CBRL: DEMAND DESTRUCTION’S FIRST STOP IN RESTAURANTLAND

Cracker-Barrel is, in my view, the most susceptible of all restaurant concepts to the demand destruction that is caused by elevated gasoline prices.

 

Cracker Barrel is a struggling concept and the outlook is not looking very positive for the company as gasoline prices head higher and management struggles to generate traffic.  Over the past four years, only three times has CBRL reported positive traffic growth.  It has become a familiar refrain for management there to discuss the need to build traffic. 

 

First and foremost, the “Seat-to-Eat” initiative has been a disappointment to say the least.  Despite implementation across 70% of the company’s stores, it would be difficult to call the impact of the program anything but negative.  There has been no meaningful impact on traffic from “Seat-to-Eat” and management’s reluctance to disclose any granularity on that topic during the last earnings call is telling.  While the initiative has been much-hyped by management in terms of its scope (29 different operational changes) and significance, at this point I think the cost of retraining 68,000 employees as part of the program may outweigh the benefit, if there ever is one, from “Seat-to-Eat”.  In my experience (admittedly, zero years as a restaurant operator), it has generally turned out that initiatives that are not consumer facing generally take longer to impact the diner’s experience.  While long-term back-of-the-house efficiencies may materialize from the initiative, I fail to see how this will drive traffic of the magnitude CBRL needs.  As Benjamin Franklin said, “Never confuse motion with action.”

 

Secondly, the vast majority of CBRL’s restaurants are located along interstate highways; a mere 90 of the company’s 597 stores are located near “tourist destinations” or are considered “off-interstate” stores.  As such, CBRL is highly vulnerable to fluctuations in gasoline prices.  The company’s traffic problem, which has been a problem even with the price of gasoline at its most benign, is greatly compounded when gasoline prices are at current levels and above.  Referencing management commentary during the most recent spike in gasoline prices is ample evidence of this; time and again in 2008, gasoline prices were cited as a key top-line headwind.  The chart below shows that CBRL’s traffic trend is tightly linked to vehicle miles driven data as measured by the Department of Transportation. 

 

While gasoline prices are dipping precipitously today, on the back of a Goldman Sachs report calling for a pullback in oil prices, generally expectations have been for elevated gasoline prices throughout the summer months.  If that were to be the case, it would materially impact CBRL’s traffic during an important time of year. 

 

CBRL: DEMAND DESTRUCTION’S FIRST STOP IN RESTAURANTLAND - cbrl traffic versus miles drive

 

Howard Penney

Managing Director


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