Are you wondering how the Fed’s interest rate cut will affect spending and the restaurant industry at large? Well, it all depends on who you ask. Those with a glass-half-full attitude and a sense of joie de vivre believe it will boost consumer spending and borrowing. Those with a wait-and-see, comme ci, comme ca persona suggest consumers aren’t rushing back to the restaurant table.
So, how do operators prepare for the unknown in the coming months? The good news is that the holidays are right around the corner, a period when people celebrate all the good in their lives by joining friends and family in their favorite eatery. The bad news is that the January slump follows along with the cyclical nature of life in the hospitality industry.
Here, we’ll explore both sides of the proverbial same coin to see if we can determine which way the quarter falls.
Reduced Spending Continues
This economic theory revolves around time. While the United States Federal Reserve reduced rates by 0.5%, the largest reduction since the 2008 financial crisis, it will take time to trickle down into consumer spending.
Nation’s Restaurant News spoke with Lauren Fernandez, the founder and CEO of Full Course, an incubator and accelerator, about the operating environment and the need for patience. “This can’t be construed as a bad thing. Is it a silver bullet? No. What’s happening now is multi-layered. A lot of operators are in a super uncomfortable holding pattern, because they’re waiting for the consumer base to readjust to the cost of living and that just takes time…From an inflationary perspective, rate cuts are not necessarily what it’s going to take to have appropriate correction.”
Because many operators looked to loans to get them through the consumer pullback, they’re now faced with significant monthly payments. Now may be the time to look for refinancing possibilities or wait to see if continued rate reductions are in the forecast.
She also notes that if you’re in debt and having trouble servicing that debt, now’s the time to make each location efficient and preserve your margins. You might consider expansion plans in the future.
Additionally, due to consumers’ built-up loans and credit cards, the effect on consumer spending will be negligible as they, like restaurant operators, begin the “catching up” process. Eventually, access to cheaper funds will improve both operators’ and guests’ outlooks.
Today, the current economic landscape is still driving value meals. According to data obtained by Restaurant Dive, independent restaurants added 3,250 combo menu items during the summer. All You Can Eat options increased by 30% for the first full week in August. Applebee’s All You Can Eat campaign is taking the lion’s share, ahead in the casual restaurant category by about 45%.
The Party Picks Up
The folks at CivicScience are a little more optimistic. Their data, gained from over 5 billion consumer responses, reveals that the economic sentiment in the U.S. is surging following the rate cut and getting to its highest level in over one year. However, a large percentage still feel unaffected.
About 63% report that the rate cut has no bearing on how they feel about their finances. On the upside, 40% of Americans intend to increase their spending. Most of that money will go to paying off debt, followed by contributing to retirement savings, making a major purchase, and applying for new credit.
Another nice trend is consumer spending, which is still on the uptick, albeit a mere 0.2% in August. At the same time, the annual increase in prices saw the smallest gains in over 3.5 years. Strong growth expectations were also demonstrated by the narrowing of the goods trade deficit, the most in almost two months.
Michael Pearce, deputy chief U.S. economist at Oxford Economics, shared with Reuters, “The resilience of consumer spending and the stronger foundations strengthen our conviction that the near-term outlook for the economy remains bright. That should eventually help drive a re-acceleration in the pace of hiring and help keep labor market conditions solid over the coming year or two. That is one factor that will help convince the Fed to slow the pace of rate cuts next year.”
As is common in the world of economics, it sounds like the coin can land either way. As always, in the restaurant industry, one of the keys to maintaining profits is to keep a watchful eye on benchmarks and data, ensuring you’re staying on the straight and narrow path to sound financial decisions.
