Middle Class Erosion Effect on Restaurants

Middle Class Erosion Effect on RestaurantsIt seems the state of the middle class is always in the news, with both sides of the political aisle pointing fingers as to who’s to blame for middle class economic struggles. No matter which party you blame, there is growing concern about the middle class erosion effect on restaurants and pubs.

Despite what either party may claim about the status of the middle class in America, the business world seems to be the most accurate indicator. That indicator is trending toward the top five percent of earners accounting for 38 percent of personal consumption spending in 2012. That’s over a ten percent increase in the last 20 years.

Middle Class Erosion

According to John G. Maxwell, head of global retail and consumer practice at PricewaterhouseCoopers, “As a retailer or restaurant chain, if you’re not at the really high level or the low level, that’s a tough place to be. You don’t want to be stuck in the middle.” (Quoted in the New York TimesThe Middle Class Is Steadily Eroding. Just Ask the Business World.”)

Statistically, with the top five to twenty percent of earners responsible for greater than half (61 percent) of personal consumption, stores and restaurants are either appealing to the top twenty percent with high-end offerings of goods and restaurant choices or going in the complete opposite direction to appeal to the real penny pinchers with low pricing. The middle appears to be getting lost.

Those statistics are also supported in “Inequality, the Great Recession, and Slow Recovery,” a paper released last month by Barry Cynamon, Federal Reserve Bank of St. Louis, and Steven Fazzari, Washington University in St. Louis. Their research shows that the consumption-to-income ratio of the bottom 95 percent fell sharply during the recent recession with an inability to generate adequate demand… hence the slow recovery.

Restaurants Report Softer Sales

In step with the trend of middle class erosion, the National Restaurant Association’s (NRA) Restaurant Performance Index (RPI) also registered a decline for December, the first decline in three months. However, the RPI remained above 100 for the 10th consecutive month. Additionally, NRA’s SVP of Research and Knowledge Group, Hudson Riehle suggests the dip could be due in part to nasty weather over much of the country and remains positive: “Despite the softer December results, restaurant operators remain generally optimistic about business conditions in the months ahead.” (Quote in FastCasual.com’s “Restaurant operators report slightly softer sales, traffic in December.”)

The RPI is made up of two other indices: the Current Situation Index and the Expectations Index. The former is made up of four indicators (same-store sales, traffic, labor, and capital expenditures). The latter measures restaurateurs’ six-month outlook for the same four indicators. In the Expectations Index, 16 percent expect a worsening economy while 28 percent expect economic improvement in the next six months. The balance expects no change in the economy.

Over the last few weeks, we’ve share relatively positive outlooks for the industry (2014 Restaurant Trends, Restaurant Industry Sales Growth, and Fast Casual Restaurants Leading the Industry.) The latest news and research doesn’t dampen the outlook, but it may alter where growth and success will possibly occur – either at the high end or the low end but not so much in the middle.

Trackbacks

  1. […] certainly can’t control the economy nor the projected erosion of the middle class (see Middle Class Erosion Effect on Restaurants), but you can work to boost traffic in your establishment with a restaurant loyalty program. From […]