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 a 2.7 percent decline 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.
Fine dining and upscale casual winning the segment battle
Fine dining and upscale casual were the strongest segments in February. Fine dining was the only segment up overall. The weakest segments, both with same-store sales below -4.0 percent, were casual dining and family dining.
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.
For restaurant managers, 50 percent of companies said they would add staff during the first quarter of 2017. The percentage of companies that expected to increase their management staff the previous quarter was 54 percent.
Job growth may be 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. TDn2K analysis continues to reinforce that service and guest experience are the key drivers in performance. Best-in-class brands demonstrate that food and beverage are important, but people and service provide unique and indefensible competitive advantages.
TDn2K (Transforming Data into Knowledge) is the parent company of People Report, Black Box Intelligence and White Box Social Intelligence. People Report provides service-sector human capital and workforce analytics for its members on a monthly basis. Black Box Intelligence provides weekly financial and market level data for the restaurant industry. White Box Social Intelligence delivers consumer insights and reveals online brand health. TDn2K membership represents 38,000 restaurant units, 2.3 million employees, and $66 billion in sales. They are also the producers of leading restaurant industry events including the Global Best Practices Conference held annually each January in Dallas, Texas.