Why Restaurant Operators Are Cautious About Business Conditions

The Expected Business Conditions indicator is part of the Expectations Index. It measures restaurant operators’ outlook towards business conditions over the next six months. Like all of the other indicators under the Restaurant Performance Index, or RPI—an equally-weighted composite of the Current Situation Index and the Expectations Index—if the Expected Business Conditions Index is above 100, it indicates an expansionary outlook over the next six months.

In December 2014, the Business Conditions Index was 103. It declined from 103.3 in November 2014. In the above chart, you can see that the outlook towards business conditions has been over 100 for the past 13 months—since October 2013.

According to the NRA (National Restaurant Association), the restaurant operators will become “more cautious” towards business conditions over the next six months. About 37% of the restaurant operators expect business conditions to improve over the next six months, 56% expect the business conditions to remain the same, and about 7% of restaurant operators expect the business conditions to decline.

Positive business conditions would entail more customers increasing their discretionary spends and eating out at restaurants. Eventually, this helps increase the top line of stocks like Chipotle Mexican Grill (CMG), Panera Bread (PNRA), DineEquity (DIN), and Taco Bell and Pizza Hut under the umbrella of Yum! Brands (YUM).

Yum! Brands is also a part of a broader consumer discretionary portfolio ETF—the Consumer Discretionary Select Sector SPDR (XLY). XLY holds ~4% of McDonald’s (MCD).

In the next part of this series, we’ll look at how the food cost has been affecting restaurants.