Web Exclusive | August 2010 | By Jordan Melnick

Washington May Not Have the Economy Pegged Just Yet

Timothy Geithner is “welcoming” Americans into the recovery, but restaurant operators aren’t feeling the hospitality.

On August 2, Treasury Secretary Timothy Geithner wrote an op-ed in the New York Times with the title, “Welcome to the Recovery.” Despite the brash headline, Geithner was cautiously optimistic about the direction of the economy.

“Recoveries that follow financial crises are typically a hard climb,” he wrote. “That is reality. The process of repair means economic growth will come slower than we would like. But despite these challenges, there is good news to report.”

The good news, the secretary said, includes “booming” exports, private job growth (“not as fast as we would like”), a stabilized banking system, and a business sector that has “repaired its balance sheets” and is in “a strong financial position to reinvest and grow.”

Geithner conceded that such positive indicators were “cold comfort to those Americans still looking for work and to those industries, like construction, hit hardest by the crisis.” But he defended the Obama administration’s actions to combat the recession: the $787 billion stimulus package; the Trouble Asset Relief Program, or “bank bailout,” which was set in motion by the Bush administration; and the so-called “auto bailout” of Chrysler, General Motors, and Ford.

Though there is still a tough row to hoe, Geithner said, “we are coming back.”

Some restaurant industry players, however, are far less optimistic than the Treasury Secretary.

“Right now there’s no incentive to build a business,” says John Brodersen, a Popeyes franchisee with 11 Detroit locations. “There is zero. I’m so scared right now I can’t even sleep at night.”

Brodersen’s fear comes in large part from his inability to get a loan—“I could wallpaper my walls with rejection letters” from banks, he says—as well as the projected costs of complying with the health care reform bill that passed in March, which he estimates will cost him between $2 million and $8 million.

He says he and his fellow operators are proceeding cautiously because of government measures that he considers hostile to small business.

“We’re all so scared right now of what they’re going to dream up next,” he says.

While Brodersen stands out for his especially bleak outlook, many in the restaurant industry share his concerns. Operators have listed the economy as the No. 1 challenge facing their business for 29 straight months, according to the National Restaurant Association. In June, the NRA’s Expectations Index, which measures the industry’s outlook for the coming six months, hit a five-month low.

“This has certainly been the most challenging period in the modern history of the restaurant industry,” says Bruce Grindy, the NRA’s chief economist.

Still, the recession did spare a lucky few. Larry Feldman is Subway’s biggest area developer. His company, Subway Development Corporation of Washington, has more than 1,100 locations in the District of Columbia, Virginia, Maryland, and Delaware.

Feldman says he shares Geithner’s cautious optimism about the economy, and he is planning to open 60–70 new stores per year through 2015. But he acknowledges that Subway’s success during the recession—worldwide, sales and locations have increased—is an anomaly, and he laments the persistently tight credit markets.

“The bottom line is, unless you’re an existing franchisee, you’re not getting a loan,” Feldman says. “Too many prospective franchisees are sitting and waiting for these dollars.

“It’s unbelievable,” he says. “The entrepreneurs are lining up.”

For his part, Feldman wants the government to be more proactive in helping small businesses. Formerly the assistant minority counsel to the House Banking Committee in the 1970s, Feldman says he has contacted his congressman about a bill that would release hundreds of government-backed loans to small businesses. The bill is stalled in the Senate.

“The bottom line is, unless you’re an existing franchisee, you’re not getting a loan.”

Peter Wright, senior vice president of franchise sales and administration for The Counter, a build-your-own-burger concept based in California, also has his eye on the bill.

“We’re watching that pretty closely, hoping that something will pass soon,” he says.

With The Counter seeing higher customer counts and a 50 percent increase in franchise inquiries in 2010 compared to the same period last year, Wright also says he shares Geithner’s optimism. Founded in 2003 and catapulted to success in part by an Oprah recommendation, The Counter continues to expand—it will total 30–32 locations by the end of 2010, Wright says—albeit at a slower pace than planned before the recession.

“We’re definitely seeing more aggressive development on the part of our existing franchisees,” he says. “They’re able to attain financing, and they’re finding great locations. Landlords are more willing to deal in terms of lease flexibility than in the past to secure a good tenant.

“So, where we were seeing some of our development goals slowing,” Wright says, “we’ve seen some of that pick back up.”

But access to financing isn’t the only key to getting the restaurant industry moving in the right direction. For Rodger Head, CEO of Duke & King Acquisitions Corporation, which operates more than 100 Burger Kings and 14 Popeyes in nine states, high unemployment is the biggest issue.

“Your primary user of quick serves is your middle-income, blue-collar worker, and those are the ones suffering from unemployment the most,” Head says. “So their eat-out frequency is still way less than what it was a year-and-a-half ago.”

Attributing his pessimism partly to Burger King’s woes—the company’s sales and stock are both in decline and its corporate marketing operations in flux—Head maintains a negative outlook on the economy in general.

“We’ve not seen a specific change in the last six months that would indicate that we’re making a turn out of the recession,” he says.

As for Geithner’s “Welcome to the Recovery” pronouncement, it does not resonate with Head.

“My response would be, 'I don’t see it,'” he says.