By Tim Powell, Managing Principal
Last week, the Fed dropped the interest rate a quarter percent to hit a rate target of 1.75 to 2.0 percent. What does this mean for foodservice? The business cycle which so many food companies rely on for growth is starting its downward path. We are in the autumn of the cycle, in other words. This is the time to squeeze out as much productivity from existing capital to reduce lasting effects of the impending recession.
The industry metrics already show that the demand side is soft. We see it clearly in traffic declines, check averages and same-store-sales. More broadly, the economy is in a decade-long (and historical) growth cycle, consumer confidence is status quo and discretionary income is tight (the very lifeblood of FAFH spending).
The Phillips Curve shows us the inverse relationship with wage inflation and unemployment. According to this controversial function, when inflation rises, unemployment declines. Until the great economist Milton Friedman challenged this during the high inflation and high unemployment 70s, the chart instructed the Fed to hit a target of 2% inflation to achieve say, 5% unemployment.
Unfortunately no single device can foretell when a recession hits — we usually learn we are in one six months later. The fact is, a cycle, like the seasons, occurs naturally.
Foodservice is in the enviable position to tout that it is the first indicator (like housing starts) to see economic recovery because FAFH traffic increases begin even when unemployment peaks. Unfortunately, this means we are also the first to feel a recession long before it officially begins.
I will leave this question for food executives and strategists: if we are now in a recession, what contingency plans that do not include cost-cutting can you look to? Action, not just reaction, is what will help companies thrive during negative economic growth.