Sunday, August 22, 2010

Fewer Restaurants As Spending Remains Low

If you think you’re seeing more vacant restaurants than ever, it’s not your imagination. Restaurants open and close every year, but they are more likely to close when a recession drags on and on.

A Los Angeles Times story on restaurants in financial distress notes the declining number of restaurants in California — with 2 percent fewer than last year — and nationally — 1 percent fewer. It is rare for the number of restaurants to actually decline in a recession, but much larger declines are possible over the next two years. The story notes that many restaurants are barely hanging on, hoping for things to turn around soon, while the turnaround for the national economy may still be two years away.

The two best examples of restaurants in decline cited in the Los Angeles Times were local steakhouse chains. Are steakhouses specifically in decline? I found some hints of that: many reports of steakhouses closing in beef country, foreclosure of a parking garage that serves customers of a Chicago steakhouse, and in Baltimore, a famous steakhouse facing a foreclosure auction next month. There is no question that consumers are spending less on steaks, but there are reasons why steakhouses might not be the first restaurants to close. They sell big-ticket items — a steak might cost twice the price of a comparable restaurant entree. At the same time, their labor costs are low. Steaks, like hamburgers, are cooked by unskilled workers who may have only an hour or two of training.

Meanwhile there are reports of all kinds of restaurants closing for every reason you can imagine, along with a similar number of reports of restaurants opening. Many of the restaurants closing now had opened just this year, or last year, but that is the normal pattern in the restaurant business. It takes a big push to launch a new restaurant, and no one, it seems, can predict in advance which ventures or locations will succeed.