Mr. Buckley: What's been most interesting and most beneficial for the stocks is that the restaurant business has fared very well over the last 18 months even as the economy has slowed. We attribute that performance to a very controlled rate of expansion in the industry over the past several years. When we look at supply and demand, supply, which is driven by the rate of expansion and the number of restaurants in existence, is the much more volatile of the two factors and therefore it's the more critical factor in the supply/demand relationship. Demand will ebb and flow with the economy, but pretty modestly. When we look historically at periods when the industry has done well and periods when the industry has done poorly, it has been driven more by the rate of expansion or the supply side of the equation. This is an industry that in the early 1990s over-expanded. There were 46 restaurant IPOs in about a three-year period in the early 1990s that fueled some of that expansion, and the established companies in the industry responded to the new competitive threat by opening more restaurants as well. By the mid-1990s you had an industry that was underperforming due to over- storing. You had too much supply, which led to negative same-store sales, disappointing earnings, and poor stock performance. However, capital inflows into the industry have been very minimal over the last seven years, and the established companies generally have slowed their rate of expansion. So the overall rate of expansion has been very moderate. We started to see the benefits of this moderation show up in positive same-store sales beginning in late 1997, early 1998, and it has continued right through today. It has permitted this industry to put up strong sales and earnings growth in a soft overall economic environment, and that's been very positive for the stocks.
Tickers included in this excerpt: AFCE, APPB, EAT, RI, RYAN
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