August 26, 2009
Down in the dumps over news from ace research outfit NPD Group that there were 4,000 fewer restaurants in the U.S. this spring than in 2008? Media pessimists interpreted this drop as further proof that the country is mired in a deep recession. But are 4,000 fewer restaurants a lot? Let’s take a closer look at the numbers.
NPD’s Spring 2009 ReCount census pegged the net loss of restaurants nationwide at a negative one percent, noting that the results of NPD’s Spring 2008 study found no growth in the industry then, either. The research gurus at the National Restaurant Association say there are 945,000 restaurants in the U.S. Using NRA’s number as the base, the 4,000-unit decrease found by NPD would represent a net loss of less than one-half of one percent.
Given that the real estate foreclosure crisis, the credit crisis, the stratospheric unemployment numbers and other economic ills that befell the U.S. economy during this period, 4,000 restaurants seems like an unexpectedly tiny reduction in the overall count. Factor in the well-documented failure rate among new restaurants and you might be wondering why so few U.S. restaurants failed.
What’s the normal failure rate? Researchers from Michigan State University and Cornell University tracked new restaurant openings in three different markets and found that over a 10-year period, 27 percent of startups failed in the first year, 50 percent went bust after three years, 60 percent had disappeared after five years and 70 percent were gone at the end of the 10-year study period.
Separately, an Ohio State University professor studied Columbus, OH-area restaurant startups and found that 26 percent didn’t make it through the first year, an additional 19 percent didn’t last until the two-year mark and another 14 percent were gone by the end of year three.
Given these numbers, and given this economy, you’d expect that routine attrition would have caused NPD to find significantly more than 4,000 restaurant failures. That they didn’t may testify to the resilience of restaurant operators in tough economic times. Or it could mean that banks—leery of restaurant lending in the first place—had stopped giving loans to aspiring restaurateurs, causing there to be fewer opportunities for failure. Either way, if this is the biggest hit the restaurant industry is going to take in the current economic downturn, we say it’s an encouraging report.
But the NPD numbers weren’t encouraging for every operator in every segment. The census found a four percent drop in fine dining units nationwide, and a seven percent drop among independent operators in all segments. Chains having between three and 49 units took a hit, too.
“It’s clear that independent restaurants and smaller chains have been most impacted by the slower economy,” says NPD’s Susan Kleutsch. “The recession appears to have weeded out restaurants performing poorly prior to the economic downturn. This seems most true for independents and smaller chains that are likely having a hard time competing with the resources and marketing power of major chains.”
If she’s right, she’s telling us a lot about what the restaurant industry is going to look like a few years down the road.
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