This exclusive series to Nation's Restaurant News provides insight into the sales and traffic data from clients subscribing to Black Box Intelligence, a financial performance benchmarking company. The views expressed here do not necessarily reflect those of Nation's Restaurant News.
After disappointing sales in the third quarter, the restaurant industry was desperate for good news. October delivered, with same-store sales turning positive for the first time since May 2016.
The 0.9-percent same-store sales growth last month was the industry’s best result in more than two years, according to TDn2K data through The Restaurant Industry Snapshot, based on weekly sales from 30,000 restaurant units, more than 155 brands and representing over $68 billion in annual revenue.
Same-store traffic declined 1.5 percent, continued evidence that falling guest counts remain the biggest challenge for restaurant chains since the recession. However, October’s traffic results represented the strongest month since February 2016, and have significantly improved over the average 3.6-percent decline in the first three quarters of the year.
“Another encouraging sign was that the October sales improvement was evident at the brand level, and not only in the aggregate numbers,” said Victor Fernandez, executive director of insights and knowledge for TDn2K. “Over half of the brands tracked by Black Box Intelligence had positive sales for the month. For comparison, fewer than a third of the brands were up in September.”
Overall, the U.S. economy was strong in October.
“The economy posted its second consecutive quarter of 3-percent GDP growth, an indication that business activity is really solid,” said Joel Naroff, president of Naroff Economic Advisors and TDn2K economist. “This occurred despite the hurricanes devastating parts of Texas and Florida, making the growth rate even more impressive.”
The economy’s resilience was seen in the solid October jobs increase and a decline in the unemployment rate to its lowest level in 17 years. The strong economy is allowing consumers to spend more, and that demand is being spread around.
However, there is a warning in the data. Wage gains remain muted and households are pulling from savings to maintain their standard of living. Growth should be strong enough going forward to tighten the labor market further, but without higher wage increases, it will be hard to sustain recent strong growth in consumer spending through all of next year.
Industry shows strength
In addition to improved traffic, top lines benefitted from higher guest checks. On average, consumers spent 2.5-percent more in October than in the previous year. Since January, guest checks had only been growing at an average 2 percent.
October’s sales recovery extended across industry segments, all of which posted their highest sales growth rates since July. The month was particularly strong for table-service brands. Family dining, casual dining, upscale casual and fine dining all had positive sales growth in October.
Geographically, all regions had stronger sales in October than in September. Sales improvement was particularly strong in Florida (up 11.3 percentage points from September) and Texas (up 3.4 percentage points). These two states, along with the Western region, were the three best-performing regions during the month.
Focus on the general manager
The unemployment rate, which is highly correlated to restaurant hourly employee turnover, dipped again in October, to 4.1 percent. Restaurant turnover typically rises when unemployment falls. With turnover already at historically high levels, the outlook is that operators will continue to struggle to find and retain hourly employees.
According to TDn2K’s People Report, hourly employee turnover decreased slightly in September, signaling that perhaps turnover has reached a plateau. But management turnover continued to increase.
People Report research has shown that a primary reason restaurant managers leave their jobs is for higher compensation. This suggests rising labor costs in upcoming quarters as restaurants feel pressure to pay more to attract and retain key employees. This research also underscores the critical importance of the general manager position.
“We know that the success of the general manager will impact the key driver of service, and ultimately the guest’s intent to return,” said Joni Thomas Doolin, founder and CEO of People Report. “Companies that do a better job of attracting, compensating, retaining and developing this key position will continue to have a competitive advantage.”
Restaurant sales have been on an upswing since a low point in July, and finally broke through to positive territory in October. Looking ahead to the fourth quarter and holiday season, the question is whether this trend can be sustained, or if it’s just a short-term anomaly.
“On the positive side, economic indicators such as improved GDP growth and strong consumer confidence point to a favorable macro environment. Also, we’ll be comparing to generally weak results from last year,” Fernandez said. “But retail sales can be a big factor, especially the degree to which online shopping impacts brick-and-mortar visits. Overall, we’re encouraged by depth and breadth of recent trends and are cautiously optimistic they will extend through the fourth quarter.”
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. TDn2K membership represents 43,000 restaurant units, 2.5 million employees and $68 billion in sales. TDn2K also produces leading restaurant industry events including the Global Best Practices Conference held annually each January in Dallas.