Reporter's Notebook
Restaurants had a really good first quarter

Restaurants had a really good first quarter

This post is part of the Reporter’s Notebook blog.

Restaurants had a good first quarter across the board, and not just because their sales were up. Profits were up, too.

Industry same-store sales rose 4.3 percent in the first quarter, according to a benchmarking report from the consulting firm BDO, and they rose for each segment. And average prime costs — food and labor — fell 0.1 percent.

“All segments looked pretty good,” said Dustin Minton, a partner with BDO. “The first quarter of 2014 was fairly soft. Most of that was bad weather. That helped make comps a little better this year.”

Not surprisingly, the sector leading the way, in terms of both profits and sales, was pizza. According to BDO, pizza chains’ same-store sales averaged 8 percent in the first quarter — highest among all segments.

At the same time, the chains’ prime costs, food and labor, were down 0.8 percent in the quarter — thanks almost entirely to lower cheese prices.

Food costs for pizza chains fell 1.5 percent, according to BDO, while food costs were flat or increased for all other segments. Pizza chains’ prime costs were 53.3 percent of revenues. On average, the industry’s costs were 60.8 percent in the first quarter. Cheese costs are down nearly 14 percent this year.

Keeping costs low is important for pizza chains. They compete aggressively on price, which forces them to work hard to keep costs down.

“Certainly, cheese has helped them to drive profits,” Minton said. “They’re very, very competitive at the top line. They have to keep these costs of sales and labor down otherwise they can lose money really quickly.”

Pizza chains, notably Domino’s and Papa John’s, have done a good job recently of luring customers by making it more easy for them to order pizza. They also have strong marketing campaigns to backstop those efforts.

Domino’s 2009 marketing campaign for its new pizza recipe, one in which the chain admitted its old recipe was terrible, continues to resonate today, nearly six years later. “That whole campaign has really paid off for them,” Minton said.

The strength of the pizza business has put more pressure on independents and small chains, Minton said. He has one independent client that realized its large pizza was one inch bigger than Domino’s, and re-sized the pizza.

“They put a real squeeze on local or regional pizza chains,” Minton said. “It forces them to rethink their strategy and how competitive they are to the Domino’s and Papa John’s of the world.”

Fast casual chains had strong same-store sales, too — on average, the chains’ sales rose 6.6 percent in the period. But every other sector grew. Quick-service chains’ sales rose 5 percent. Even casual dining (up 3.5 percent) and upscale (3 percent) had strong quarters.

While weather was part of it, gas prices helped, too. Gas prices were more than $1 per gallon lower in the first quarter than a year ago. “It wasn’t just a blip, they’ve been down for a while,” Minton said.

The higher sales have helped concepts improve labor efficiency. Overall, labor costs fell 0.2 percent, according to the report.

“There’s always a certain amount of fixed costs that go with labor,” Minton said. “And you can increase the sales without adding the labor.”

Commodity costs are heading downward, too. While cheese is down big, poultry (down 1.9 percent), pork (down 1.6 percent), and wheat (down 7.6 percent) are all down. Beef is up 0.2 percent, remaining largely flat after last year’s 23.6 percent increase. Overall, the total commodity basket is down 2.7 percent.

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