This exclusive series to Nation's Restaurant News provides insight into the sales and traffic data from clients subscribing to Black Box Intelligence, a financial performance benchmarking company. The views expressed here do not necessarily reflect those of Nation's Restaurant News.
Restaurant sales performance in the third quarter is disappointing at first glance. Same-store sales fell 2.2 percent, a 1.2-percentage-point drop from the previous quarter. And same-store traffic declined 4.1 percent. Furthermore, restaurants posted the second worst sales and traffic growth rates in over five years during the third quarter.
The slump reignites fears that the industry’s woes may be more severe than initially thought. These insights come from TDn2K data through The Restaurant Industry Snapshot, based on weekly sales from nearly 30,000 restaurant units, more than 155 brands and representing in excess of $68 billion in annual revenue
But deeper analysis reveals that the results, while troubling, may not be as worrisome as they appear.
“On one hand, the last three months were plagued by significant events that are external to the industry, but nevertheless had considerable negative impact on restaurant sales,” said Victor Fernandez, executive director of insights and knowledge for TDn2K. “Hurricanes Harvey and Irma affected millions of people in two of the country’s largest economies during the quarter. On the other hand, there were some signs of improvement throughout the quarter, especially when removing the effect of Texas and Florida on the national sales results.”
Same-store sales improve in September
Same-store sales fell 1.9 percent in September, a small improvement from the 2.1-percent decline reported in August, which was also negatively impacted due to Hurricane Harvey and a pay-per-view boxing match at the end of the month. However, the September results show a more significant jump from July’s 2.7-percent sales decline.
The effect of the storms on restaurant sales was significant for the affected areas. Texas reported a same-store sales decline of 5.1 percent in August, and same-store sales fell 6.2 percent in Florida during September. Nationwide same-store sales would have improved by about 0.2 percentage points for the third quarter if these two states were excluded from sales growth calculations.
Additionally, by excluding Texas and Florida, the data reveal a bigger improvement in sales performance throughout the quarter. Same-store sales would go from a 2.8-percent decline in July to a 1.8-percent drop in August, and would improve to a 1.4-percent decline by September.
“Clearly, sales are still declining year-over-year, but the rate at which they are falling has been decelerating,” Fernandez said. “The trend is for improving results throughout the quarter once some of the external factors are isolated.”
Fine dining hit hard by storms
All industry segments experienced negative same-store sales in September. It was the second consecutive month that all segments reported declines.
The fine-dining segment, which has posted positive sales for most of the year, has seen a decline since August. The segment, which was hit particularly hard in Texas and Florida after hurricanes there, performed the weakest based on sales growth for the month. The best-performing segments during September were family dining and upscale casual.
Increased consumer spending unlikely to help
The hurricanes that hit in August and September created chaos on the ground and in the economic data.
“For example, vehicle sales surged in September, largely due to the replacement of damaged vehicles,” said Joel Naroff, president of Naroff Economic Advisors and TDn2K economist. “Consumer spending likely picked up, but not for the reasons we would hope for.”
Going forward, rebuilding efforts will temporarily boost economic activity. Third and fourth quarter growth should be strong, but could create turmoil in the first part of 2018.
“Separating out the weather effects from trend economic growth, it appears that conditions have firmed a bit,” Naroff said. “That should be enough to trigger somewhat faster wage gains and spending, but don’t expect significant improvement in discretionary consumer purchases, such as restaurants.”
Turnover rates rise again
According to TDn2K’s third-quarter People Report Workforce Index, operators continue to worry about finding enough qualified employees to staff their restaurants. They expect recruiting difficulties to continue in the coming months.
After plateauing for the last few months, turnover rates for both restaurant management and hourly employees increased again in August, surely a factor behind the growing concerns regarding staffing.
This is not surprising given that competition for available employees keeps rising as the labor market tightens. The national unemployment rate dropped to 4.2 percent in September, the lowest rate in almost 17 years.
“The correlation between unemployment and restaurant turnover, especially for hourly employees, has been well documented by People Report,” Fernandez said. “But regional factors also come into play. For example, Kentucky and Mississippi, which are among the states with the highest restaurant hourly turnover rates in the country, both have unemployment rates around 5.3 percent, well above the national number.”
The battle for market share is fought at the local level. Service, value and lower turnover rates are key differentiators in today’s market. Brands that consistently deliver on these attributes are better positioned to deliver above-market performance.
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 43,000 restaurant units, 2.5 million employees and $68 billion in sales. It also produces leading restaurant industry events, including the Global Best Practices Conference held annually in Dallas.