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Nervousness Is Bubbling About A Restaurant Industry Recession

This article is more than 7 years old.

Restaurants are one of the indicators that economists follow in looking for signs of a weaker economy. Although people always need to eat, no matter their personal fortunes, they don't always need to eat out.

So, ears pricked up in the restaurant industry this past week when analyst Paul Westra of Stifel Financial downgraded the entire sector.

The reason, Westra wrote in a research report, is that same-store sales of big restaurant groups are falling. They have been down in the past two quarters, according to Nation's Restaurant News.

And, the decline bothers him so much that he thinks a recession might be coming in 2017. According to his research report, restaurants led the economy lower three to six months ahead of the last three recessions.

Some analysts believe the slowdown in same store sales is simply because restaurants built too many outlets, at a time when interest in eating out wasn't growing that fast, according to NRN.

But, Westra doesn't see that reversing any time soon. He downgraded 11 restaurant companies to Hold or Sell, including some very familiar names such as The Cheesecake Factory Inc. and Chipotle Mexican Grill Inc., Olive Garden owner Darden Restaurants Inc. and Panera Bread Co.

As if to echo Westra's pessimistic report, the franchise holder for Ruby Tuesday's in Illinois abruptly closed all its 11 restaurants last week. As the Chicago Tribune cheekily reported, "Tuesday was the last day you could eat at Ruby Tuesday's in Illinois."

Ruby Tuesday's, a fast casual chain, has been on a steady decline since its peak at 800 restaurants in 2012. It currently operates 729 in 44 states and around the world, most of them corporate owned.

And while it was just a tiny development, two Chili's restaurants in Mississippi also abruptly shut down this past week. The fast casual spots franchises were near each other in Starkville and Columbus, and no reason was given for their closure.

Chili's, owned by Brinker International,  owns more than 1,500 Chili's in 31 countries and two territories. It recently rolled out a new menu of craft burgers, offering the option of a grass-fed beef patty.

The nervousness about the restaurant industry comes after decades of growth in restaurant sales, from just $42.8 billion in 1970, to a projected $782.7 billion this year, according to the National Restaurant Association.

Still, you might keep an eye on your local mall, strip mall or boulevard of restaurant chains. If Westra is right, there could be more empty buildings.

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