Lane Cardwell

Days of Future Passed

You hear and read it a lot these days. "It has never been this bad before." "We are in uncharted territory." "It could be the end of the restaurant industry as we know it." 

Yes, it is bad. Sales are soft. Cost pressures are unrelenting. There seems to be no end in sight of the bad news. It can't possibly last, can it? No, but it can be bad for a long time, and it has been before. I joined the restaurant industry in 1978 at Steak Ale, right at the beginning of a prolonged period of high inflation. I didn't know at the time the historical perspective of what we were experiencing. I figured it must always be like this.
 
As a financial analyst one of my duties was keeping up the statistical tables that we used to evaluate how we were doing. Sales, price changes, deflated sales, lunch vs. dinner, food vs. liquor, sales per seat, sales per foot, and so on. As someone new to the industry, and to the company, they were just numbers with little perspective. After about the sixth month of calculating a negative deflated sales change for Steak and Ale I asked my boss if this was normal. She told me that she had been with the company for almost two years and it had always been negative.
 
We weren't tracking customer traffic at the time, although deflated sales (sales adjusted for price increases) was a good surrogate. The only problem was it sounded too academic to most people in the company to cause any alarms to go off. And we didn't have a sales problem--our sales per restaurant were pretty much flat for the 1978-1980 period. But we had a customer problem. They were dropping as fast as we were raising prices. 
 
From 1978 to 1981 industry restaurant prices rose about 10% a year. Was the industry being greedy? Not at all. Inflation on all items (CPI) was going up at about 11% a year. It was an ugly time. At Steak and Ale we were taking $1 price increases on all entrees on a regular basis. A steak that cost $10 at the start of 1978 was selling for $14.60 at the end of 1981. It seemed that for a while one of the biggest expenses in the company was for reprinting menus.
 
A restaurant that was averaging $2 million a year in 1978 was still doing $2 million a year in 1981. Not bad? Stay with me on this. If the check average was $10 in 1978, it was $14.60 in 1981. That meant for sales to have stayed flat there was a dramatic decline in customer traffic. How dramatic? A 31% decline. That meets my definition of dramatic.
 
As an industry we raised prices to protect our margins, and to cover our costs. But we did it at the price of our customer base. The result of the decline in customers was that each customer was carrying a bigger load of the sales each year. And the loss of more customers the next year meant that the remaining customers had to shoulder an even bigger load.
 
Every period in our industry has different opportunities and challenges. In the 1978-1981 time period, with runaway inflation across the country and in the industry, there were still some positive things going on. Women entering the workforce were a boost to restaurant sales for several more years. Off-premise sales were growing at double digit rates as drive-thrus were becoming more prevalent. Alcohol sales were growing. And casual dining was just in its infancy, giving price battered customers a lower cost, and more fun, way to participate in table service restaurants. By way of reference, gas prices were 63 cents a gallon in 1978.
 
As bad as it seems today, we are not having to raise prices 10% per year to cover our costs. Maybe next year, but not yet. The more time that you spend in the industry, the better prepared you will be to handle whatever comes at you. We adjust, the customer adjusts, and we all move down the road. But don't forget the lessons of that long ago period. Price increases bring customer decreases.

Posted by Lane Cardwell on July 7, 2008 | Comments (4)