It is not difficult to make predictions in a down market. In May I made calls on two stocks, CROCs Footwear and Ruby Tuesday Restaurants. They both had just released their Q1 earnings and I made a call by spending some time with their 10-K and their proposed strategy. While 3 months is a short time to check back, a quick view of their current market prices justify the short call.
RT is now trading at $5.8 down 21% from $7.35
CROX is now trading at $8.25 down 30% from $11.81
Compared to this S&P 500 is at 1283.6 down 8.1% 1397.68.
So not all weakness in these two stocks are due to market downturn. Motley Fool’s Tim Hanson called Crox attractive at current prices. But given the red flags in their accounting it is good to stay out longer.
The problem with products like food and drinks and with food service business is scalability. There are only a limited number of people in the market. The current slowdown in restaurant business has its roots in how the market grew at faster rate than the population growth. National Restaurant Association says that the number of restaurants grew at a more than two times the rate of population growth during the period 1990 to 2006. The total market size increased from $239 billion (nominal) to $550 billion (nominal). This implies two stylized facts:
- The average sales per restaurant has remained constant over this period.
- An average meals consumed outside the home per person increased as well.
The current economic slowdown will lead to people cutting their additional meals outside home. An average restaurant that saw near zero growth will now see its sales drop. With increase in marginal costs due to food prices increase and the increase in operational costs, restaurants are getting squeezed from revenue side and the cost side.
For franchise owners, there is no relief from the franchise fees despite falling sales and rising costs since the franchisees pay a percentage of the sales.
For family owned and operated restaurants, the impact is going to be worse, since the costs are much higher and the operations are geographically concentrated.
This calls into the question the notion of making a comfortable living by owning a franchise or a family restaurant let alone running a business