It is easy to forget that the way things are now is not the way they have always been, which means the way things are now is not how they will be in the future. For instance, the giant book stores that are going out of business never existed forty years ago. For most of the post-war period, there were mall shops to sell best sellers and popular stuff and there were boutique book shops for the stuff aimed at serious readers.
Then with the invention of free money from the global financial system, every town in America suddenly had a massive book superstore. Barnes & Noble started out a rickety old warehouse in Boston. With free money, they built book warehouses all over the country. The story is similar with Borders Books, which started in Michigan. Now, they are going under as people remember that they don’t really read that much after all.
The same is true of casual dining. Thirty years ago, casual dining meant a local joint run by local people, often foreigners. Immigrants could start a restaurant, because it required more labor than capital. They could make it a family business. Then all of a sudden we are flooded with massive chains like Olive Garden and Red Lobster. Now it appears they may be following the path of Borders and Barnes & Noble.
In a move sure to set the culinary world and classy guys everywhere reeling, Darden has announced that it will either sell or spin off its Red Lobster restaurants.
Adding to the devastation, the company, which also runs Olive Garden and other fine-dining establishments, said it will suspend the opening of new Olive Garden locations and slow down new locations for LongHorn Steakhouses.
Why, you ask? Dear God, why??
Because Darden isn’t doing so good. It seems that consumers are turning their noses up at hoity-toity sit-down places like Red Lobster and Olive Garden these days in favor of cheaper chains like Chipotle.
Darden is one of the largest companies in the casual dining industry, with a market value of $6.7 billion, but its core chains have had stagnant growth, according to The New York Times. Last quarter the company experienced a 31 percent drop in net earnings. “The reduced unit growth will lower capital spending by at least $100 million annually,” the company said in a statement.
Red Lobster has 705 restaurants in the United States and Canada and had annual sales of $2.6 billion in 2013, but we guess that wasn’t enough for ol’ Scrooge Darden.
Putting aside the millennial snark from the writer, there could be a bunch of reasons for this that have nothing to do with the economics of chain restaurants. For example, Red Lobster is awful. It’s everything that is wrong with the American diet on the same menu, but made worse somehow. Olive Garden is better, but they tend to be over priced for what you get. Paying $25 for spaghetti seems wrong. In other words, whatever novelty there was to them has worn off and people now realize these places are not very good.
There’s something else going on with big retail. The rise of massive chain stores is due in large part to the credit boom. When you can get money at 2%, you will make different bets than when the money costs 10%. More important, you can make money from things with 2% money that you can’t with 10% money. Big capital projects like restaurant and bookstores can’t exist at borrowing rates at or above historic averages.
Cheap credit allows for a form of pump and dump that cannot exist under normal borrowing conditions. Cheap money allows for massive expansion, where revenue is realized today, but the cost of expansion is pushed off into the future. That draws in more money, allowing the original investors to get their money out with a profit. The chain expands until it runs out of room and then those costs come home.
Interest rates remain artificially depressed, but lending is not as free as we saw for two decades leading up to the crash. Giant corporations can get plenty of credit, but their customers are a different story. The Fed keeps pumping money into the system hoping the clogs eventually break free, but no one know if that will happen, before the consequences of loose money turn up in other parts of the economy.
Even assuming the smart Jews running the global finance system can keep the plates spinning forever, there’s another aspect to this problem. Cheap money allows for cost reductions by eliminating competition. These chain restaurants have killed off the local dine, for example, but rigging the supply chain so they get much lower costs. That works for a while, but there is a natural boundary. Costs never fall below zero.
The free money era feels a lot like a bust out. The boom and bust of giant bookstores, for example, left us with no bookstores. One company, Amazon, now controls 80% of the book business. The boom and bust of chain restaurants is about to leave us with no local restaurants, but soulless chain stores owned by some global capital group. It’s one company operating under a dozen brands, selling the same food.