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NPD: Persistent unemployment tempers hope for recovery

NPD: Persistent unemployment tempers hope for recovery

Some observers expect the economy to begin its upswing later this summer, but the restaurant industry is not likely to feel that surge anytime soon, according to The NPD Group.

With total industry traffic continuing to decline and the previously robust morning meal and snack dayparts now falling victim to the recession, restaurants are looking at another six months or more of tough going, said officials of the Port Washington, N.Y.-based market research firm.

“It’s going to be a while before things can move away from the current strategies,” said NPD analyst Bonnie Riggs, referring to rampant discounting, giveaways and other programs designed to lure cash-strapped consumers.

The majority of the industry’s current woes are related to unemployment, which isn’t expected to improve quickly, Riggs said. Often referred to as a “lagging economic indicator,” the overall unemployment rate—which reached 9.4 percent in May—isn’t expected to peak until after the rest of the economy begins to recover, she added.

The recession and rising unemployment have even begun to stall growth in the morning meal and snack dayparts, two recent bright spots for the industry, NPD found.

“No meal occasion has been able to escape the impact of this recession,” Riggs said.

Even the morning meal, which has historically held up well during tough times, is being battered by the recession and rising unemployment, NPD found. In the three-month period ended in March, breakfast visits declined 2 percent, after several quarters of growth. It’s the first time morning meal traffic has fallen since 2004.

The decline in breakfast traffic is occurring across all segments, NPD found. The steepest decline in visits was seen at midscale restaurants, which fell 6 percent. But even the quick-service segment recorded a 2-percent drop in morning meal visits. A few segments, such as fast casual, bakery-sandwich, convenience stores and family dining, still managed to hold their own at breakfast, NPD found.

Historically, the first “meal” that diners drop when times get tough is the snack, which is considered the most discretionary daypart. While snack-related visits did not grow compared to the strong gains they recorded in 2007, they are holding steady, NPD found.

Consumers appear to be changing some of their snacking habits, however, trading visits to coffeehouses for visits to, among other places, doughnut shops, hamburger outlets and convenience stores.

Though lunch traffic had been picking up earlier in the year because of increased deal promotions, traffic at the midday meal held steady in the most recent quarter. As with breakfast, NPD attributes the decline in lunch to the rise in unemployment. Nearly three-fourths of the lunch traffic loss can be traced to fewer workers ordering lunch from commercial foodservice outlets, NPD found. More brown bagging and the increased availability of frozen entrées also have hurt lunch, which is historically the most vulnerable daypart during times of stress.

The weakness at lunch is widespread. In the most recent reporting period, both the midscale and casual-dining segments experienced sizable losses, while quick service held steady. The categories that have continued to drive traffic include quick-service hamburger units, convenience stores, sandwich shops, casual-dining Italian eateries, discount stores and midscale Mexican restaurants.

Once a dependable daypart for driving traffic, dinner has been crumbling under the pressure of the recession. In the quarter ended in March, dinner traffic was down 3 percent, after falling 2 percent in the previous quarter.

While dinner continues to post the steepest traffic declines, however, NPD discovered that consumers were making more visits to casual-dining restaurants on the weekends than they were a year ago. In addition, more were ordering alcohol with dinner.

“Perhaps in the midst of all this economic doom and gloom, the foodservice industry offers a chance for a little escape, an affordable luxury,” Riggs said of the shift.

Both unemployment and shrinking household incomes are contributing to the decrease in dinner traffic, NPD found. When comparing per-capita dinner visits to U.S. household income levels over time, NPD found a strong correlation between the two. The data reveal that as income growth leveled off in the late 1990s, visits to restaurants for dinner began to decline.

As with lunch, there are a few exceptions to the trend. Concepts that are faring relatively well at dinner include sandwich shops, quick-service and midscale Mexican concepts, casual Asian restaurants and fast-casual eateries. Both casual-dining steakhouses and seafood restaurants were able to hold traffic from a year ago.

Operators looking to spur their recovery from the current recession should study the past, Riggs said.

“To come out of this recession it’s going to take a lot of creativity and innovation,” she said. “That’s what did it in previous downturns.”

Riggs points to such examples as the introduction of breakfast at quick-service outlets that followed the 1979-1980 downturn; the casual-dining boom that came on the heels of the 1982 recession; and the rollout of super value meals, combo meals and three-tiered pricing that followed the 1990-1991 recession.

But the past isn’t necessarily the key to the future, some industry experts say.

“I don’t think [the recession] created the innovation; it accelerated the adoption,” said Dennis Lombardi, executive vice president for Columbus, Ohio-based WD Partners, a consulting firm specializing in design and development. “The recession, at best, was an influencer in restaurants trying new things, and therefore helped [traffic] grow.”

Lombardi said the solution to coming out of the recession on top is not about looking back, but looking forward to develop ways to please a new generation of diners.

“It’s not going to be radically different, but it’s not going to go back to the way it was a year and a half ago,” Lombardi said of consumer dining-out habits. “[Operators should] take four things that are really important to [their] customer base and do those well.”

Kevin Moll, chief executive of Denver-based National Restaurant Consultants Inc., agrees.

“I think what we’re looking at is a new generation of buyers,” Moll said.

Since it’s still unclear just what those buyers will look like, Moll suggests restaurants focus on operational basics for the long term.

“It’s more important, now more than ever, that they fine-tune operations,” he said. “It’s easier to save a dollar in costs than to generate $10 in revenues.”

Despite a challenging present, Riggs remains optimistic about the future.

“We’re a dynamic industry,” she said. “We’ve been there before, and we will find innovative and creative ways to bring [ourselves] out of this.”

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