Nashville restaurants feeling impact of sluggish economy

Tuesday, May 27, 2008 at 12:04am
High-end independent restaurants as well as publicly traded chains are feeling the pinch from reduced consumer spending and higher commodity prices. Matthew Williams/File/The City Paper

The national restaurant industry has been taking it on the chin.

Higher fuel prices have pushed up wholesale prices. Commodity prices have

fluctuated wildly, mostly to the higher side. And the sluggish economy has

put a crimp in consumer discretionary spending.

Moody’s Investors Service recently dropped its outlook on the industry to

negative because of it all.

The national troubles have trickled into Nashville’s independent

restaurants. They are feeling the profit margins getting squeezed more and

more with higher commodity prices. Though they are making do in the tougher

environment, trouble could come if the higher wholesale prices persist and

demand for dining continues to slide.

“The pie is shrinking,” said Rick Bolsom, an owner in Tin Angel, Zola’s and

Mirror.

Locally based Nashville chains have felt the pinch as well but with varying effects.

O’Charley’s recently reported lower revenue and income and its stock price isn’t far off its 52-week low.

Cracker Barrel has been weathering the tough environment with restaurant revenue increasing some in the first quarter of the year. Net income was a little lower, however. Retail sales in the stores declined during the quarter, an indication that patrons will spend on food but have cut back on extra purchases in the stores.

Though Cracker Barrel has been doing well relative to the rest of the national industry, the company’s stock price has taken a hit over the past months because the broader industry woes. Its 52-week range is $24 to $46.36.

Overall, national chains have reported traffic counts being off 9 to 11 percent on average, according to the National Restaurant Association.

“We mirror locally the national scene,” Randy Rayburn, owner in Sunset Grill, Midtown Café and Cabana, said of the local industry.

Others say the traffic count has been off some but it depends on the price point.

“We’re still humming along,” said Mike Dolan, an owner in MAFIAoZA’s in the 12South area. “We’re still having success because we are a value play.”

All are dealing with higher wholesale prices. Profit margins have tightened considerably as prices rise and can’t yet pass the increases on to the consumer. Fuel surcharges have been in play for several years to deal with fluctuating gas prices.

“The biggest thing that has gone up for us is flour costs,” Dolan said.

Bolsom noted that flour prices have increased from $9 per bag to $30 per bag. He said because of the push for more ethanol any grain used to feed the animals used as meat products has increased in price. That in turn has increased the price of meat

“We are having to absorb never before seen increases across the board,” Bolsom said.

Mike Kelly, owner of Jimmy Kelly’s Restaurant, said meat prices are high right now but aren’t as high as they could be based on the high price of corn and soybeans.

Kelly is paying $1 per pound less for tenderloins than he was a year ago, he said.

The restaurant industry can be extraordinarily nuanced with its price points and its ability to raise prices to reflect higher costs.

“We’re seeing some resistance in the consumers,” Kelly said of menu pricing to reflect higher costs.

Bolsom said it is much harder to raise prices significantly given a restaurant’s target price point and the value on the plate it wants to deliver while preserving quality. So there might be some extras that had been added during better times that might not come now.

Citing an extreme example, Bolsom said, “We’re not going to sprinkle truffles on the food.”

With a tougher economic environment, the question becomes who will survive. So far, no one has closed down because of the climate.

But Bolsom noted that during good times poorly run restaurants can survive with strong cash flow. Once the cash flow dwindles, though, the problems emerge.

“The effect [on the restaurant industry] will be long term not short term,” Bolsom said.

Filed under: City Business
Tagged:
By: frank brown on 12/31/69 at 6:00

Gasoline is a bargain when compared to the prices charged at the West End (semi-casual) BRICKTOPS.

By: lamons on 12/31/69 at 6:00

Nashville is lucky to have numerous locally owned and operated restaurants. I encourage everyone to at least consider patronizing these as opposed to the big national chains. These restaurants support local charities and are active in the community. A great example of this is this Wednesday's Generous Helping event at the Convention Center to benefit Nashville's Table/Second Harvest Food Bank. A list of over 20 excellent local restaurants provide the food and can be found at www.secondharvestnashville.org. Please support these as they support our community.