U.S. Restaurant Industry Stuck In Worst Collapse Since 2009

Shortly after we reported that the "restaurant industry hasn't reported a positive month since February 2016", we can add one more month to the running total: according to the latest update from Black Box Intelligence's TDn2K research, in July both same-store sales and foot traffic declined once again, and this time the slide was more pronounced, tumbling by -2.8% and -4.7% compared to declines of "only" -1% and -3% in June, respectively, in the process extending the stretch of year-over-year declines for the US restaurant industry to 17 consecutive months - the longest stretch since the financial crisis.

Source: @GS_CapSF

Sales rose in only 12 markets while declining in 183 with the Midwest - the worst region in the US - suffering a 3.6% and 5.2% decline in sales and traffic respectively, while even the best region, California", posted a decline in both sales (-0.7%) and traffic (-3.6%).

Source: TDn2K

Unlike last month, not even Black Box Intelligence's TDn2K research tried to spin the data, noting that the "sales rebound optimism was short lived" as "July restaurant sales tumbled."

“July proved to be a tough month for chain restaurants,” said Victor Fernandez, Executive Director of Insights and Knowledge for TDn2K.

“Based on recent trends, we were cautiously optimistic that the tide was turning a bit, especially since brands were comparing against weaker comps in 2016.” But not so much any more.

According to Black Box, calculated on a two-year basis, sales in July 2017 were down -4.2% compared with July of 2015, in other words there has been no growth in over two years. The data is even worse for same-store traffic, which was down -8.7% for that same period. These are the weakest two-year growth rates in over three years, additional evidence that the industry has not reversed the downward trend that began in early 2015.

In light of the surprisingly poor monthly results, the consultant appear to have not only given up on any recovery in the restaurant sector, but are now extrapolating the weakness to the broader economy.

"While the economy keeps growing at a moderate pace and job gains remain strong, the consumer seems to be on vacation – literally and figuratively,” said Joel Naroff, President of Naroff Economic Advisors and TDn2K economist whose Industry Snapshot tracks sales at 27,000 restaurant units from 155 brands, generating $67 billion in annual revenue. That’s about 10% of total “eating and drinking places” revenues as tracked by the Commerce Department

One of the clearest indicators that households are spending cautiously is the softening of big-ticket purchases. In July, for the eleventh month out of the last twelve, vehicle sales were below the rate posted the year before. Home sales, while still trending up, are now expanding at a decelerating pace.”

While food and alcohol sales were down, prices once again rose, with the the average amount per check rising 1.8% in July, which once again was not enough to make up for the decline in customer count, confirming that restaurants have little to no pricing power to even stay up with inflation. Black Box adds that the growth in check averages has slowed in recent months "as brands fight the tide of continuing traffic declines."

Check increases in 2015 and 2016 were largely an effort to maintain margins in the face of higher labor costs. The slowdown in check growth may be a combination of value platforms and increased deal activity aimed at increasing visitation frequency. It may also be recognition that top-line increases are under more scrutiny despite the potential impact to operating margins. Given that grocery prices have been dropping year over year, it is no surprise that restaurants have been compelled to review their value proposition

More troubling, Naroff pointed out something we first observed two weeks ago: the dramatic revision lower in the US personal savings rate, which wiped out $250 billion from what the Department of Commerce had previously calculated was a healthy personal savings backdrop:

Households are currently maintaining their lifestyles by reducing their savings rate and that is likely restraining spending on discretionary goods. We may have to wait until the fall or early winter, assuming wage gains accelerate by then, to see any pick up in restaurant sales.”

Here, as Wolf Richter laconically adds, "everyone is waiting for wage increases for the lower 80% of the wage earners that will finally outgrow inflation. That’s all it would take to crank up the economy, and even the restaurant business. People have been waiting for years for these real wage increases. But it’s just not happening."

Furthermore, it goes without saying that the above assumption is a substantial problem for the roughly half of American households who have no savings in which to "dip" and fund discretionary purchases.

Meanwhile, as the vast majority of the US population struggles to make ends meet and digs into their meager savings, the far smaller group of high wage earners continue to spend generously at fine dininf establishments. Indeed, fine dining was the only segment up in July (0.4 percent) even as upscale casual was down fractionally. Still, the slowdown in fast casual sales noted in the past continued in July, as did softness for quick service. While much of fast casual’s headwinds are a result of rapid segment growth, the steady performance decline in lower PPA segments will be important to follow. Both segments outperformed the industry in 2015 and 2016, but trail through July of this year.

As reported last month, the pain among chain restaurants is due to a combination of factors, including:

  • The surge of independent restaurants, from high-end to delis.
  • “Grab-and-go” prepared foods available at every grocery store.
  • VC-funded meal replacement kits, such as Blue Apron, one of the most anticipated IPOs this year that has now totally crashed.
  • Convenience stores and food trucks

Meanwhile, as the government reported recently, June sales for "food service and drinking places" held at $56.0 billion, were flat with November 2016, a period of 8 months without growth. They were down 0.6% from January but still up 1.7% year-over-year. This weakness in nominal sales is also evident in the latest retail sales data which has been on a steady decline for the past two years.

... a fact corroborated by Bank of America's internal spending data

Ironically, in addition to challenges from falling guest counts, the inability to pass through price increases, rising competition and declining overall spending, strong challenges continue to confront restaurants in both staffing and retaining enough qualified workers.   We say ironically, because as we showed after the latest jobs report, restaurant/fast food/waiter/bartender hiring remains the only strong spot in the US labor market. As the chart below shows, starting in March of 2010 and continuing through June of 2017, there have been 89 consecutive month of payroll gains for America's waiters and bartenders, an unprecedented feat and an all time record for any job category. Putting this number in context, total job gains for the sector over the past 7 years have amounted to 2.4 million or over 14% of the total 16.7 million in new jobs created by the US over the past 89 months. Needless to say, these jobs fall within leisure and hospitality, that sector pays the worst wages, an average of $13.35 an hour, and $331.08 a week

And yet, according to BlackBox, restaurant operators are pessimistic regarding the difficulty of recruiting in the upcoming quarters. According to TDn2K’s People Report, 63 percent of companies reported an increase in difficulty recruiting qualified employees to staff their restaurants during the second quarter of 2016. Additionally, the expectations component of the index predicts continued job growth for the industry, with 47 percent of restaurant companies anticipating an increase in their number of hourly jobs. 42 percent reported an expected increase in their net number of restaurant management jobs.

As a result, retention continues to be a major challenge for the industry. Both restaurant management and hourly employee turnover increased again during June. However, the latest indicators may be hinting that increasing turnover rates are beginning to taper off. Still, even if turnover rates reach a plateau at their current levels, which is likely to be the best case scenario, they will remain at record high levels and continue to be a source of headaches for restaurant operators forced to keep raising wages to retain waiters and bartenders.

Putting it all together, we give the last word to Wolf Richter who summarizes the unsustainable situation as follows: "so credit card debt, at $1.02 trillion, has hit an all-time high. Auto loan balances, at $1.13 trillion, have far surpassed any prior all-time high. Housing costs are eating up an ever larger share of incomes. Healthcare costs are soaring. Households with kids in college are paying a big price. Many millennials, even those with good jobs, are buckling under their student loans, which have skyrocketed 164% over the past ten years to $1.45 trillion. And inflation-adjusted discretionary spending such as for restaurants by people at the lower 80% of the income scale is taking a hit. Something has to give. It’s the description of a messed-up economy."