Restaurant companies will continue to trade market share as overall industry sales growth slows in 2017, according to a report Monday by the ratings firm Fitch Ratings.
But profitability should increase next year as food costs fall and productivity increases, the report said.
“There will be winners and losers,” said Carla Norfleet Taylor, senior director of US Corporates for Fitch Ratings. “It’s a market-share game. Traffic is just not growing.”
Fitch Ratings expects restaurant sales to increase 4 percent in 2017. That’s a slowdown from the 5-percent growth expected for 2016. Half of the growth next year will come from unit expansion, the report said, and the other half from price increases. Traffic growth is expected to be flat.
The sales slowdown could put grocery spending back on top next year, according to Fitch Ratings. In 2016, restaurant spending exceeded grocery spending for the first time, the culmination of a long-term trend toward dining out.
But growth in prepared food options, along with slowing restaurant traffic, could reverse that trend and lead to a bigger percentage of the food dollar being spent on food at home in 2017.
Much of the sales slowdown next year is expected to come from slowing price increases, Norfleet Taylor said.
Restaurants have been increasing prices for much of the year. Those increases are a combination of leftovers from aggressive price hikes in response to food cost inflation, along with increases to match rising wages.
But grocers have been lowering costs, leading to an unprecedented gap between the two main sellers of food to customers. Food-at-home prices have fallen 2.3 percent over the past year, according to federal data. Food-away-from-home prices have increased 2.4 percent.
That gap has been widely blamed for a slowdown in traffic and same-store sales this year. Same-store sales have fallen for each of the past nine months, according to the Black Box Index, while traffic has fallen 13 of the past 14 months, according to MillerPulse.
However, Norfleet Taylor sees evidence that restaurants are slowing their price increases this year in a bid to get some of that lost traffic.
“It’s evening up a little bit,” she said.
Fitch Ratings expects restaurants to increase prices in the lower end of the 2 percent to 3 percent range.
“We’re not expecting any big pickup in traffic growth,” Norfleet Taylor said. “We don’t see a big catalyst for an uptick in traffic.”
The lack of traffic growth has come despite a host of economic data suggesting consumers have more money to spend and are more confident in the economy. Gas prices and the unemployment rate are low, and wages have risen.
But there’s evidence that restaurant unit growth is outpacing demand for those locations.
“There are a lot of options out there for consumers,” Norfleet Taylor said. “The industry has continued to expand. There’s not a lot of capacity coming out of the industry. You wouldn’t see an increase in traffic if capacity was increasing.”
Because of the lack of traffic, restaurants are expected to trade market share with one another.
Fitch expects that quick-service restaurants in general will continue taking share from the casual-dining segment. Within quick-service restaurants, however, newer fast-casual chains and specialty burger concepts will take share from more mature concepts.
The good news for restaurants is that they will be more profitable. Commodity costs, especially for costly proteins like beef, are expected to continue falling next year. While labor costs are rising, Fitch sees evidence of increased productivity that could offset that increase.
While negative same-store sales at casual-dining restaurants could diminish profits next year, restaurants that generate sales growth should be able to squeeze out more earnings.