Is the Dining-Out Decline a Wider Recession Warning?

As we approached the end of 2016, the majority of America’s restaurant owners were not so happy. In the second quarter diner traffic slowed down significantly, according to data from market research firm The NPD Group. Analysts noticed the slump during the summer, an indication that a restaurant recession was on the cards.

Statistics pulled from the same study also highlighted reduced demand during breakfast and lunch as well. Since this is the very first decline in traffic for five long years, restaurant owners are on the edge of their seats, anticipating (or perhaps dreading) what’s in store for them in 2017.

Some say they should have seen it coming however, following the forecast of a restaurant recession by the brokerage firm Stifel Nicolaus in July 2016. When a survey was conducted by the Restaurant Industry Snapshot earlier in the year, the findings outlined a 2.8 percent reduction in restaurant traffic from January through September.

Stifel said they were now “bearish” on restaurants, noting, “our most recent Stifel Sales Survey reflects the start of a US Restaurant Recession – which, may also represent a harbinger to a US recession in early 2017; and, if so, Restaurants have historically led the market lower during the 3-to-6-month periods prior to the start of the prior three US recessions.”

With the slowdown not expected to end in the near future, the effects are hitting restaurants across the price spectrum, including Del Frisco’s Steakhouse chain, El Pollo Loco, Chipotle and seeming perennial favorite the Cheesecake Factory. Overall, more Americans dined out in 2015 than last year, and sales haven’t bounced back since the election, a worrying signal. Paul Westra, of Stifel Nicolaus announced the firm had downgraded its stock ratings for popular chains BJ’s and Panera Bread.

Restaurants Out at Home Plate

The other obstacle facing restaurants is the fact that cooking and dining at home is much cheaper than the cost of dining out nowadays. While there’s been a 2.4 percent decrease in the amount of money spent on groceries in the past year, the biggest 12-month reduction since the Great Recession, restaurant tabs increased by 21% over the last decade.

Most likely as a result, grocers are seeing a rise in sales.  We’ve also seen a sharp uptick in services such as Amazon Fresh and other grocery delivery providers that make eating at home easier for working families.

Is the Larger Economy Next?

While certain market innovations and pressures are unique to the restaurant sector, the amount Americans spend on entertainment, including dining out, has classically been seen as a leading indicator of the health of our economy.  Put plainly; when we’re feeling financially confident we go out.  Thus, the multi-quarter decline in restaurant spending is a genuine cause for concern, since more than one quarter of slumping spending is the definition of recession.  That, added to the fact that no resurgence was seen after the election, and even into the holiday season, may be an omen that all is not sunshine ahead.