Investing

Slowing Restaurant Sales Scaring Some Analysts

Are Americans cutting back on eating out? According to CNN Money they are as Yum! Brands, Starbucks, and McDonalds — which had been on a hot streak since introducing its breakfast all day menu — have also seen slumping sales as of late. While many reasons have been suggested as to why this is, some are more concerned about what it could mean for the economy overall.

Restaurants have long been a top choice for consumers with some disposable income. As a result the sector has also been a decent indicator of how the country is faring financially. That’s why, despite a general consensus among economists that the U.S. is not headed toward an impending recession, others are worried this “restaurant recession” could signal bigger problems.

As Stifel Nicolaus analyst Paul Westra explains, “Restaurant industry sales tend to be the ‘canary that lays the recessionary egg.'” He added that the alleged recession could not come at a worse time for the industry which has been experiencing rising labor costs. Some specific targets Westra warns about include Darden Resturants (owners of Olive Garden, Red Lobster, and other chains) and Panera. Specifically he also suspects that the fast-casual Mexican grill Chipotle — which struggled with food contamination outbreaks last year — could lose half its value.

Of course there are other theories as to why sales would be down that don’t necessarily point to a widespread recession. The first theory is that prices at restaurants have gone up at a faster rate than groceries have, encouraging more people to eat in. Another possible explanation for many locations seeing sales slip is that competition has intensified. As CNN Money notes Shake Shack, El Pollo Loco, and Zoe’s Kitchen have all had recent IPOs, which means they’ll be expanding further in the next few years. So maybe it’s not the sector that’s down but a few of the individual players?

Some of the other theories do speak to the overall feeling of the country. For example people could be growing cautious about how they spend their money because of the uncertainty looming around this year’s blockbuster presidential election. Some even suggest that the rise in terror attacks in Europe and the attack in Orlando, may be causing people to think twice about congregating in public places or at so-called “soft targets.” It is possible that these anxieties could spread to the economy at large but many, including Guggenheim Partners analyst Matthew Difrisco, feel these security fears could be short-lived.

So is the restaurant industry headed for a recession? It’s possible. However at this point it seems unlikely that such a downturn would take the rest of the American economy with it. Perhaps it’s time we look to other indicators for guidance and figure out where consumers are shifting their disposable spending to now.

Other Articles by Jonathan Dyer