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Costing more to eat out?
Post-Katrina energy woes mean consumers could also see menu prices go up, analysts say.
September 23, 2005: 7:42 AM EDT
By Parija Bhatnagar, CNN/Money staff writer
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Disaster strikes. Now what?

NEW YORK (CNN/Money) - The ripple effects from Hurricane Katrina may have just worsened the already challenging environment for the nation's restaurant industry, analysts cautioned.

"Restaurants sales were weakening before the storm and it will only get worse from here," said Jill Eft, an analyst with Avondale Partners.

"People are being pressured at the pump. Therefore, they're taking a step back with their discretionary spending. One of the first areas where they cut back is on eating out less often," she said.

A survey conducted in late August by market research firm Technomic showed that 18 percent of consumers polled said they had reduced their spending in quick-service restaurants such as McDonalds because of higher fuel costs.

About 19 percent said they are cutting back spending at full-service restaurants.

"It appears that the threshold has been reached where consumers are feeling the pinch of higher gas," Ron Paul, president of Technomic, said in the report. "We are also seeing softness in restaurant same-store sales, which we track monthly, further validating a reduction in consumer spending."

Among the restaurant chains, the casualties are beginning to emerge.

CEC Entertainment (Research), owner of the Chuck E. Cheese pizza chains, earlier this week warned on its earning outlook over the next two quarters. The company lost 128 store operating days due to store closures in the Gulf States.

However, CEC said high gas prices and inefficient marketing were mostly to blame for recent weak sales rather than Katrina.

Sales at stores open at least a year -- a key retail metric known as same-store sales -- fell 3.9 percent for the June to August period at casual dining chain Ruby Tuesday (Research).

And restaurant chain operator O'Charley's (Research) last week cut its third-quarter earnings forecast and withdrew its profit outlook for the year, blaming rising gasoline prices for dampening customer traffic in addition to closures and damage caused by Katrina.

The National Restaurant Association (NRA) estimates a limited impact from Katrina, per se, to overall impact industry sales of $476 billion.

Annual restaurants sales for Louisiana, Mississippi and Alabama -- which together account for 6,800 restaurants and other food service outlets -- last year were about $12.4 billion, or a very modest 2.6 percent of the national total.

Observers say the bigger concern for the industry still continues to be the inflation in gas and energy prices.

A triple whammy for restaurants

First, when gas prices go up people tend to dine out less often, but with one caveat.

Said Technomic's Paul, "The quick-service chains benefit as consumers trade down from a casual dining option to quick-service chains."

Even so, same-store sales at McDonald's (Research) last month were less than stellar, coming in at 3.4 percent or at the low-end of Wall Street expectations for a rise of 3 to 6 percent.

Second, suppliers will probably incur higher energy costs which they'll pass along to restaurant operators in the form of surcharges.

Third, the escalating price of natural gas pressures the back end of businesses in the form of higher utility bills.

What does this mean for consumers? If restaurant chains can't keep absorbing the costs, it could very well translate to higher food prices down the road.

"This is how it gets back to the consumers. It's through the price of food," said Harry Balzar, restaurant sector analyst with market research firm NPD Group.

"Menu price inflation has heated up," cautioned Hudson Riehle, senior vice president of research with NRA. Year-to-date until July, Riehle said menu inflation is up 3.2 percent. "Typically, menu price inflation tracks between 1 to 3 percent a year," he said.

Riehle said gas concerns have moved up in the ranking of top worries for the industry. "Gas and energy prices right now are at No. 3 behind retaining staff and maintaining sales. Usually gas is lower down on the list."

Nevertheless, Riehle and Avondale's Eft see a few silver linings.

Said Riehle, "Katrina's effects will play out against the backdrop of strong economic growth. Subject to no other shock, we think sales will begin to pick up next year."

"The other factor working in the industry's favor is consumer habits," Eft pointed out.

"This country will not be changing habits anytime soon," she said. "Don't expect more Americans learning to cook at home just because they're paying a little more for gas."

CEC Entertainment, Ruby Tuesday and O'Charley's could not be reached for comment.  Top of page

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