The outlook has not looked good in the restaurant industry for years, and now the outlook is even worse. Here’s the details…
At the low-end of the restaurant totem pole, there are the low cost, fast food establishments such as Subway.
Last year was not a good year for the chain that prides itself on fresh food, as evidenced by over 800 store closures in 2017, but this year is now really only getting started, and the outlook appears that Subway is in store for more of the same (no pun intended).
Here’s more from Zero Hedge:
For the first time in its 52-years of operation, the company contracted in 2016, shuttering 359 US locations, which was the most significant retrenchment in its history. In 2017, the company closed another 800+ US locations, as details emerged that some one-third of shops in the US could be unprofitable.
Subway’s crisis could be linked to many factors: demographic shift, healthy eating trends, a disgraced ex-spokesman charged as a pedophile, and or managerial shifts. As we explained in December, it is only the tip of the iceberg for Subway’s closures, as we stated it is the “beginning of a crisis.”
And according to a new report from Bloomberg, the sandwich chain continues to close US stores at a record pace (which is not saying much as it has only had 2 full years of net closures in its entire history). Not even one month into the second quarter, management already announced that as many as 500 stores are closing across the country. While it is evident that Americans did not spend their Trump tax cuts on Subway sandwiches, the company is shrinking its North American footprint for greater opportunities in the U.K., China, India and Latin America, Bloomberg said. Last year, the chain closed +800 stores, bringing its total U.S. count to around 25,908 — well off the highs of 27,103 in 2015.
“We want to be sure that we have the best location,” Chief Executive Officer Suzanne Greco, 60, said in a phone interview. “We focused in the past on restaurant count. We’re focused now on strengthening market share.”
“Store count isn’t everything,” she added. “It is about growing the business.”
Greco told Bloomberg that the company is struggling to increase sales in the U.S. as newer, more modern fast-food chains are crowding out the industry.
Notice one key phrase in that quote – as many as 33% of Subway restaurants could be unprofitable in the U.S.
When you’re selling at a loss, it’s kind of hard to make it up on volume, so stores shut.
But there’s a new type of profitability killing that is creeping in – minimum wage laws and increasing real estate prices.
The entire city of New York is so affected by this those two forces, with already increasing food prices, that a group of restaurateurs pleaded the Mayor at Town Hall with a letter written by a group of more than 100 restaurants saying they are suffering, and the restaurateurs need the Mayor’s help to avert disaster.
Here’s more from Zero Hedge
At the end of 2015, just before New York State hiked minimum wages, we warned that the price of food was about to surge as restaurant managers passed through rising wages to end clients. Meanwhile, some restaurants, worried about losing their clients, opted to instead eliminate tipping entirely – that primary source of incremental wages for thousands of food industry workers – while hiking base prices by as much as 30%, with the money going toward higher payroll. Worst of all, many restaurants simply laid off much of their staff who suddenly became unaffordable.
In short, there would be less money for everyone, even as food prices surged, disappointing everyone in the process.
Now, a little over two years later, just as so many libertarians predicted would happen, the NYC restaurant financial situation has turned from merely painful to grotesquely dire for the vast majority of managers as a result of record mandatory wage hikes over the past couple of years, in addition to rising rent, food and other costs.
The result: restaurant owners are demanding that the socialist administration of Bill de Blasio and other City Hall lawmakers allow them to levy a surcharge on all diners to cover their bloated expenses. Without the surcharge, which could range from 3% to 5% – or more – many restaurant owners said they will go out of business.
As MarketWatch reports, a group representing more than 100 restaurateurs – among them such exclusive venues as Nobu, Tao, Smith & Wollensky, Tribeca Grill and Daniel – drafted a giant letter that was displayed on the steps of City Hall Wednesday. The group claims to have weathered nine mandated wage increases over the past several years. Next up: a minimum wage hike in 2019, to $15.
Allow us the option of using a clearly disclosed surcharge to generate the revenue to simply survive,” the group said in an open letter to Mayor de Blasio.
Among the complaints the restaurants list are the following:
We have laid off tipped employees including, servers, bartenders, bussers and runners
We have cut hours for many employees.
We have laid off highly compensated employees.
We have changed our menus to try to control kitchen payroll.
We have closed restaurants, which will continue closing at an increasing rate.
We have been forced to increase menu prices. These price increases have not and cannot come close to offsetting mandated wage increases and real estate costs.
We do not consider opening new full-services restaurants in NYC.
So let’s have some food for thought and perform a mental exercise:
If consumers are tapped out, and if they are facing inflation way more than the Fed or the government claims, such as rising gasoline prices, rising minimum payments on credit cards, rising rent and housing costs, rising healthcare and education costs, increased taxation from the lowest level taxing authority, like a school district or a public hospital, to increased taxation at the municipal and state level, even if we have had some sort of tax “cuts” at the federal level, which are being negated by all those increasing costs just mentioned –
going to be able to afford higher prices and surcharges to eat-out?
Which is why the restaurant apocalypse is on.
It’s an apocalypse within an apocalypse.
Which leads me to believe, that sooner or later, we’re going to see even more closings announced across the board, on the low-end and on the high-end.
And as a result, either legally or otherwise, we’re about to see an increase in street vendors selling their good eats, much like is done in foreign countries such as Mexico or China, even if the U.S. is privy to the Food Truck, because those will most likely not escape the burden of increasing regulation either.
– Half Dollar
About the Author
U.S. Army Iraq War Combat Veteran Paul “Half Dollar” Eberhart has an AS in Information Systems and Security from Western Technical College and a BA in Spanish from The University of North Carolina at Chapel Hill. Paul dived into gold & silver in 2009 as a natural progression from the prepper community. He is self-studied in the field of economics, an active amateur trader, and a Silver Bug at heart.