This article 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.
Same-store sales saw another disappointing month in February. The last two months have reversed the industry’s positive momentum from the fourth quarter of 2017 and have revived concerns that the restaurant business may not yet be positioned for sustained growth.
Same-store sales fell 0.8 percent in February, a 0.5-percentage-point decline from January and the weakest month since last September. These insights come from TDn2K data through The Restaurant Industry Snapshot, based on weekly sales from over 30,000 restaurant units, more than 170 brands and representing over $68 billion in annual revenue.
Traffic fell 3.1 percent in February, the industry’s worst month since September 2017. Although traffic dropped only 0.1 percentage points compared with January, the negative effect on sales was amplified by a significant slowdown in the growth of guest checks. On average, consumers spent 2.4 percent more than they did last February. By contrast, year-over-year growth in average spending was 3 percent in January.
“However, the trend that continues is higher guest-check growth compared with the first three quarters of 2017,” said Victor Fernandez, executive director of insights and knowledge at TDn2K.
Since the beginning of the fourth quarter, all months except December have posted year-over-year guest-check growth of at least 2.4 percent. The average for the first nine months of 2017 was only 2 percent.
“Furthermore, the latest TDn2K research indicates that restaurant brands with sustained top sales growth over the last two years have been successful at increasing their average guest checks even more,” Fernandez said.
Too early to call it a downturn
The fact that prior year sales were very weak (down 3.7 percent) makes February’s results even more disappointing. Taking a longer view, sales last month were 4.5 percent lower than they were two years ago, in February 2016.
“It’s probably too soon to determine if this is an aberration or the start of a new trend,” Fernandez said. “We had several external factors in February that cloud our view into the underlying performance.”
Foul weather included winter storms and record rainfall in some areas. The Winter Olympics captured the attention of almost 20 million Americans nightly for two weeks. And Valentine’s Day fell on Ash Wednesday, a time when many were involved with church activities.
“Each of these events impacted sales to some degree,” Fernandez said. “We’ll watch results carefully over the next few weeks to evaluate restaurant trends in a more normalized environment.”
Increased consumer spending expected
While job gains have remained solid, the overall economy has yet to accelerate as much as was expected when the Trump administration’s tax cuts were passed.
“It may be early, especially since income growth was robust in January, but that has not yet translated into strong retail spending,” said Joel Naroff, president of Naroff Economic Advisors and TDn2K economist.
Consumer confidence remains solid, but the chaos in Washington, D.C., has created volatility in equity markets that could be weighing on consumers. Nevertheless, with wage pressures rising due to strong demand for workers, consumer spending is expected to improve.
“We may not see a sudden surge, as it takes time for the tax cuts and wage increases to translate into improved demand, but the acceleration should become clear by the end of spring or early summer,” Naroff said. “Growth in the 3-percent range for this year is still likely, and that means most sectors, including restaurants, should be in for better sales going forward.”
Best- and worst-performing segments
February results were soft industry-wide, and all segments reported negative sales. Fast casual was the best-performing segment in February, a welcome improvement in its relative sales performance. Although fast casual continues to gain market share with new unit openings, it hadn’t been the best-performing segment in terms of same-store sales since early 2015.
Fine dining, which led the industry in same-store sales last year, experienced a dramatic downturn in February, posting its third worst month in three years. External factors noted earlier could have been particularly troublesome for this segment.
Counter-service brands capture consumer spending
Chains may have a same-store sales problem, but total sales continue to grow as the industry keeps generating net unit growth. According to TDn2K’s Market Share Report, which includes data representing over 125,000 individual restaurant locations, chains grew total sales 2.9 percent in 2017.
As total sales continue to grow, so does the share of those sales that flow to counter-service brands. Quick-service and fast-casual sales account for 72 cents of every dollar that was spent at chains during the fourth quarter. Especially telling in the data is the fact that for years consumers have been slowly shifting spending to these segments, signaling the increasing appeal of chains for value, convenience and off-premise dining (over half of counter-service sales are for food consumed outside the restaurant).
Containing employee turnover
Employee turnover across all levels of restaurant operations, from front-line hourly employees to restaurant managers, has climbed to historically high levels and shows no signs of easing. In January, TDn2K People Report data recorded another increase in the 12-month rolling turnover rate for hourly employees, as well as the rate for all levels of management.
Data also show that turnover challenges are worse for back-of-house hourly positions than for the front-of-the-house. As restaurants compete for kitchen talent, they will have to look to their compensation plans as part of the strategy. Restaurant companies reported that the top reason back-of-house employees leave is for higher compensation.
Even if the tightening labor market affects all restaurant companies, top-performing companies seem to be more focused on strategies to retain employees and have been more successful in maintaining lower turnover rates. TDn2K analysis indicates that top-performing companies have experienced a drop in management turnover rates. Unsurprisingly, management turnover for brands in the group with the weakest sales performance has increased by about 10 percentage points during the same period.
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 over $68 billion in sales. TDn2K also produces leading restaurant industry events, including the Global Best Practices Conference held annually in Dallas.