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Industry watchers predict upswing; McD marches to another SSS-positive month

Industry watchers predict upswing; McD marches to another SSS-positive month

New data from two industry analysts suggests that better times might be just around the corner for beleaguered restaurant operators as their research sheds light on the economy’s current cycle.

In mid-September, Larry Miller at RBC Capital Markets said in a note to clients that a rebound in the investment bank’s proprietary consumer confidence index could indicate a turnaround in the industry’s fortunes as early as January 2009. Meanwhile, David Tarantino at Robert W. Baird & Co. said in a report that his traffic model revealed an upturn as early as this month.

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“Our industry traffic model predicts less negative trends in September,” Tarantino said. “Partly due to less year-over-year drag from gasoline prices plus [the] cycling [of] a major slowdown related to housing problems in the year-ago period.”

Miller’s projection is based on an in-house survey that found consumer confidence had begun to inch upward in September after hitting lows in August and July. All four components of the RBC index, which includes consumer attitudes toward the current economic environment, job security, investments in the stock market and future economic expectations, rose substantially, he noted.

Historically, the RBC index is a good indicator of restaurant same-store sales in the immediate months to come, meaning that restaurant traffic could improve in the last months of the year, he said.

Based on the results of RBC’s recent index, “working backward, we can point to February 2008 as the unofficial start of the recession, as confidence historically bottoms six months after the start of a recession,” Miller said.

He noted that restaurant spending tends to hit bottom six to eight months after the start of a recession, indicating the lowest levels of spending occurred in August and are continuing to occur in September and October. The industry typically returns to pre-recession levels of spending about 11 months after the trough, which would point to a recovery by January, he said.

“While a reversal [in consumer confidence] in the coming months wouldn’t be surprising,” he said, “we think it is unlikely confidence will breach the July lows.”

Research from Tarantino at Robert W. Baird echoed Miller’s expectations for a turnaround and also showcased a weak August for many restaurant chains.

In his report, Tarantino released a survey of 57 restaurants, some privately held and others franchisees of public companies, that represented as much as $6 billion in aggregate sales. The majority of respondents pointed to sluggish guest traffic in August.

About 42 percent of the respondents to the Baird survey said sales last month were below expectations, while 29 percent of respondents said results came in higher than expected. The restaurant operators cited high gas prices, softer consumer confidence, housing market issues, Olympic broadcasts and severe weather as depressing their numbers of guest visits.

The upturn in traffic projected by Tarantino’s model would bode well for the industry. September traffic results will be key to helping many of the industry’s largest companies meet their third-quarter expectations.

While many operators continue to post slowed sales others have bucked the trend. This month the nation’s largest restaurant company, McDonald’s Corp., reported an 8.5-percent jump in August global same-store sales, with an increase of 4.5 percent in the United States, driven by beverages, the chain’s breakfast menu and Olympic advertising for the new Southern Style Chicken Sandwich.

Oak Brook, Ill.-based McDonald’s has been one of few in the industry able to withstand the economic malaise and to post positive sales trends even as consumers shy away from dining out. The results, especially in the United States, where McDonald’s operates or franchises more than 14,000 restaurants of the 31,000-unit-plus global system, were described by restaurant analyst David Palmer at UBS Equity Research as “nearly double the U.S. fast-food industry.”

Palmer’s research estimated that U.S. same-store sales in the quick-service segment had slowed in August to about a 2-percent gain, from an increase of between 3 percent and 4 percent in July.

McDonald’s restaurants in Europe recorded a same-store sales increase of 11.6 percent and locations in the Asia-Pacific, Middle East and Africa region posted a same-store sales gain of 10 percent.

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