There appeared to be a glimmer of hope for the restaurant industry last month, when BlackBox Intelligence's TDn2K titled its most recent Restaurant Industry Snapshot: “Flat Sales, Welcome Change for Restaurant Industry in January.” In the report, it said that "while same-store sales growth was flat (zero percent) in January, it represented a welcome break from the ten consecutive months of negative sales growth experienced by the industry through the end of last year." That finding, however, was refuted by a recent Reuters/Ipsos opinion poll which found that one-third of the 4,200 adult respondents said they were eating in restaurants less often than three months ago. The poll was conducted in the second half of January. Of them, 62% cited cost as the primary reason.
The modest recovery was also denied by the most recent Restaurant Performance Index report by the National Restaurant Association, which lamented that “same-store sales and customer traffic levels remained soft” in January, which kept the Current Situation Index (tracking same-store sales, traffic, labor and capital expenditures) at 98.6 in January, the fourth consecutive month of contraction, and tied for the worst print in four years.
More concerning was the disclosure by restaurant operators, 50% of whom said same-store sales declined year-over-year, the second highest reading in recent history and second only to the 53% reported last August.
Quite unlike the rosy picture of consumer spending painted by various other macroeconomic data points such as consumer spending, or even alleged wage growth, looking at one of America's favorite pastimes - eating out - the situation has rarly been more gloomy.
While the silver lining to the latest RPI report was a surge of hope in the near-term futures as a result of the "animal spirits" unleashed by Trump, which have impacted everything from the stock market to the jobs report (recall the January-February plunge in people out of the labor force was the biggest on record), the latest, just released report by TDn2Kquickly doused those hopes in its latest, February, Restaurant Industry Snapshot which found that "Restaurant Sales and Traffic Tumble in February."
Same-store sales fell -3.7 percent in February, with traffic declining -5.0 percent. Unfortunately, January’s improved results were not a turning point in declining industry performance. Trends are hard to discern since weather, holiday shifts in Valentine’s Day and President’s Day and winter breaks distorted weekly results.
A macro view leaves little room for optimism. Same-store sales averaged -2.7 percent for the last three months. February’s results were among the weakest in the last four years.
Restaurant Sales and Traffic Tumble in February
Same-store sales fell -3.7 percent in February, with traffic declining -5.0 percent. Unfortunately, January’s improved results were not a turning point in declining industry performance.
A macro view leaves little room for optimism. Same-store sales averaged -2.7 percent for the last three months. February’s results were among the weakest in the last four years. This insight comes from data by TDn2K through The Restaurant Industry Snapshot, based on weekly sales from over 26,000+ restaurant units and 145+ brands, representing $66 billion dollars in annual revenue.
Guest Checks Plummet
Guest checks grew by a modest 1.2 percent in February, the lowest rate in four years. By contrast, checks had grown roughly 2.3 percent in the previous six months. This is a function of more conservative pricing, customer trade downs or discount promotions. All segments experienced a decline in the rate of check growth last month. Casual dining and quick service were virtually flat compared with the prior year. The bar and grill sub-segment actually experienced a drop in average checks versus 2016.
The Macroeconomic Environment
“While the stock market soars and confidence jumps, the economy continues on its steady but unspectacular upward path,” reported Joel Naroff, President of Naroff Economic Advisors and TDn2K economist. “Growth in the first quarter should exceed the tepid pace at the end of last year and with Europe finally starting to recover, the economy should pick up steam as we move through the year.”
Consumers are spending, but they are being battered by rising inflation. The rebound in energy costs may be helping that sector but it is not doing much for households. Indeed, spending power has flatlined as wage gains are barely offsetting price increases. That is putting additional pressure on the restaurant industry.
Still, the labor market is as tight as it has been in decades. Rising wages should lead to better spending in the months ahead. One note of caution: “The higher inflation has given the green light to the Fed to raise rates and if Trump spending and tax policies are implemented, rates are likely to rise faster than most currently expect.”
Income Tax Refund Delay
The IRS delayed roughly 40 million tax refunds associated with families claiming the “Earned Income Tax Credit” or the “Additional Child Tax Credit” this year. These delays undoubtedly depressed sales in the early weeks of February. In 2014, almost 30 million families received more than $70 billion in Earned Income Tax credits. Even a small delay in refunds had the potential to greatly impact consumer spending. Looking forward, the release of refunds provides some upside for the industry in the coming weeks. Curiously, none of this alleged weakness was observed in the recent retail sales data, which quite the contrary came in stronger than expected.
Upcoming: The Easter Effect
Easter is in April this year instead of March. The potential impact varies by segment. Brands where diners tend to celebrate special family occasions, such as upscale casual and fine dining, typically see an increase in sales during these periods. For these segments, same-store sales growth will likely be hurt in March but aided in April. For the dining segments where the holiday shift is less likely to impact consumer behavior, the sales impact will be less pronounced.
The Restaurant Workforce
According to the Q1 2017 Workforce Index published by TDn2K’s People Report restaurant operators predict staffing challenges to continue in 2017. However they are increasing at a slightly slower pace. One factor in this relative easing of labor woes is the slowdown in restaurant job growth reported in recent months. At the hourly employee level, 48 percent of restaurant companies reported that they planned to add staff during the first quarter, compared with 66 percent in the fourth quarter of 2016, hardly a glowing endorsement of the bright future for the sector.
Meanwhile, as job growth is slowing, but both hourly and management turnover continue to rise. As a consequence, recruiting and retaining qualified employees is the top people-related challenge for restaurant operators.
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Finally as discussed last month, while a sense of renewed gloom has fallen over the restaurant space, one wouldn’t know this by walking around San Francisco. Yelp lists nearly 8,000 eating establishments in the City, many of them recent creations, including 500 cafés and 3,000 delis. A lot of the places are packed. Some can be impossible to get into on a Friday or Saturday night without a reservation days or weeks in advance. Others are nearly impossible to get into no matter when or what.
But, as Wolf Richter pointed out, other restaurants are nearly empty. There has been a slew of recent restaurant closures, amid talk of a big shakeout, including something called the “Mid-Market Massacre” in an area around Market St., where restaurant after restaurant closes, done in by exorbitant rents, not enough traffic, too much competition, a finicky public that might have lost interest, and insufficient sales. So yes, it’s tough out there, even in San Francisco, in what must be one of the toughest businesses on earth.
Yet while San Francisco - one of the few prosperous US hubs, generously funded with startup VC funding - is still holding on, the restaurant industry across the rest of the US continues to sink as consumer demand declines with every passing month, denying even the most rudimentary "recovery" narratives.