The third quarter of 2018 was relatively strong for the restaurant industry. Same-store sales were up 1.2 percent in September, the fourth consecutive month of growth. The industry had not experienced a quarter in which all months had positive sales since the fourth quarter of 2015. Sales for the third quarter were also up 1.2 percent, the highest since the third quarter of 2015.
These insights come from TDn2K’s Black Box Intelligence™ data, based on weekly sales from over 30,000+ locations representing 170+ brands and nearly $71 billion in annual sales.
“Top line numbers were good for the latest quarter and months,” commented Victor Fernandez, vice president of insights and knowledge for TDn2K, “but the question is, ‘How strong is the restaurant industry really?’ The data suggests restaurants are doing much better, but the industry is still struggling with significant challenges.”
The weather effect
Restaurant sales benefited from strong tailwinds in the form of easy comparisons to soft sales last year when major storms hit Texas and Florida. In fact, the third quarter of 2017 is tied for weakest sales performance in the last three years. In 2017, both Florida and Texas — where hurricanes Harvey and Irma hit — reported quarterly sales below -3.0 percent.
“It is easy to attribute the current strength to the bad weather that impacted some of the largest economies in the country last year,” Fernandez said. “However, the fact that all regions posted positive sales in the third quarter of 2018 — the first time this has happened in any quarter over the last three years — and six of the eleven regions achieved growth of 1 percent or better suggests that the relative strength goes beyond just the easy comparisons in the hurricane areas. Excluding Texas and Florida, the quarter would have been 1 percent vs. the 1.2 percent reported.”
Guest count erosion
Even as sales climb into positive territory, the reality is that the industry continues to lose guests. As a result, it is only through rising guest checks that restaurants are able to post top line growth.
Traffic declined 1.4 percent in September and dipped 1.2 percent for the third quarter of 2018, compared with the year ago third quarter. Even more troubling, same-store traffic declined 5.7 percent over the same two year period.
The fact that the third quarter of 2018 was still the best quarter for traffic in the last three years highlights the magnitude of the continued market share battle for guest traffic.
Still, there are signs of improvement. Two-year sales performance averaged a 1-percent decline over the last two quarters, a slight improvement from the concerning 2.5-percent decline for the previous four-quarter period.
Economic warning signs
“The economic expansion is the broadest-based in nearly two decades,” explained Joel Naroff, president of Naroff Economic Advisors and TDn2K economist. “Growth has moved from manufacturing and large corporations into the small-business sector. Looking forward, though, there are warning signs.”
Firms seem intent on raising benefits, not wages, and household income is still growing at a disappointing pace. That should continue to restrain consumer spending. Rising energy costs are diverting funds into gasoline and utility purchases. A softening in the housing sector, which typically leads the economy, indicates that households are becoming more conservative. And the Fed has signaled that rates will likely rise through next year. Together, these trends imply that the retail battle for share of consumer wallets will only intensify in what is likely to be a more moderate growth environment.
Ongoing workforce challenges
The national unemployment rate dropped again in September and is currently at 3.7 percent. With the economy at full employment, recruiting and retaining employees remains a leading concern for operators. Adding to recruitment pressures is the continued growth in the number of restaurant positions. According to TDn2K’s People ReportTM, the number of employees in the industry grew 2 percent year-over-year in August after increasing 1.7 percent the previous month.
However, August did hint at good news from a workforce perspective. Turnover for both hourly employees and restaurant managers decreased in August. After years of continual climbing, turnover rates in recent months are beginning to drop slightly. This trend, however, is not expected to reduce turnover rates enough for retention to lose its status as a critical issue haunting operators.
Wallace Doolin, chairman of TDn2K, said “the evidence grows in our White Box Social Intelligence guest satisfaction data cross-referenced with Black Box Intelligence sales and traffic data.”
“There is one aspect of the restaurant experience that separates Top Box performing companies from the rest: the guest perception on service,” he said. “Those are the same companies that we find in the People Report data that are successful at retaining their top talent and effective in staffing every shift”.
Reducing historically high turnover rates and staffing for sales growth will likely be at the forefront of successful restaurant operators’ strategy discussions as they plan for next year.
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 monthly. 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 nearly $71 billion in sales. They are also the producers of leading restaurant industry events including the Global Best Practices Conference held annually each January in Dallas, Texas.