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Restaurants See Best Pickup in Business in 3 Years

Tuesday, 30 Nov 2010 | 6:58 PM ET

If your favorite restaurant seems a bit busier, that's because it probably is, and economists see that as a sign of growing consumer confidence.

Photo:Doug Ellis

So do restauranteurs.

"We see business picking up. I own restaurants in New York, Philadelphia and Florida...we see a bigger pickup in New York, much stronger. I hesitate to say happy days are here again, but it's starting to feel a lot like Christmas. We're feeling some joy," said Stephen Starr, founder of the Philadelphia-based Starr Restaurants group.

Consumer confidence in November rose to 54.1, its highest level in five months, according to the Conference Board Tuesday. Still at a subdued level, confidence made gains based on improving labor conditions and a rise in consumer expectations.

A lesser watched but interesting metric, the National Restaurant Association's restaurant performance index, shows a similar trend this week. The index, which measures the health and outlook for the industry, rose to 100.7 in October, up 0.4 percent from September and its strongest reading since September 2007.

"It's definitely an improved environment over a year or two ago. It's not a rebound to prosperity and the improvement will be gradual," said Hudson Riehle, senior vice president of the Research and Knowledge Group for the restaurant association. Fifty-one percent of restaurant operators reported a same-store sales gain in October, up from 44 percent in September and the first majority to report gains since August 2007.

That improved consumer confidence is showing up in better holiday sales, and it makes sense that holiday spending at restaurants would also be on the rise.

Riehle said restaurant traffic picks up when hiring conditions improve and that is part of what is boosting business. One of the first areas to expand when hiring increases is convenience dining, where people drop in to grab coffee or fast food, but that's not the only dining category improving.

"It's across the board. Spending is up," he said. "In the end, all restaurant spending is local, dependent upon a microeconomic level. It can vary dramatically, but the fact is overall, it is a markedly better environment than a year ago."

Danny Meyer, whose collection of New York city restaurants span fine dining to sports bars, says he's seeing a pickup across the board in all of his establishments and in his catering business. "This is probably the first time in three years, we've seen every one of those businesses pick up," he said.

"If you had asked me this question a year ago, I would have said we're doing very well with our barbecue cuisines and our hamburger business and less well with some of the more fine dining kind of restaurants," said Meyer, chief executive officer of Union Square Hospitality Group.

"Our restaurants that skew towards neighborhood business did very, very well during the recession, like the Union Square Cafe and Maialino. It's (Maialino) a year old and it was born during the not-so-fun part of the recession," he said.

Improved restaurant traffic also leads to hiring and increased spending, and Riehle said 43 percent of the restaurant operators in his survey expect higher sales in the next six months. Forty-eight percent expect to increase capital spending, and there is more hiring anticipated.

Riehle said the forward-looking staffing expectation index is also moving up and at 100.6, it broke 100 for the second month in a row, a sign of expansion.

"Over the first ten months of this year, the industry has actually created on a net basis over 140,00 new jobs. When you look at the rate of employment growth in the industry this year versus the national economy, and you take this October versus the previous October, employment in the industry increased 1.3 percent, which is the strongest 12 month gain in over three years. At the same time, total U.S. employment rose 0.5 percent," he said.

Shake Shack Founder Danny Meyer
Courtesy Photo
Shake Shack Founder Danny Meyer

Meyer said New York restaurants benefit from tourism and Wall Street, so the experience is clearly different in other regions. He said catering and social entertaining are showing good gains. Some of his other restaurants include Eleven Madison Park, Gramercy Tavern and Shake Shack.

"If you remember, the first several jolts of this recession were so severe it made people wonder if the recession was ever go to end or if the world was going to end. We all had to address two things—can people afford it, and if they can afford it, will they feel okay about being seen consuming," said Meyer.

He said one telling indicator is wine sales, which are improving. "Wine is one product in restaurants that has a billboard. So when you order a bottle of wine, you're saying something to the whole world and that billboard sits on your table. There was a period...when there were any number of people who could not afford that expensive bottle of wine and there were any more number of people that could afford it, but didn't want to be seen drinking it," he said.

Starr said in his 24 restaurants, he also sees an across the board improvement, but the very high end is increasing more slowly. "In our higher end, $90, $100 a person, there's less of an increase than last year. It's an increase but less. I still think people are price conscious, but we see people feeling like it's okay to go out again, despite what the statistics say. My guess is they feel like it's okay to go out again and their sticking their toes in the water to see if its okay."

The restaurant industry is important because Americans spend about 48 percent of their food dollars at eating establishments, according to NRA statistics. That number has nearly doubled since the 1950s.

"If you look at how consumers allocate their household budgets, Americans love to use restaurants. Over 90 percent indicate they enjoy going to a restaurant and it's hard to get 90 percent of Americans to agree on anything," said Riehle. "Restaurant operators know consumer spending is much more discerning. The expectations on the part of the consumer is higher because it's much more deliberative to spend the dollars. In terms of delivering superior service and food price valuation, there's no room for missteps. There are almost one million restaurants across the country, and consumers are quick to vote with their feet."

Starr said he does not expect a real turn in business until next summer, and the holiday season is certainly helping. "In the next couple of weeks, we're going to know if we're going to see if the restaurant business is greater than last year," he said. Starr, though, is willing to invest and is opening several new restaurants, including three locations in Philadelphia and a sushi restaurant near Miami. He is also lining up a new space in New York.

"We're going a little crazy right now with this growth spurt," said Starr, adding that it's been five years since he last undertook a big expansion. "I felt compelled to do it. I felt the time is ready," he said. Starr's restaurants include Buddakan, Morimoto, the Continental, Barclay Prime, Butcher and Singer.

Both Starr and Meyer are hiring. Meyer said he is actually closing his first restaurant because the traffic was too low for the size of the space. Tabla, an Indian cuisine restaurant, gave staff and guests several months notice of the year-end closing.

Just recently Tabla had a job fair for the employees of the restaurant, and managers of his other restaurants showed up as did ten other New York City restaurants. The employees are not available to take new jobs until January.

"The reason that's an important story is that when people are hiring for January, that in and of itself is a great measure for the future. I'm a great believer in fear breeds fear and hope breeds hope," Meyer said.

- Follow me on Twitter @pattidomm.

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