THE RESTAURANT INDUSTRY AND WORLDWIDE FISCAL/MONETARY DEVELOPMSENTS – WHAT’S THE RELATIONSHIP?

Some of our readers may be wondering why, while focusing intently on restaurant industry fundamentals, we also regularly summarize worldwide fiscal/monetary developments.

It used to be that a restaurant operator, especially a single location operator, could “mind the store”, and pay relatively very little attention to money flows, governmental deficits, and inflationary trends. All you had to do was hold (and build) your market share. The broader economic trends, especially after the stagflationary nineteen seventies, were slow moving, not dramatic in nature, and affected you very little. Those trends were mere ripples in the sea.

These days, that equation still holds true, as long as you are running one or two locations, are personally meeting and greeting customers, and watching almost every meal that comes over the transom.

However, if you are a multi-unit operator, with visions of growth, the local ripples have become a broad based tidal wave, and that has been especially evident the last eighteen months. As Warren Buffet famously suggested: “When the tide goes out you find out who has been swimming naked”.

FISCAL/MONETARY AFFAIRS AFFECT RESTAURANT OPERATORS

The growing multi-unit operator cannot afford to be unaware of trends in interest rates, the availability of debt or equity financing, the trends in wages, commodities and inflation in general. That is where the study of fiscal/monetary affairs and restaurant fundamentals intersect. While a great deal of our time is spent advising restaurant companies and institutional restaurant investors, we also feel the need to protect our personal long term purchasing power by way of gold mining stocks.

RESTAURANT OPERATING TRENDS ARE REFLECTIVE OF CURRENT AND FUTURE FISCAL/MONETARY DEVELOPMENTS

It also should be noted that while fiscal/monetary developments can affect restaurant fundamentals, the reverse applies as well. Restaurants and the hospitality industry in general provide an effective window, and can (should) affect economic policy. The logic is as follows:

• Approximately 70% of the U.S. economy is consumer driven. If consumer confidence and spending is soft, the general economy will suffer accordingly.
• The restaurant industry, in particular, has proven for many decades to be an effective leading indicator on the economy as a whole. Meals, bought and/or consumed, away from home are an entrenched part of our life style. Since the expenditure is a relatively small ticket compared to travel spending, automotive or housing spending, computer purchases, even cell phone expenses, consumers can adjust this spending easily with frequency and average ticket. The typical family will adjust the frequency of an appetizer or dessert well before they will take a vacation (or not), buy a new car (or not) or renovate their home (or not).
• Transparency within this industry is unique. Inventories turn weekly, so inventory building or drawdown does not affect the results, as opposed to measurement of so many elements of the GDP. An analyst following same store sales, traffic trends adjusted for pricing is not going to be badly misled. If the largest retailers on the planet, WalMart and Target, report  flat same store sales,  and Ralph Lauren or Estee Lauder (on the high end) are also troubled, you can probably conclude that the economy is not in great shape.
• Approximately 14 million adults are employed by the retail/hospitality industry (80%-90% in restaurants) in the U.S., approximately 10% of the U.S. workforce. Wage trends, health care cost trends, and employment trends (such as adjusting weekly hours to meet ACA requirements) are significant windows into national employment trends, and inflation expectations.
• Cost of goods (beef, chicken, seafood, paper costs, etc.) at restaurant chains approximates 30% of sales so frequent reporting, and commentary,  by publicly held restaurant chains provides a window into inflation expectations.
• Corporate transparency is unique. Traffic trends, quality standards in terms of price/value, service at the store level, cleanliness of facilities, etc. are visible meal by meal. A visit to the mall or dinner at a restaurant chain can pay dividends. Every stock you buy may not enrich you, but will not impoverish you if you pay attention.
• Restaurant industry is relatively recession resistant. Trite though it might be, people have to eat, meals away from home are entrenched as a lifestyle (as suggested above) and will remain so. Traffic trends and average spending fluctuate but not hugely. Well run restaurant chains, and even some that aren’t so well run, can survive over the long term. The good ones can grow spectacularly, like McDonalds and Starbucks (for decades), more recently chains like Shake Shack and Wingstop.  Overall, however, individual investments in restaurants and retail should be monitored, not “put away” long term. More companies suffer serious periodic stumbles than produce reliable results year after year. Parenthetically, our experience is that this is true to an even greater extent in retail, rather than restaurants, where an apparel company can be only as good as their latest “floor set”. Quality standards in a well run restaurant company will not normally change much on a very short term basis.

For these reasons, and more, the restaurant/retail industry is not just about burgers, tacos, or even apparel, furniture, or smart phones.  The study of retail consumer trends gives us a window into far more general economic trends.

With that backdrop, we will tomorrow provide a Fiscal/Monetary Update

Roger Lipton