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After the woes of ’07, operators face a challenging new year

PORT WASHINGTON N.Y. As 2007 gives way to 2008, foodservice operators are bracing for more difficult times ahead as they tally the less-than-stellar results of the past year.

Although there were pockets of success, 2007 was largely a dismal year for the restaurant industry, according to new data from The NPD Group, a Port Washington, N.Y.-based global market research firm. For the year ended in September, industrywide traffic growth slowed to 1 percent, down from a 2-percent increase in 2006.

“Traffic is barely keeping pace with population growth, which is 1 percent,” said NPD analyst Bonnie Riggs. “It's been quite a while since the industry was this weak.”

While there was no change in consumers’ per-capita restaurant visits from 2006 to 2007, there were dramatic changes in the frequency of visits by age group.

The core restaurant users — those aged 18 to 34 — were responsible for the lack of traffic growth industrywide on a per-capita basis. In the year ended in September, those aged 25 to 34 made six fewer visits per person than in the previous year. Those aged 18 to 24 also ate out less frequently in 2007, making three fewer visits per person than in the previous year. However, the data showed a slight increase in visits by those 65 and older and those under 18.

Rising gasoline prices and home heating costs, as well as the continued housing crisis and ensuing credit crunch, are among the economic pressures that have continued to eat away at consumers' dining-out dollars and forced many to cut back on visits to restaurants, said industry experts.

While the entire industry has been affected by consumers’ decisions to rein in spending at restaurants, the quick-service segment fared the best during the past year, NPD found. In the quarter ended in September, quick-service traffic, on the rebound from sluggish growth in recent quarters, was up 2 percent on top of a 2-percent gain a year ago. Casual-dining traffic increased about 1 percent, after posting no growth a year ago, and traffic at midscale eateries was down 1 percent, following a 1-percent decrease a year ago.

“When consumers are going to restaurants, it appears they are going to QSR,” Riggs said.

Few restaurant categories performed well in 2007. Of 22 categories examined by NPD, only seven saw an increase in incremental traffic over the previous year.

Topping the list were gourmet coffee and tea outlets, hamburger purveyors and retail units, such as convenience stores, supermarkets and discount outlets. In the year ended in September, there were approximately 400 million more visits to gourmet coffee and tea shops, a 20-percent increase over the previous year.

The hamburger segment had nearly 340 million more visits, a 3-percent increase over the previous year. Convenience stores and other retailers had about 161 million more visits, a 2-percent increase over the previous year.

Sandwich sellers, including those specializing in chicken, as well as bakery/sandwich outlets, bar-and-grill restaurants and barbecue eateries rounded out the list of top performers.

Categories heavily dependent on dinner traffic posted the biggest incremental traffic losses. Pizza was hit the hardest, coming in last, with more than 100 million fewer visits.

No matter the segment or the category, major chains performed best in 2007. In the quarter ended in September, major chain traffic was up 2 percent, versus a year ago, largely because of a 2-percent increase in unit expansion. During the same period, traffic at independents was flat and unit expansion was up only 1 percent.

Although it's been a dark year for the industry overall, it hasn't all been bad, Riggs said. One of the bright spots of 2007 was the growth in the morning meal and snack categories, she noted.

Traffic growth in the morning meal and snack categories continued to increase, while traffic at core dayparts, especially dinner, remained soft, NPD found. In the quarter ended in September, traffic was up 5 percent at morning meal purveyors, on top of a 5-percent gain a year ago. And traffic was up 5 percent at snack sellers, on top of a 4-percent increase a year ago. During the same period, lunch traffic inched up 1 percent, after posting no growth a year ago, while dinner traffic dipped 1 percent, after falling 1 percent a year ago.

The foods that posted the greatest increase in the number of servings sold, compared with the year earlier, included those meeting breakfast and snack interests, Riggs said.

Breaded chicken sandwiches and breakfast foods topped the list of the foods most popular with consumers in 2007, NPD found. In the year ended in September, there were approximately 277 million more servings of breaded chicken sandwiches than in the previous year, a 15-percent increase. There were approximately 275 million more servings of breakfast sandwiches than in the pervious year, a 9-percent increase. The huge increase in the number of servings of breaded chicken sandwiches was driven largely by value menus, while the increase in servings of breakfast foods was tied to the growth at the morning meal daypart, Riggs said.

Iced tea, specialty coffee and bottled water topped the list of drinks with the largest increase in servings.

Oakbrook, Ill.-based McDonald's, which is in its 55th month of consecutive comparable-store sales growth, has continued to thrive in these tough times partly because it has successfully capitalized on the morning meal and snack occasions, officials said.

“We have seen some significant lift in the breakfast daypart in traffic and sales,” said Danya Proud, a spokeswoman for McDonald's USA. “A lot of the growth in breakfast has been through incremental visits.”

Amajor driver of the increases seen at breakfast has been coffee sales, which have increased nearly 40 percent since the chain rolled out its premium coffee line in spring 2006, Proud said. Another big hit for the No. 1 burger chain has been the Snack Wrap, a downsized version of the chain’s signature chicken served grilled or crispy and wrapped in a flour tortilla. Since launching the product in August 2006, McDonald's has sold more than 600 million Snack Wraps. To meet consumer demand, this summer the chain added a chipotle barbecue flavor to complement the existing ranch and honey mustard options.

“We recognize that lifestyles have changed in the past few years,” Proud said. “People are looking for more convenience ... premium products at a value.”

To win a larger share of consumers’ shrinking food dollars in the coming year, forward-thinking operators already have begun to roll out everything from retooled menus, coupons and incentives to new marketing and advertising campaigns.

Glendale, Calif.-based IHOP Corp. is in its 19th straight quarter of comparable-store sales increases, achieved largely through price increases and a shift in the mix of menu items as opposed to increased traffic, according to the chain.

“Traffic has been a bit of a challenge in recent years,” said IHOP spokesman Patrick Lenow.

To build consumers’ appetite for IHOP, several years ago the chain embarked on a systemwide remodeling, including decor, cutlery and crew uniforms. Nearly three-quarters of the chain's 1,328 restaurants have been overhauled so far. Regular menu changes and frequent limited-time offers also have been a part of the chain's strategy.

“At IHOP, it is really very much a stay-the-course strategy,” said Lenow of the chain's plan for 2008.

Even Starbucks Coffee has begun to feel the effects of the chill on consumer spending. For the first time, the Seattle-based chain reported a year-to-year drop in same-store customer traffic. U.S. transaction counts in the quarter ended September fell 1 percent from a year ago, according to the chain.

“The pressure we are seeing in traffic isn't entirely unexpected considering the challenging operating environment and similar trends reported across both the retail and restaurant industry,” Starbucks president and chief operating officer Jim Donald said in a Nov. 15 conference call. “Despite that, we believe there are opportunities within our control to increase traffic in our stores.”

In an effort to boost traffic, Starbucks launched on Nov. 16 its first-ever national television advertising campaign. In addition, Starbucks, which has 10,684 domestic stores, readjusted its projected U.S. company-operated store openings to 900, which 100 stores fewer than previously announced. In light of weaker transactions in 2007, the company also lowered its comparable-store sales growth to a range of 3 percent to 5 percent.

“It looks like the challenge will continue,” Riggs said. “It's going to take a lot of creativity to drive traffic.”

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