Restaurants Make Tasty Recovery

Posted on March 16, 2011

Things are looking up in the U.S. restaurant industry, which is on track for its best showing in more than three years as the recovery broadens.

Sales at full service eateries, where customers pay after a meal rather than before, will rise 0.7 percent in 2011 after adjusting for inflation, the first year-over-year increase since 2007, according to a National Restaurant Association forecast by Malcolm Knapp, a New York-based consultant who has monitored the industry since 1970.

Buoyed by savings from payroll tax cuts and improving job prospects, households are starting to indulge on discretionary items. The pickup may help jump-start a restaurant rebound after a record stretch of sales declines and reinforces growing strength in household spending, which accounts for about 70 percent of the economy.

“Consumers are finding some retail therapy in things like eating out,” said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston.

“They may not be ready for that two-week vacation in Europe yet, but they’ll go to a restaurant once every couple of weeks. It’s an affordable luxury.”

Investors aren’t as enthusiastic. A Bloomberg index that tracks 18 full service chains, including Darden Restaurants Inc.’s Red Lobster and Olive Garden and Glendale, Calif.-based DineEquity Inc.’s Applebee’s, is up 0.8 percent since Nov. 30, compared with a 9.8 percent rise in the Standard & Poor’s 500 Index of stocks.

Persistently higher energy and commodity costs may erode restaurant profits or prompt eateries to raise prices, which “might not be good for their sales,” said David Yucius, president of Aurora Investment Counsel in Atlanta, who oversees $250 million.

Restaurant sales represent 4 percent of gross domestic product, and every dollar spent on dining out generates $2.05 spent in the overall economy, according to the restaurant association. The industry is the second-largest private sector employer in the U.S., comprising about 10 percent of the work force, the association said.

Shobhana Chandra and Anthony Feld, Bloomberg News