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.
Restaurant sales fell again in July, dealing a blow to an industry that had shown modest signs of improvement in recent months.
Same-store sales fell 2.8 percent in July, a decline of 1.8 percentage points compared with June. The drop was disappointing in light of the 1.3-percent decline in average same-store sales for the first six months of the year, and the 1.6-percent drop recorded in the second half of 2016.
Same-store traffic also weakened, falling 4.7 percent in July, a 1.7-percentage-point drop from June.
These insights come from TDn2K data through The Restaurant Industry Snapshot, based on weekly sales from more than 28,500 restaurant units, more than 155 brands and representing over $68 billion in annual revenue.
“July proved to be a tough month for chain restaurants,” said Victor Fernandez, executive director of insights and knowledge for TDn2K. “Based on recent trends, we were cautiously optimistic that the tide was turning a bit, especially since brands were comparing against weaker comps in 2016.”
Calculated on a two-year basis, sales in July fell 4.2 percent, compared with July 2015. Same-store traffic dropped 8.7 percent during the same period. Those were the weakest two-year growth rates in over three years, additional evidence that the industry has not reversed the downward trend that began in early 2015.
Consumer spending ‘on vacation’
“While the economy keeps growing at a moderate pace and job gains remain strong, the consumer seems to be on vacation — literally and figuratively,” said Joel Naroff, president of Naroff Economic Advisors and economist at TDn2K. “One of the clearest indicators that households are spending cautiously is the softening of big-ticket purchases. In July, for the 11th month out of the last 12, vehicle sales were below the rate posted the year before. Home sales, while still trending up, are now expanding at a decelerating pace.”
Consumption will likely improve as consumer confidence stabilizes and income growth strengthens, but it may take time to see results.
“But households are currently maintaining their lifestyles by reducing their savings rate, and that is likely restraining spending on discretionary goods,” Naroff said. “We may have to wait until the fall or early winter, assuming wage gains accelerate by then, to see any pick-up in restaurant sales.”
Average check growth slows
Average check growth has lost momentum in recent months as brands fight continuing traffic declines. Check increases in 2015 and 2016 were largely an effort to maintain margins in the face of higher labor costs. The slowdown in check growth may be a combination of value platforms and increased deal activity aimed at increasing visit frequency. It may also be recognition that top-line increases are under more scrutiny despite the potential impact to operating margins. Given that grocery prices have been dropping year over year, it is no surprise that restaurants have been compelled to review their value proposition.
Fine dining leads segment performance
Fine dining and upscale casual restaurants continued to outperform other segments. Fine dining was the only segment to grow same-store sales in July, rising 0.4 percent. Upscale casual saw a minor decrease.
The fast-casual sales slowdown continued in July, as did softness in the quick-service segment. While much of the fast-casual segment’s headwinds are a result of rapid segment growth, the steady performance decline in lower per-person-average segments will be important to follow. Both segments outperformed the industry in 2015 and 2016, but trail through July of this year.
Labor still a major challenge
Restaurants are not getting much relief in terms of labor. According to TDn2K’s People Report Workforce Index, 63 percent of companies reported an increase in difficulty recruiting qualified employees to staff their restaurants during the second quarter of 2016. Additionally, the expectations component of the index predicts continued job growth for the industry, with 47 percent of restaurant companies anticipating an increase in their number of hourly jobs. Forty-two percent reported an expected increase in the net number of restaurant management jobs.
Retention continues to be a major challenge. Both management and hourly employee turnover increased again during June. However, the latest indicators may be hinting that rising turnover rates are beginning to taper off. Even if turnover rates plateau at current levels, which is likely the best-case scenario, they will remain at record high levels and continue to be a source of headaches for operators
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 41,000 restaurant units, 2.5 million employees and $68 billion in sales. They also produce leading restaurant industry events, including the Global Best Practices Conference held annually each January, in Dallas.