The Federal Reserve surprised many by keeping interest rates near zero. Major chains are under pressure to spin off their real estate holdings but the IRS may intervene. Sysco has a three-year plan that includes focusing sales attention on independent restaurants. Foodservice prices continue to increase faster than overall consumer prices. These stories and a whole lot more This Week In Foodservice.
The Federal Reserve passed on raising interest rates at least until late October, citing concerns about the strength of the U.S. economy. This underlines the obvious fact that the recovery from the recession is the weakest one in the last 60 years. Thus, interest rates will remain for the time being at what many consider to be artificially low rates. The Wall Street Journal found it interesting they barely budged the rate. This is doubly curious since it appears most members of the Fed board appear to favor increasing rates.
This is not all bad. Low rates help the automobile market by providing attractive loan rates for borrowers. It is a boon to major restaurant chains as well as large industry suppliers who can finance their businesses at historically low rates. It also helps the housing industry by offering attractive mortgage interest rates. But the housing market is still well below normal in many parts of the country, showing there are other factors than interest rates on mortgages.
Low interest rates don’t do much for small companies who usually don’t qualify for bank loans. This is especially true for start-ups. Some observers believe that low interest rates prop up the stock market because consumers can’t make a decent rate of return on bonds, savings accounts, or CDs.
Some economists fear the Fed, having kept interest rates near zero since 2008, will now have to play catchup and raise rates so aggressively that they will impair the economy.
In brief, low interest rates help borrowers — at least those with the best credit — and punish savers.
Economic News This Week
- The Consumer Price Index decreased by 0.1 percent in August after six straight months of increases. The Bureau of Labor Statistics stated the primary reason for the drop was a sharp decline in gasoline prices. The “core” index (without the volatile food and energy prices) rose 0.1 percent. In the last 12 months the all-item index rose 0.2 percent without seasonal adjustment. The Federal Reserve has set a goal of 2.0 percent growth for the CPI and it is obvious that their efforts have been totally unsuccessful. (For the report on food prices, please see the Foodservice News section below.)
- First time jobless claims declined by 11,000 to 264,000 in the week ending September 12. The 4-week moving average dropped 3,250 to 272,500. While some major firms such as Hewlett Packard and U.S. Steel have announced significant layoffs, these reductions have obviously not shown up in the jobless claim states yet.
- August industrial production fell 0.4 percent largely as the result of a decline in the production of motor vehicles and parts. The Federal Reserve also reported that capacity utilization fell 0.4 percent to 77.6 percent, a rate that is 2.5 percentage points below its long-run (1972-2014) average.
- The Empire State Manufacturing Survey for September showed declining activity for the second month a row. The Federal Reserve Bank of NY reported the new orders index was minus 12.9 and the shipments index was minus 8.0. The study also showed that both employment levels and hours worked decline. The employment index came in at minus 6.2, the lowest reading in 2 years. The average work-week index dropped to minus 10.3. Since any number less than zero indicates declining activity, this is indeed a dismal report for the N.Y. area.
- The Philadelphia Federal Reserve’s Manufacturing Business Outlook Survey showed declining general activity in the region for September but by no means was the decline as severe as that reported in the N.Y. region. The index for general activity went negative falling to minus 6 but the new order index rose to 9.4 while the shipments index declined but stayed well into positive territory at 14.8. The number of employees’ index also increased to 10.2. (Any number over zero indicates increasing activity.
- The number of building permits rose 3.5 percent in August to an annual seasonally adjusted rate of 1,170.000. This is 12.5 percent over the number of permits issued in August 2014. Single-family authorizations rose 2.8 percent over July. August housing starts fell 3.0 percent from July but were up 16.6 percent from August 2014. Single-family housing starts also declined 3.0 percent in August from the July number.
- Leading economic indicators index inched up 0.1 percent in August. The Conference Board reported that the Index now stands a 123.7. The Index was flat in July and up 0.6 percent in June. A spokesperson for the board stated that the Index “suggests economic growth will remain moderate into the New Year, with little reason to expect that growth will pick up substantially.”
Foodservice News This Week
- Restaurant chains have been urged to spinoff their real estate holdings but the IRS may have a different viewpoint. Activist stockholders have pushed chains to “unlock shareholder value” by selling and leasing back their buildings and land. Darden is in the process of doing it. Frisch’s has just done it. McDonald’s is under pressure to do it. Now the IRS is “concerned” that these splits are a disguise for dividends and other taxable transactions. The IRS says they will stop giving preapproval for such deals.
- Sysco has announced a three-year plan to improve profits including stringent cost cutting and aggressive selling. The giant distributor said they will target independent restaurants by adding creative ideas and assistance.
- Consumer food prices rose 0.2 percent in August with food away from home up 0.2 percent. Food away from home prices are up 2.7 percent in the last 12 months while food at home prices increased 0.8 percent in the same time period.
- The NYC Department of Health ruled that restaurant menus must indicate if a menu item has more 2,300 mg of sodium. This is the recommended daily maximum. But, Scott Hume, publisher of Burger Business, pointed out that some of the most popular burgers at fast food restaurants will not require the warning. In fact, none of the burgers served by Burger King, McDonald’s, Sonic, and Wendy’s hit the 2,300 mg ceiling. Carl’s Jr. does have two burgers that will require the salt warning label. Hume found that some casual restaurant chains do have at least one burger that exceeds the limit including Applebee’s, Chili’s, and Red Robin. While this is primarily because the burgers are larger, it is interesting that the often-demonized fast feeders’ offerings may be healthier than the full-service operators.
- Fast-casual pizza chains are targeting the Chicago market. Blaze Pizza, Pie Five Pizza and MOD Pizza did not have a single store in the Chicago area a couple of years back but now collectively have 18,
- Taco Bell will be opening their new concept called Taco Bell Cantina in Chicago with a second to open later this month in San Francisco. The new design features open kitchens, “localized” exteriors, an “urbanized” approach to fit in pedestrian areas without drive-thru windows, and will be more energy efficient. The new concept will also serve beverage alcohol.
- Corporate Stirrings: Frisch’s new owner, NRD Capital Partners, has sold 19 of Frisch’s properties to National Retail Properties. While Frisch’s management has not commented on the transaction, in all likelihood this is for a leaseback arrangement. Levey Restaurants announced it has acquired Minneapolis-based Prom Management, a family-owned concessionaire that manages over 34 golf events annually including the Ryder Cup, the PGA Championship and the Women’s PGA Championship. No terms of the purchase were revealed. Jamba, Inc. announced another refranchising deal with 13 stores in Southern California sold to RPM Jamba #5. The chain states that 88 percent of their locations are now franchised.
- Checkers and Auntie Anne’s will build a new prototype in five Wal-Mart stores in Central Florida. The franchisee, Orlando-based All American Business Associate, Inc., said the combined concept has been tried successfully in other cities.
- The Rusty Taco chain of 9 restaurants is changing its name to R Taco. Buffalo Wild Wings is the majority owner of the operation.
- Growth Chains: Papa Murphy’s will open 30 locations in the St. Louis area in the next 6 years. Freshii’s has an agreement to bring their healthy food concept to at least 4 Army and Airforce Exchange locations. MOD Pizza will open a location in Tempe, Ariz., as well as 6 locations in the St. Louis area in 2016. Panera Bread Co. plans to open 7 restaurants In Idaho in early 2016. McDonald’s will open 250 units in India by 2020. Burgatory, based in Pittsburgh, has opened its fourth location in the area. Pieology Pizza has signed an agreement to open at least 3 locations on Saipan and Guam. Pie Five Pizza has signed a deal to bring up to 28 restaurants to Southern Florida. Burgerfi has signed 2 franchise deals that will result in the opening of 18 restaurants in the Dallas area.
- Comparable store sales reports: Cracker Barrel up 3.8 percent and Sonic Drive-ins (system up 4.9 percent, company owned up 4.5 percent and franchised up 4.9 percent.)
For details and same-store sales of other chains, please click here for the Green Sheet.