Why restaurants are among the hardest hit during downturn

December 11, 2019 08:00
Restaurants are most affected in times of economic slowdown or social unrest. Photo: CNSA

Hong Kong is going through a recession, which should not be a deep one as we have not experienced any bubble bursting. Severe recessions in the past were all due to huge leveraging and then deleveraging; it's obviously different this time around.

However, we should admit some sectors are performing exceptionally worse. The food and beverage sector is one of them.

Let’s take a look at its history. The accompanying chart shows year-on-year growth of retail sales and restaurant receipts in real terms. These are quarterly data compiled by the government with records beginning in the early 1980s. As the chart also shows periods of real GDP contraction (in grey; those in 1988 and 2004 are not recession with only a single quarter being negative), we may observe the following: Whenever GDP falls (into negative) both the retail sales and restaurant sectors fall, but the converse is not true. These two sectors tend to underperform the overall economy (GDP), with restaurants performing even worse than retail sales – the red line on the chart is often lower than the blue one.

That retail sales tend to underperform the overall economy can be explained by the nature of the industry itself: the sector has a lower net profit margin than many other industries, especially the professional ones.

Similarly, restaurants are more affected in bad times because of the nature of their business. A general retail store will see clients walking in and out throughout the day, while most people only dine during specific hours. Even in good times, restaurants cannot accept clients beyond their space limit.

In bad times, such as when civil disturbance occurs or traffic is blocked, restaurant revenue would simply plunge. Those who offer food delivery might be less affected.

On the other hand, even in the midst of social unrest, people still have to buy their daily necessities from retail stores, especially those online, or wait until the situation calms down before going out and buying what they need.

Another factor is fresh food, which can be kept for only a limited amount of time. Retail outlets are able to store their unsold goods, but restaurants obviously cannot do the same, especially when they cannot operate for several consecutive days.

The government ought to provide relief to businesses most affected by the months-long unrest, and the restaurant sector should be on top of the list.

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The author is Adjunct Professor in the Department of Economics and Finance, City University of Hong Kong and previously the chief economist of a bank. (facebook.com/kachung.law.988, [email protected])