2009Oct1 Watering Down Profits
2009Oct1 Watering Down Profits
The headlines above remind us of the old joke about the salesman who sold his products at a loss:
“How can you make money selling each item at a loss.”
“Easy, I’ll make it up in volume.”
Unfortunately, this is the kind of desperate logic that prevails during times of overcapacity. With Americans watching their pocketbooks these days, the retail dining sector is simply too large.
It’s getting smaller, of course. Bennigan’s, Steak and Ale, Bonanza, and Black Angus Steakhouse are some of the larger names to close their doors since the onset of this recession, and they have been joined by countless mom and pop establishments.
Even so, the survivors are having a hard time filling their tables and are having to slash their prices and offer incentives as a result. The Wall Street Journal writes,
Restaurant chains, hit hard by the economic downturn, are walking a tight-rope, dangling cheap alcoholic drinks to attract customers at the risk of diluting some of their most profitable sales….
For restaurants that rely on the sale of alcoholic beverages to boost sales and income, the recession has been devastating. Chili's reported that same-store sales declined 9.4% in its quarter ended June 24, while Morton's reported a 26% decrease in same-store sales in its quarter ended July 5.
This is what deflation looks like in the modern economy. It’s not all bad—if you have a stable source of income and you like a margarita with your dinner—but there are consequences. Restaurant owners will continue to face a brutally competitive environment going forward, and more are likely to fail. Retail landlords will be left without tenants, and neighborhoods will be left with blight.
What can we do about this? Honestly, nothing.
It’s likely to happen whether we want it to or not. But we can prepare the best we can by preserving our capital and taking advantage of opportunities as they become available.
Who knows, perhaps the bankruptcy of another large restaurant chain would provide a great new business opportunity for an entrepreneur who can supply a good meal cheaply to young families or to aging Baby Boomers. In capitalism, with every crisis comes an opportunity.
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