Are Restaurant Chains Recession Proof?

Restaurant chains seem to always be in the headlines, sometimes it's for the fatty foods they serve or the good deeds that they perform. Recently at work I have had the opportunity to go behind the lines at a fast food restaurant chain and learn more about how they operate. While talking to the area manager about a specific store he talked about its weekly revenues and stated that it did not see a drop in sales during the recession and claimed that it was "recession proof." This did seem to make sense to me because people have to eat. Also we as humans like to stay with things we know. For example when I think, "what do I want for lunch" the name of a restaurant chain almost always comes to mind.

When I did more research I found more evidence of what was said, many chain restaurants were "recession proof" during the last recession. Those that did the best evolved their menus to our everyday budgets by offering low cost items. At the same time they increased advertising of these items and others that were on the changing menus. But, not all restaurant chains participated in those activities and at the same time had success. Other chains did not seem to have the same success as others partially due to decreases in advertising or stale menus. My question is, are some restaurant chains built better for a recession? Does management play a role in keeping their restaurant chain recession proof?

1 comment:

Dave Tufte said...

Pedro: 100/100

I think that certain classes of restaurants may very well be recession proof.

But the aphorism going through your mind should be something like past performance is no guarantee of future performance.

Industry performance in a recession is very much like beta in stock-picking. Firms cluster around a beta of one, indicating that they move with the market ... but almost all of them have a beta greater than zero indicating that they go up and down with the market.

What this manager is saying is that the "beta" of that restaurant's performance compared to the business cycle is zero. That could be; I have no doubt that some restaurants are like that. But it probably also means that this restaurant lags others when the economy grows.

I am sure that some managers acted proactively to push their restaurant towards a zero "beta" during the last recession. But were they able to push their "beta" back up when the recession ended? My guess is that they'd say yes, but I'd think that the data wouldn't indicate that they had this much power.

FWIW: I periodically remind students of one of the oddest bits of business trivia I've come across in Cedar. Most of you know there's a KFC/A&W on 200 North. That used to be just a KFC before the remodeled about 10 years ago. The reason they remodeled is that KFC was too upscale for a college town. So yes, I think managers can do things actively to adjust to the situation of their customers, but maybe not in response to business cycles.