Reporter's Notebook

Restaurants only now recovering from the payroll tax hike

Restaurant chains in the past couple of weeks have reported mostly positive third-quarter sales reports, with some chains even noting that they're coming off their best quarter in two years. This reflects sentiments from recent restaurant sales indexes, including one today from Black Box Intelligence.

It's taken a while for sales to improve, even though employment has grown fairly steadily. One reason for the slow improvement? The end of the payroll tax holiday.

Remember that? From 2010 to 2012, the payroll tax was reduced from 6.2 percent to 4.2 percent for incomes up to $110,000. That holiday ended in 2013, so the vast majority of working Americans got a 2-percent pay cut in 2013. 

For a household with an income of $50,000, that was $1,000 for the year, or $19.23 a week. That's enough for a meal or two at a fast food restaurant.

Restaurant sales took a tumble. In January of 2013, according to Black Box, traffic fell 3.1 percent. It fell 6.2 percent in February. And traffic has been down every month until last month, when according to the latest report it increased 0.4 percent for the first positive traffic month since February 2012. 

"It was a direct impact on earnings," said William Fahy, vice president and senior credit officer at Moody's Investor Service. "It doesn't seem like something that's ever recovered."

Restaurants depend on disposable income for sales, because they're discretionary — more discretionary than most industries, Fahy said, except for gaming. Taking that $1,000 a year from a middle class consumer hurts. "It's something that's not coming back," Fahy said. "They're spending from a lower base."

No restaurant executives that we heard specifically talked about the payroll tax during recent quarterly earnings calls, but the uncertain consumer environment was a common theme. 

"I really think the consumer is in a strange place," Dunkin' Brands CEO Nigel Travis said on that company's earnings call last month. 

And as I noted in my story earlier today, Wendy's CEO Emil Brolick said that value consumers have been increasing at a rate higher than premium consumers over the past 10 quarters. 

"There are still several households that have not increased their incomes over the last several years," Brolick said. "There are a lot of families that don't feel robust."

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.