Wednesday, January 6, 2010

A Texas-sized restaurant hurt?

The Fourth Ring of Hell, once thought to be California or Michigan, may turn out to be Texas, at least for restaurants, according to officials of the Sonic drive-in chain.

In true Texas fashion, the Lone Star State had largely fended off the economic downturn that gut-punched restaurants in most other places, the executives explained during a conference call with financial analysts.

Most of those investors were likely well aware of the recession’s impact on places like southern California or the greater Phoenix area, and especially Michigan. Unemployment and a drop in economic activity, from car manufacturing to buying a restaurant meal, had turned those locations into locales right out of a Steinbeck story. Restaurants had suffered accordingly.

But in Texas, “the economy seemed to hold up longer,” observed Sonic CFO Stephen Vaughan.

Not any more, he and his colleagues lamented. The state
“is now possibly suffering more on a trend basis in terms of increasing unemployment rate” than the regions that went off the cliff long ago.

President Scott McLain noted that sales taxes collected in Texas during October had fallen 12% from the level of a year earlier, and the total had dropped by 14% in November. Economic activity is clearly down, he suggested, and that’s having more impact on Sonic’s sales than competitor’s moves like cutting breakfast prices, he suggested.

That’s very bad news for Sonic, which has a very big presence in Texas. But, with the state second only to California in the number of restaurants it hosts, the late and severe downturn could prove awful for a lot of restaurant operators.

Of particular concern is unemployment, since that’s having a direct impact on the breakfast sales of restaurant chains. If people don’t work, they’re no longer buying a muffin and coffee on the way to the salt mines. They may not have that money altogether.

For Sonic, a chain known for its burgers and custom-mixed soft drinks, morning traffic “has actually held up relatively well,” said Vaughan. “It has not been a growing day part for us but it has not been one of our weakest day parts, either.”

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