's picture

It's kind of like trickle-down, without the trickle.  

yogibear's picture

Obama, the Fed and the MSM say the economy has recovered. All in an effort to get Hillary elected at all cost. Just to support the continuation of the Obama economy. Don't look for change anytime soon.

Wulfkind's picture

Look at those charts above and then go back and look at the article about Construction spending collapsing.

They're almost exactly the same.

Then go back a flew clicks and find the article about collapsing shipping rates.  Almost exactly the same.

Things are syncing up quite nicely now.

Mr. Yellen is cranking up the Fed' Interactive Brokers' account in 3...2....1.....

DogeCoin's picture

The real economy is faltering ladies and gentleman. The apocalypse is upon us. Who will cook and serve us our food now? How will we be able to take pictures of that food and post it on Instagram? Think of the children!

KickIce's picture

Not to worry folks, there will be plenty of GMO field corn for all.  No nutritional value whatsoever but you will still weigh 400+ lbs.

LawsofPhysics's picture

"No nutritional value whatsoever but you will still weigh 400+ lbs." ---

I think there is a bit of a contradiction there.  Water is the only thing with no nutritional value (zero calories), yet it won't make you gain weight...

CheapBastard's picture

"We need some common sense restaurant legislation."

LawsofPhysics's picture

We need to let stupid fucking die for a change...

withglee's picture

"We need some common sense restaurant legislation."

Right. 40,001 new laws next year.

KickIce's picture

There is a term for "foods" like field corn, they are what as known as empty calories.  Actually when you take into consideration the excesss sugar content along with the chemical makeup it probably has a net negative value on nutrition and health.

LawsofPhysics's picture

LOL!!!  The "chemical makeup" is fructose which can be converted to glucose in a single step and burned just like glucose.

Pull you head out of your ass and do a little homework.  The issue with fructose in the bloodstream is it remains undetected (our bodies "sense" glucose and glucose-6-phosphate). Unregulated suger in the blood does all kinds of bad shit. People who constantly consume anything with high fructose are setting themselves up for all kinds of bad shit. However, it's okay to consume such things if you are burning it quickly...

like running a marathon etc...

God, people are so fucking ignorant in this country and just love to spout off anything "catch phrases" that their tiny little brains can find.

Fucking moron.

KickIce's picture

Since when did sugar provide any nutritional value.  Quick energy yes.  Nutrition, not so much.

LawsofPhysics's picture

Again, pull your head out of your ass and do a little homework.  Your body converts everything you eat to "sugar". 

KickIce's picture

But your body also pulls out nutrients, vitamins, minerals and proteins.  None, or very little, is found is field corn.

shovelhead's picture

I agree about those stupid catchphases:

Roll the mother fucking guillotines, nothing changes otherwise.

 

 

withglee's picture

(zero calories),

Can you point me to a link that proves the relationship between calories and weight. I have a theory that if all I ate was Hershey bars, I'd waste away to nothing pretty quickly. They determine calories by burning the food and measuring the heat it puts out, right? When I heard that I quit eating logs altogether.

LawsofPhysics's picture

Really?  You are that ignorant?  Okay.  Start by reviewing the 100+ years of literature on metabolism.  Specifically, glycolysis, the Krebs cycle, the electron transport chain, and oxidative phosphorylation.  Then you need to study how these central pathways are regulated relative to the anabolic pathways such as fatty acid biosynthesis.

 

"Better to remain silent and be thought a fool than to speak and to remove all doubt."

BSHJ's picture

But....does any of that taste good?

withglee's picture

WG: Can you point me to a link that proves the relationship between calories and weight. I have a theory that if all I ate was Hershey bars, I'd waste away to nothing pretty quickly. They determine calories by burning the food and measuring the heat it puts out, right? When I heard that I quit eating logs altogether.

LOP: Really?  You are that ignorant?  Okay.  Start by reviewing the 100+ years of literature on metabolism.

WG: That's just to start?

LOP: Specifically, glycolysis, the Krebs cycle, the electron transport chain, and oxidative phosphorylation.

WG: And so if I burn a pound of spinach and measure the heat it gives off, all that nonsense you just spewed tells me how much that means in weight gain? Same for a pound of Hershey bars?

LOP: Then you need to study how these central pathways are regulated relative to the anabolic pathways such as fatty acid biosynthesis.

WG: Then will I know how much weight a pound of Hershey bars will add to my weight? And if I ate nothing but Hershey bars, all that tells me I would still grow to be enormous?

LOP: "Better to remain silent and be thought a fool than to speak and to remove all doubt."

WG: I have no problem with doubt. All that gobeldy gook you just spewed removed no doubt.

My best professors were the ones who could make clear any subject at any level to any person without pompous elite double talk. Virtually all my professors in the humanities were phony blowhards ... and I went to a pretty expensive private university. Your reply is absolutely typical of a clueless academic intellectual avoider implicitly claiming standing to avoid answering.

I ask again: Can you point me to a link that "proves" the relationship between calories and weight.

Osmium's picture

"Some are repeat offenders, including Buffets LLC (Old Country Buffet, HomeTown Buffet, and Ryan’s) which is now mired in its third bankruptcy"

Old Country Buffet Near me closed.  They should know better than to offer all you can eat to fat ass Americans.

withglee's picture

including Buffets

If Golden Corral went under, much of the nation's weight problem would be solved. Collateral damage: People making outriggers for chairs.

Government needs you to pay taxes's picture

I used to enjoy the GC about once a week.  That all stopped about 6 months ago.  Golden Corral's prices are ~35% higher than they were 3 years ago, and the meat quality has gone to hell.  Those ribs are all fat, the premium 'steak' on the weekends relies on salt to taste like anything, and their desserts are nothing more than high fructose corn syrup, in multiple configurations.  For ~20% less $, I can go to the local asian buffet and get real sushi, ribs that rock, plus a number of decent chinese dishes with veggies.  Golden Corral is OVER as a business model.  All that is left is the decline into oblivion.

Arnold's picture

Mongolian BBQ.

You bastard.

Open tomorrow, Dreams tonight

withglee's picture

For ~20% less $, I can go to the local asian buffet

For about 80% less I can just pressure cook my food and make up any kind of meal I want just by heating jars in boiling water for 15 minutes. Nothing gets into or out of the jars in the process (except raw food going in and cooked food out and onto my plate). My aveage time preparing meals is 15 minutes ... eating ... 3 minutes ... drive time, 0 minutes. That leaves time to do lots of other things during the day. My dogs are about the same but don't have the 15 minute prep time. Storage seldom exceeds 6 months. Go to grocery about 4 or 5 times a year. Buy mass quantities at bargain prices when there.

Unless you're at a training table, food should never be a big deal these days.