The bad news continued for the restaurant industry during the second quarter of 2016. Same-store sales fell .7 percent, which followed last quarter’s .2 percent year-over-year drop, becoming the second consecutive quarter in which the industry has failed to produce positive sales growth.
The last time the industry experienced two consecutive quarters of negative same-store sales growth was over two years ago. This adds up to a disappointing .4 percent same-store sales decline year-to-date for 2016. This insight comes from data reported by TDn2K’ Black Box Intelligence through The Restaurant Industry Snapshot, based on weekly sales from nearly 25,000 restaurant units, and more than 130 brands that represent $64 billion dollars in annual revenue.
June’s same-store sales fell 1.1 percent, compared with flat sales growth during May. Since the beginning of the year, positive sales growth for restaurants was only reported in February. Furthermore, June’s sales growth was the worst since January 2014, which was heavily affected by weather.
To add insult to injury, the June and second quarter results benefited by a shift in the July 4th holiday, from June and second quarter last year to July and the third quarter in 2016. In the past two years, the 4th of July holiday week negatively affected restaurant sales about seven percent compared with the average sales for the four weeks preceding the holiday.
The slowdown in the industry’s sales was widespread from a geographic perspective during June, with 148 (76 percent) of the 195 designated market area tracked by Black Box Intelligence posting negative same-store sales growth during the month. As a comparison, only 55 percent of markets experienced negative growth during May.
“The economy is coming out of its six-month slumber as job growth rebounded in June”, commented Joel Naroff, TDn2K economist and president of Naroff Economic Advisors.
“Second quarter economic growth is expected to be solid because households went out and spent strongly. Wage gains continue to accelerate, and that is providing households with more income to spend. But, the increases are still only moderate and consumer confidence, while rising, is doing so sluggishly. That points to slowly rising consumption — not a jump in demand going forward.
“The question remains: will restaurant traffic rise or will the added income be spent on other goods? Right now, consumers are distributing their incomes across all categories and so we are not seeing any one retail or restaurant sales category rise sharply. I expect that pattern to continue.”
“When it comes to the restaurant industry segments, our data shows consumers favoring quick service from both same-store sales as well as total sales perspective,” said Victor Fernandez, Executive Director of Insights and Knowledge at TDn2K.
“Quick service was the only industry segment that had a significant improvement in same-store sales during the second quarter and the only segment that gained total sales market share during the first quarter. For many chain restaurant consumers, price and value appear to increasingly be key drivers of their dining decisions. This segment typically has the lowest average guest checks, but recently has also been very aggressive with promotions and driving the value perception of their offerings. The consumers seem to be responding positively: it was the only segment with positive same-store traffic growth during the second quarter.”
“At the other end of the guest check scale” continued Fernandez, “Fine dining was the second best performing segment during the quarter on both same-store sales and traffic basis.
Same-store traffic fell 3 percent during the second quarter, becoming the fifth consecutive quarter of negative traffic growth and the worst performing quarter in over five years. Same-store traffic growth for June fell 3.5 percent, a drop of 1.3 percent from the May results.
Rising turnover levels
In addition to the slowdown in sales and traffic, the industry is also facing considerable challenges when it comes to finding enough qualified employees and managers to keep their restaurants fully staffed. An important component of this challenge is the sustained trend of rising turnover levels. Rolling 12-month turnover for hourly restaurant employees increased again during May according to TDn2K’s People Report currently tracking 1.8 million restaurant employees. The industry has not experienced a month of decreasing hourly turnover since September of 2013.
Restaurant manager turnover is also on the rise and again increased during May after getting some relief from a stagnant turnover rate last month. Management turnover rates are at the highest levels recorded for the industry in over ten years and currently represent a major concern for restaurant operators.
Furthermore, the challenges operators face vary widely depending on the region of the country in which they operate. An example of this is in People Report’s counter service restaurant segment (quick service and fast casual). For first quarter of 2016, the difference in hourly employee turnover rates between the region with the lowest median turnover (California) and the one with the highest rate (Southwest) is 64 percent for counter service restaurant brands and 49 percent for table service brands.
Another significant trial for the industry has been legislation changes that affect employee compensation. Added to the usual concerns of labor costs increasing due to potential minimum wage increases, the industry now faces the additional concern of managing the change in the Fair Labor Standards Act overtime regulations. In response to this new test for the industry, People Report conducted a survey among its restaurant community to assess the impact of these changes.
● 95 percent of restaurant brands have employees that will be affected by the regulation change.
● 64 percent of quick-service companies reported that at least half of all their general managers are under the new threshold.
● 33 percent of fast casual brands will see over half of their general managers affected.
● 77 percent of table service restaurant brands said they have no general managers under the threshold.
● 23 percent of the table service restaurant brands stated that the affected percentage is less than half of their general manager population.
“Uncertainty is the enemy of growth in consumer spending,” said Wallace B. Doolin, Chairman and Founder of TDn2K. “While the macroeconomic environment might be showing signs of improvement for restaurant spending during the second half of the year, in the near term the restaurant consumer is not responding.
“We have a confluence of events with an overbuilt mature industry, a share of stomach battle for all food expenditures and 24/7 news that creates uncertainty. We know the old saying that a rising tide lifts all boats. We don’t seem to have a rising tide. However, the decreasing tide does not swamp all boats either.”
Our best practice performers continue to focus on what they can control, which is doing a better job than their competitors in hiring the best talent, efficiently staffing, innovating in technology and delivering a compelling value that is more than price.”
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. Together they report on over 36,000 restaurant units, over 1.8 million employees and $64 billion in sales. They are also the producers of two leading restaurant industry conferences: Summer Brand Camp and the Global Best Practices Conference each held annually in Dallas, Texas.