High Unemployment Makes IHOPto-Red Lobster Target Higher Income
NEW YORK: Rising housing costs and stubbornly high inflation are battering many consumers and the hit to their wallets is now hurting America’s low-cost restaurants.
Chains including Red Lobster, which is considering a bankruptcy filing, and TGI Friday’s Inc are becoming even more distressed as their labour expenses increase and more diners opt to eat at home.
The fast casual segment’s reliance on lower-income households means their customer base has been disproportionately impacted by rising prices, analysts from Moody’s Ratings wrote last week.
Chains relying on that demographic “are feeling it the most,” said Dennis Cantalupo, chief executive officer of credit-rating and consulting shop Pulse Ratings.
The operators must also be concerned about the potential for a more prolonged slump, he said, since the most price-conscious diners are slow to return once they shift toward eating at home.
The fate of many restaurants depends on monetary policymakers striking a delicate balance between using interest-rate hikes to keep prices in check and letting higher rates choke economic growth – risking job losses for the same customers now struggling with costs.
About two in five restaurants didn’t make a profit last year, according to a survey, and a surge in the cost of certain commodities has already contributed to bankruptcies at some smaller and regional eateries.
New York-area Sticky’s Finger Joint filed for bankruptcy in April, in part due to “unprecedented” chicken and potato price increases.
Tijuana Flats, a casual Mexican restaurant chain located primarily in Florida, also filed bankruptcy in April.
Rubio’s Coastal Grill, a chain of 150 restaurants throughout Arizona, California and Nevada, is working with real estate advisers to renegotiate leases.
Prices are rising more slowly at the supermarket, meaning families can still stretch a paycheck further buying staples rather than ordering prepared foods, said Cantalupo and Michael Zuccaro, a vice-president at Moody’s.
“You get more bang for your buck there,” Cantalupo said.
That’s a problem for the likes of TGI Friday’s, which is mulling debt options amid weakening sales.
Meanwhile, as cash-strapped consumers hope for price stability, higher earners have more flexibility as economic indicators paint a rosier picture for them.
Some are still electing to go to cheaper restaurants, which helps those eateries, but not enough to make up for loyal regulars pressing pause on weekly outings.
“Across the board, you have higher labour and food input costs and hesitant consumers,” said Mark Levin, a co-founder of advisory firm Asterisk Capital.
“Some people will trade down from mid-priced to lower-priced restaurants, but a lot of lower-priced customers will just stay at home.” — Bloomberg
