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Downsizing Applebee’s: A Canary in the Coal Mine

by Invenium Viam on April 19, 2017 · 1 comment

applebees_closedLast month, on March 3, 2017, Business Insider announced that Applebee’s Restaurants would close “… between 40 and 60 locations this year.” One of those locations is a couple of blocks from my house, which closed its doors a few days ago.

 

“We believe that restaurant closures are an important tool to preserving the financial health of the system,” acting CEO Richard Dahl bloviated in a call to investors. While Dahl’s statement was PR honey-and-lemon-flavored ear wash intended to put an ExecuSpeak spin on things, the fact is that Applebee’s had already closed 46 locations in 2016 in anticipation of what analysts feared might be the onset of a ‘restaurant recession’ this year, whatever the hell that is.

 

Dahl became the acting CEO when former CEO Julia Stewart – one of the highest-profile and longest-serving chief executives in the casual restaurant industry – was forced out on February 17 (along with her CFO) and formally resigned on March 1. Stewart’s departure is the latest in a long string of restaurant-chain CEO resignations in the wake of declining sales and traffic industry-wide over the last year. Her beheading came after a failed campaign to recapture market share with an attractive new menu of $10 entrees. As a marketing professional, the meaning of that campaign was crystal clear to me – Applebee’s primary clientele, a vast swath of the wage-earning middle-class, was extremely price sensitive and the target price point is $10.

 

Ten dollars.

 

Business Insider attributes Applebee’s lackluster sales to ” … the rise of fast-casual restaurants like Chipotle and Panera, and the fact that more people are eating at home because grocery prices are falling …” but that argument is missing the forest for the trees. It is informed by competitive positioning and sales figures (two data sources that consume enormous mind share of business executives to the point of tunnel vision), based on the presumption that if restaurant customers in their market demographics are not buying from us (i.e., Applebee’s), they must be spending their food dollars elsewhere. That’s a bad assumption, utterly without foundation.

 

There are many reasons why that argument doesn’t hold water. First, Chipotle is only now showing signs of renewed life after a disastrous 2015 loss of market share and tumbling stock prices due to E. Coli deaths and illnesses from food-borne pathogens at restaurants across the country. The current stock price is $470, only somewhat improved from a low of $413 on January 8, 2016 and still down more than 25% from an all-time high of $640 on October 30, 2015 – the day before the E. Coli outbreak went public. To be sure, Panera’s sales, market share and stock prices have all jumped, partly based on a “clean food” initiative that appeals to high-wage techies and well-compensated DINK’s, but that is a notable exception to current trends. Besides, have you noticed grocery prices going down? I haven’t. The historical trend in grocery prices is an increase of 2-3% annually and that trend has held for a couple of decades, at least. In 2014, there was a huge jump in prices at the grocery store and even with stable prices in the cost of gasoline over the last several years, the cost of groceries hasn’t declined. And even if grocery prices were declining, wouldn’t that translate to more money in the pockets of consumers and more of their food dollar being spent dining out? No, it makes no sense …

 

All this begs the question: Is there a better explanation of why Applebee’s was forced into a survival-mode strategy of cutting 100+ stores? And just how is all this political, guy? Answers: Yes, there is a better explanation. And it’s political because downsizing Applebee’s is a metaphor of a downsizing middle-class.

The better explanation is that Applebee’s customers are just not spending money because they don’t have money to spend. It’s the reasons why that are political …

 

In my view, the Applebee’s store closures serve as a canary-in-the-coal-mine indicator of the financial health of the American middle-class. I think the causes for Applebee’s decline run much deeper than competition for market share and/or a series of faulty business decisions. I think it is direct evidence of a middle-class that is no longer able to stay afloat, even with rotating credit card debt and second jobs, and is now starting to slip under after treading water for a long, long time. Applebee’s is one of middle-America’s regular haunts along with Perkins and a handful of others. It’s where you take your in-laws for a quick, inexpensive lunch on their way through town. It’s where you meet your college buddy for rib-tips and a pint to catch up on things. If revenues are down and same-store sales have declined for the middle-swath of middle-range restaurants across the market offering during a period of declining unemployment, economic expansion and rising wages for the first time in a decade, it can really only mean one thing: the American middle-class is financially tapped out and just doesn’t have the money to spend.

 

There is abundant evidence to support my hypothesis. In January of 2015, the Pew Charitable Trusts issued a report entitled “The Precarious State of Family Balance Sheets.” In it, a clear picture emerged of the current state of household financial health, which ” … reveals a striking level of financial fragility: Despite the national recovery, many families have experienced minimal wage growth, have few savings, and could not withstand a financial emergency.” Among it’s key findings:

 

Earnings Growth – Earnings growth for the typical US worker increased only 2% from 1999-2009.

Limited Savings – The majority of households can replace only one month of income loss with liquid savings. For those at the bottom of the economic ladder, income loss can be sustained for only nine days. [emphasis mine]

Financial Strains – 70% of all US households face financial strains on at least one pillar of a family’s economic foundation: income, expenditures, and assets. 55% of households are “savings limited” without available liquid assets to cover one month’s income loss. 47% of households are “income constrained” which means they spend as much or more than they take in. 8% of households are “debt challenged” with at least 41% of income going to debt service. 3% of household are stressed in all areas.

Expenditures – Average household expenditures have increased only 6% since 1984, when adjusted for inflation.

 

Another indicator of the ill-health of the American middle-class is accumulated household debt. According to the Fed, as reported by ZeroHedge (a financial blog), US household debt rose to $12.6 Trillion in 2016, reflecting the biggest jump in debt in a decade. That translates to an average of $90,000 per household when you factor in households that are debt-free. For all households with some debt, the average accumulated debt is $130,000, which includes an average credit card debt of $15,000+ and an average student loan debt of $48,000+.

 

$12.6 Trillion is just over two-thirds of the US GDP for 2016. Does it bear mentioning that the Federal government carried $18.6 Trillion in debt obligations at the end of last year, which nearly equaled the 2016 GDP?

 

As if the shabby state of the middle-class financials weren’t scary enough, a few days ago the IMF reported that more than 20% of US corporations are likely to default on debt obligations if interest rates rise. Corporate leverage has risen to the highest level since either the Great Recession or the dot.com melt-down, depending on how you look at the numbers. So what happens when corporations find themselves in a financial pickle? They cut spending and they cut jobs. And what happens when householders lose their jobs who are already financially stressed and have no resources to bridge a sustained period of income loss? They default. In short, you have the makings of a classic downward spiral, or a depression, about to unfold.

 

But the news gets even worse. Howard Gold, a financial columnist for MarketWatch, points out in an opinion piece (“No one is noticing this big red flag for the stock market”) that the economy is at an official unemployment rate of 4.5% for the first time in a decade. When unemployment tanks out, it is a remarkably good indicator historically that the economy is about to enter recession and that the stock market, which has been on a long bull cycle, is about to suffer a series of “corrections” and turn into a bear market. So you can expect a much broader response from employers across the US, not just the over-leveraged 20%, as interest rates rise, markets shrink, unemployment spikes, and consumers lose buying power. My guess – just a guess – is that this next financial storm is gonna be a doozey.

 

So who do we have in Washington looking out for us grunts down here in the trenches? A bunch of small government conservatives, insufferable Ayn Rand dogmatists, monomaniacal Tea Party ideologues; and deranged, neurotic, paranoid, pretentious and delusional demagogues. Just what we need. They want to cut spending on programs that benefit the poor, the under-employed, and wage-earning households. They want to cut taxes on the wealthy. They want to slash health care, earned benefits, and the size of government. They want to spend billions more on defense. And they’re about to balloon the national debt. All policies that will help drive a recessionary correction into a full-blown, worldwide, economic depression. With all the misery that that entails.

 

Just one more little bit of bad news to share. #45 is fully aware that he’ll have to take a recession in his administration. He’s smart enough to know that it’s preferable to take it early to have any hope of a second term. And a recession is exactly what he needs to muster the political will among the deplorables he pimps daily via Twitter to effect his dystopian policies. The future, my friends, looks very dark indeed.

 

Perhaps the only bright spot is that after the financial collapse of 2008 Democrats made major gains at both federal and state levels. We could again in 2018, if the economy plays out the way I think it will and we make a few savvy moves now to prep our candidates and the electorate to fight the right fight. Unfortunately, I don’t have a lot of confidence in Democratic leadership at any level to figure out how to make a declining economy work to our advantage at the polls. They’re still playing by an old rule book and the election of Tom Perez to the DNC over Keith Ellison is just one proof that even in the face of catastrophic losses across the country, our leadership has no real plans to make any fundamental changes in how we reach out to voters and what story we want to tell.

 

We’ll continue to sell the sizzle, not the steak, and go to bed at night satisfied we didn’t hurt anybody’s freaking feelings. Me, I like winning.
 
Comments
 
From Mac Hall: Canary in the coal mine ? Hmmm … but didn’t I hear that Donald Trump was gonna save the coal miners ???
 
Seriously, we see restaurant chains open and close all the time … but the bigger concern should be the demise of retail stores. Sears is shutting down about 10% of its Sears and Kmart locations, or 150 stores, and JCPenney is shutting down about 14% of its locations, or 138 stores. Payless, Gordman’s, Gander Mountain, etc. More than 3,500 stores are expected to close in the next couple of months. There are reports that 60,000 people have been notified that they have lost their jobs … just in the past two months.
 
There are more retail job losses than there are working coal miners.
 
The concern that we should have is how many of these employees will lose their healthcare … admittedly, not every worker in retail participated in a health plan (29% according to one study) but other workers did have access to ObamaCare. So when the Republicans finally do whatever they are gonna do with the ACA, there will be a lot more people that will be impacted.
 

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