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National Restaurant Association - Economist’s Notebook: Rising gas prices cutting into restaurants' bottom lines

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Economist’s Notebook: Rising gas prices cutting into restaurants' bottom lines

In his latest commentary, the National Restaurant Association's chief economist Bruce Grindy analyzes the impact of rising gas prices.  A strong majority of restaurant operators said the recent increase in gas prices has negatively impacted their business, either on the sales or operational side.  A prolonged period of elevated gas prices could have a particular impact on restaurants with customers on the lower end of the income scale, as gas expenditures take up a higher proportion of their disposable income. 

Rising gas prices are one of the biggest threats to the economy at this point.  The Energy Information Administration reported on Monday that gas prices are averaging $3.92 on the national level, up 5 cents from last week and 62 cents since the beginning of the year.  In many major cities, including Chicago, Los Angeles, San Francisco and Seattle, pump prices are already well above the $4 mark. 

Not only does this threaten the fragile economy recovery – the national economy is still 5.3 million jobs down from its pre-recession peak – it also crowds out disposable income that could be spent in discretionary areas like restaurants.

Thus far, the overall spending impact has not been significant, with total restaurant sales reaching a record monthly high of $43.4 billion in February, according to Census Bureau figures that are adjusted for seasonal and trading day factors (including Leap Year).  However, these figures represent total industry sales volume, including new restaurants entering the market. 

On an individual restaurant level, the impact of rising gas prices is more pronounced.  According to a National Restaurant Association survey of 600 restaurant operators fielded March 15 – 22, nearly three out of four respondents said the recent increase in gas prices has had an extremely negative impact (28%) or somewhat negative impact (45%) on their business. 

Impacts were felt on both the sales and operational sides of the business, with operators reporting both lower sales and higher supplier prices – often due to fuel surcharges.  Among those that reported lower sales, operators said their sales were off by an average of five percent.

While the majority of operators reported a negative impact of higher gas prices, there were some differences across industry demographics.  Seventy-six percent of limited-service operators said gas prices are negatively impacting their business, compared to 71 percent of their fullservice counterparts.  Corporate-owned chain (82%) and franchisee (79%) operators were also more likely than independent operators (70%) to say the recent rise in gas prices has negatively impacted their business. 

Not surprisingly, restaurants that are more dependent on roadside traffic have been somewhat more affected than neighborhood restaurants or those near public transportation.  Seventy-eight percent of restaurant operators located in rural areas said the rising gas prices have negatively impacted their business, compared to 71 percent of operators in urban areas. 

In general, lower-income households are disproportionately impacted by rising gas and energy prices.  According to National Restaurant Association analysis of data from the Bureau of Labor Statistics, gasoline expenditures for households with annual incomes of $100,000 or more represented just 1.9 percent of their pre-tax income in 2010.  In contrast, households with annual earnings of less than $30,000 made gasoline expenditures that averaged 7.0 percent of their pre-tax income – more than three times the proportion of their higher-income counterparts.

In terms of restaurant sales, this suggests that over the longer-term, if gasoline prices remain at elevated levels, restaurants with a relatively high proportion of customers on the lower end of the income scale could feel a corresponding impact, if households are not able to fully absorb these additional costs.

For additional analysis of restaurant industry trends, log on to Restaurant TrendMapper (subscription required).

Annual Expenditures on Gasoline as a Percentage of Total Household Income
 
Gas Exp vs Income.gif

Source: National Restaurant Association, based on 2010 data from the Bureau of Labor Statistics

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