The fortune cookie for the restaurant industry has crumpled badly in the past two years. The restaurant industry is, after all, one of the most badly-hit consumer sectors due to the harrowing economic recession. High unemployment tends to make people eat more often at home, and foreclosure rates tend to make people forget about dining out altogether. Reduced business and holiday vacation travels also affected all areas of the tourism industry, including, of course, restaurants.
And yet despite the industry’s recent woes, glimpses of sunshine are on the horizon. A survey made by the NPD Group indicated signs of pent-up consumer demand, with a third of household respondents saying they don’t eat out as often as they would like. That news is worth its weight in gold, because that simply means that as soon as people have the money to spend, some of the first things they will spend on is a fine meal at a restaurant. And recent economic data shows that restaurant stocks have been performing much better in the second quarter of 2009, indicating that consumer spending has nearly normalized, and the diners among them are back to dining out.
So for potential investors, are restaurant ventures worth investing in? The answer is a resounding “yes but”. Yes, the outlook for the restaurant business is good because of the latent demand. But, investors need to be shrewd and look for the most innovative and engaging restaurant business to invest in, because of the stiff competition and the still uneasy economic situation.
Innovation and customer engagement are key ingredients that work to increase traffic in restaurants. A concrete example how these two ingredients can sell a restaurant like hotcakes is the recent trend of offering smaller meals at lower costs. Cheesecake Factory (CAKE), for example, survived and even increased sales by serving cheaper but value-packed food on their menu. Other restaurants innovated on their breakfast menu with surefire results. Proof of this is a couple of chains – Starbucks (SBUX) and Panera (PNRA) – who beefed up their breakfast offerings to increased traffic.
Catering to evolving customer preferences that, at this day and age, is manifested in their interest in the Internet, some restaurants ingeniously took their marketing campaigns online to attract technologically-savvy customers. According to the NPD Group’s survey, over half of restaurants are using the web as their advertising platform, launching campaigns in popular sites like Twitter and Facebook.
Discerning investors should also consider how cost-efficient the potential restaurant is, how it maintains an efficient staff, how it manages its properties and assets, how it negotiates with vendors and how it balances its credit and capital to maintain and even encourage growth. Steakhouse chain Texas Roadhouse (TXRH), for example, achieved a solid capital structure just from obtaining an attractive financial package from the economic downturn, which it funneled into growth.
Smart innovations will grab a larger piece of the market pie for any restaurant, and it is expected that the restaurant industry will have a modest but steady growth in the next two years, a tasty proposition indeed.