Outlook 2008: West

Nation's Restaurant News,  Jan 7, 2008  by Lisa Jennings,  Dina Berta

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SALES FORECAST

Aggregate restaurant sales across the West are expected to grow at a slower rate of 4.7 percent in 2008, reaching $78.10 billion, according to the National Restaurant Association's annual projections. The West would rank third behind the Southwest and Southeast in terms of sales growth, but would fall short of last year's projected increase of 5.5 percent for the region encompassing California, Alaska, Hawaii, Idaho, Montana, Oregon and Washington.

However, with an average menu price inflation rate of 3.6 percent expected by the NRA in 2008, real growth in the West would be closer to 1.9 percent.

Restaurant sales topped $74.63 billion in 2007 throughout the West, less than the $75.08 billion that had been projected by the NRA previously.

Operators throughout the region, however, remain guardedly optimistic about 2008, despite what they see are challenging times ahead. "We're definitely feeling the effects of the overall pinch on consumers' pocketbooks," says Dennis Waldron, president and chief executive of Elmer's Restau rants Inc., based in Portland, Ore. "But the economy is robust in Oregon and Washington. Home prices haven't dropped as much here, and unemployment is still low."

Growth projections for Washington are among the highest in the region. Sales growth there is expected to increase by 5.2 percent to $9.19 billion, and Washington will likely see the region's highest population growth and biggest increase in disposable personal income, at 4.5 percent.

In Oregon, where disposable income is projected to increase 4.2 percent, restaurant sales will increase 5 percent to $5.52 billion, according to the NRA.

Idaho is expected to see the largest relative increase in sales in the West at a rate of 5.5 percent, though the state's restaurant industry is relatively small, with sales expecting to top $1.6 billion.

The region's dining powerhouse, California, is projected to post modest sales growth of 4.6 percent to $56.37 billion in 2008. Employment levels are expected to remain flat and disposable income would grow a nominal 3.3 percent, below the projected national average of 3.4 percent.

OPERATOR OUTLOOK

In most Western states, the economic news is sobering. Home foreclosures are at an all-time high, and consumers are cutting back on spending. Commodity costs continue to rise, and a threatened crackdown on illegal immigration is expected to heighten labor pressures.

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"The wind is clearly not behind us. We're in still waters right now, no question," says Tom Heymann, chief executive of Mastro's Restaurants LLC, based in Woodland Hills, Calif., which operates five high-end steakhouses and two upscale seafood restaurants in and around Los Angeles and Phoenix. "But we're also seeing a lot of good things happening that, for us, are offsetting the negative impact of the economy."

Mastro's restaurants tend to target extremely affluent neighborhoods near luxury hotels, where foreign travelers are filling rooms to exploit the weak U.S. dollar.

Operators in all segments say diners in the West are looking for value. Baja Fresh Mexican Grill is looking to improve upon its value proposition by bundling core menu items, says James Walker, president of the Thousand Oaks, Calif.-based chain. "We'll be able to take advantage of diners who are not going to casual-dining restaurants as olden and spending $11 to $13 per person," versus the $9 range at Baja Fresh.

In Hawaii, operators are worried about a tourism downturn. And in the Pacific Northwest, food costs and the environment are big concerns.

In late 2007 Elmer's Restaurants Inc. completely reworked the menu of the 29-unit, three-daypart chain to feature locally produced ingredients.

Food costs on key items, such as bacon and eggs, had risen 6 percent to 7 percent before the menu revamp, says Waldron, Elmer's chief executive. Now the company is saving on transportation costs, which offsets the higher prices of local goods. In the end, food costs are still high, says Waldron, "but our guests love it, and we're seeing signs that it is bringing up traffic counts."

In 2008, Elmer's plans to launch a new casual lodge-style concept called Taprock Northwest Grill in Poulsbo, Wash.

In Washington, Jay Gigandet and Don Bellis, co-owners of seven-unit Rock Wood Fired Pizza & Spirits, based in Auburn, decry annual labor costs increases caused by the state's automatic minimum-wage hikes, based on the consumer price index. Last January, the wage rose 14 cents to $8.07 per hour, the highest in the West. That did not discourage Rock Wood's growth plans, however. Last year, the chain added two stores, and up to three more are planned for 2008.

Operators expect little relief from climbing labor costs this year in Montana and Idaho, where restaurants have struggled to compete for young talent. The situation was so dire in Montana last summer that Peter Christ for the first time brought in foreign students on J1 visas to work in his Bridge Creek Backcountry Bar & Restaurant in the tourist town of Red Lodge.