People Still Have to Eat

In the last few weeks, a lot of people have asked us how the current economic meltdown will affect America\’s restaurants.

The short-term answer is that the crisis is already having an impact. We\’ve recently surveyed 45,000 restaurant-goers nationwide. One-third told us that they\’re eating out less, 28% say they\’re visiting less expensive places, and roughly 20% are cutting back on alcohol, appetizers and dessert. Also, the number of restaurant openings has slowed. This year in New York City, there were 119 openings versus 163 last year. Another grim sign: Companies are limiting entertaining at restaurants. One thing\’s for sure — Bear Stearns and Lehman aren\’t giving any holiday parties.

Despite all this, we predict that the long-term future of the industry will not be bleak — just different. When Zagat Survey began 30 years ago, the country was in its first \”energy crisis,\” with interest rates scraping 20%. Nonetheless, America\’s restaurants flourished. After October 1987\’s Black Monday and again after 9/11, the industry took an immediate hit, but then bounced back stronger than ever. Throughout all three recessions, restaurant openings exceeded closings. Why? Besides the fact we all have stomachs to fill, we\’ve also been in the midst of a long-term social revolution that has led to unprecedented growth in the frequency of dining out for both business and pleasure. The engines of that growth haven\’t changed.

To start with, more and more women have joined the workforce over the years. Thus, in most families, no one regularly has the time to shop, cook and clean up afterwards. Second, our tax laws continue to favor eating out for business. Last, the Immigration Act of 1965 led to a diversification of inexpensive, ethnic cuisines. Today roughly 50% of all meals consumed around the U.S. are prepared outside the home.

As a result, we\’ve witnessed the exponential growth of what we call Better Alternative to Home (BATH) restaurants — casual, modestly priced eateries (pasta-rias, burger joints, BBQs, upscale diners, noodle shops and myriad ethnic places) as well as family dining chains. These restaurants buy wholesale and produce meals far more efficiently than home cooks.

In city after city, our surveys show that high-end restaurants are a small minority relative to BATHs. That helps explain the industry\’s low overall inflation rate in recent decades. As we measure it, the average cost of a meal increased by less than half of the Consumer Price Index since 1979. The current downturn will no doubt pressure restaurants to offer an even greater value proposition. Expect to see more low-priced prix-fixe meals. In New York, over 100 restaurants offer fixed-price lunch menus in the $20 range. Another approach is the small-plates menu, which allows the customer to eat less and pay less. Also plan on seeing more bargain-priced specials. Short of a full-scale depression, it\’s unlikely that our economic woes will dampen the excitement about food and dining that has become part of our cultural fabric over the past three decades. TV shows, feature films, food magazines, blogs and chef-labeled products have all helped fuel this consuming passion.

The financial downturn may have an upside for restaurants. In the throes of the Great Depression, Americans turned to entertainment — especially the movies — to forget their troubles. Today, for a generation that has grown up on The Food Network, dining out with friends or family in an attractive restaurant has become a source of comfort and entertainment. Thanks to all these factors, we believe that restaurants will weather the current environment better than many predict, and BATH restaurants will flourish as diners look for homey, hearty, reasonably priced fare. High-end places — especially those that offer value as well as quality — will be able to keep their reservation books full, if not as profitably as before.

The bottom line is that the economy may convince you to forego buying the Lexus or taking that jaunt to Maui, but at the end of the day (and at its start and in the middle too), you gotta eat.