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Same-store sales growth slowed in May, losing some of the momentum that carried the restaurant industry into positive growth territory in the last two months.
However, for an industry that has struggled over the last two years with declining same-store sales, May’s flat results are still encouraging news that continues to point to a recovery in relative terms. These insights come from TDn2K’s Black Box Intelligence data through The Restaurant Industry Snapshot, based on weekly sales from over 30,000 restaurant units, more than 170 brands and representing over $69 billion in annual revenue.
“There are two takeaways from May’s flat performance,” said Victor Fernandez, vice president of insights and knowledge for TDn2K. “First, the stronger economy is lifting restaurant spending, and 2018 should be better than the last two years. Same-store sales growth year-to-date is at 0.3 percent at the end of May, compared with -1 percent for both 2016 and 2017. Secondly, the fact that same-store sales growth dropped by 1.5 percentage points compared with April’s rate highlights the fact that the underlying challenges remain. It will be very hard for chain restaurant sales to rise beyond very modest positive gains. Those challenges include the oversupply of restaurants and the fierce competition from other sectors, like grocery-store prepared foods, convenience stores and even independent restaurants.”
One metric that has highlighted industry challenges since the recession is continued traffic erosion. Same-store traffic dipped 2.9 percent in May, which also represented a 1.5-percent fall from April. Even with this negative result, there is some room for guarded optimism. Traffic growth year-to-date currently stands at -2.5 percent, which is a modest step up from the -3.2 percent recorded for each of the previous two years.
Consumer spending picks up, but income gains still sluggish
The economy seems to have accelerated in the second quarter from a mediocre performance in the first part of year, according to Joel Naroff, president of Naroff Economic Advisors and TDn2K economist.
“Consumer spending, which grew decently in the first quarter, has picked up further as the tax cuts added to household spending power. Business investment activity has also increased, though we are still not seeing as much of the tax benefits going to new spending on buildings, machinery or software as hoped for. That is just one of the two concerns facing the economy. The second is wage gains, which may be accelerating, but so is inflation, and that means spending power continues to expand sluggishly. The expected stronger economy is coming, and we could see growth in the next two quarters at or above 3 percent. But there is still little reason to believe that the improvement will be powered by sharp gains in consumer spending. Thus, look for restaurant sales to rise a bit further,” Naroff said.
Customers spend more per visit
Another sign of the economy’s strength and improved consumer optimism is the fact that average spending has accelerated in recent quarters. For 2018, average check is up 2.8 percent. By comparison, average check grew 2.1 percent in 2017.
“To put all this into perspective, guests are spending more per visit, but dining out less frequently,” Fernandez said. “If it wasn’t for the growth in check average, we wouldn’t have seen any positive sales growth since the recession.”
Fast-casual resurgence continues
The best-performing segments based on same-store sales growth in May were fast casual, upscale casual and fine dining. The latter segments led the industry in sales during 2017 and continue to experience positive results in 2018.
Fast casual, however, takes the prize for most improved. After two years of declining sales, which followed years of dominating the marketplace as the best-performing segment, fast casual is experiencing a resurgence this year. The segment’s growth has improved 2 percentage points from 2017. By comparison, other segments have only improved sales results by an average 0.5 percentage points compared with the previous year.
Growth opportunities lie beyond lunch or dinner
The weakest daypart year-to-date is dinner, with only 0.1-percent growth. For many brands, particularly those in full service, dinner is the biggest and, in some cases, only daypart. Lunch sales are also struggling, and traffic in that daypart continues to decline.
So, where are restaurants finding success in driving incremental sales? The good news is that it is happening in all other dayparts. Sales in the mid-afternoon (after lunch and before the dinner rush), late night (after dinner) and at breakfast have each grown over 1 percent or more in 2018. At the same time, off-premise sales are rising, reinforcing the trend of consumers spending relatively less for traditional in-restaurant dining experiences.
The restaurant workforce
There is no doubt that one of the biggest challenges restaurants face is finding enough qualified employees. The latest results published by TDn2K’s People Report indicate that things are not getting any easier. Turnover is the highest it has been in decades. Compounding the problem, turnover for both hourly employees and management inched up again in April on a rolling 12-month basis.
“This is to be expected, considering that the national unemployment rate is now as low as it has been in the last 50 years,” Fernandez said. “Furthermore, in 1969, restaurants were not up against companies like Uber or Grubhub when competing for employees. People Report data shows currently over 75 percent of restaurant companies are constantly understaffed.”
What can restaurants do to improve retention? The recent People Report Recruiting & Turnover survey revealed that the most successful strategies to reduce turnover at the hourly and management levels focus on three specific areas: compensation adjustments, improving engagement in restaurant managers and providing more training to all levels of employees.
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 more than 43,000 restaurant units, 2.5 million employees and more than $69 billion in sales. TDn2K also produces leading restaurant industry events, including the Global Best Practices Conference held annually in Dallas.