Upward Momentum Stalls as Restaurant Sales Slide in February
The restaurant industry’s same-store sales fell year-over-year for the second consecutive month during February. Although February’s -0.8 and January’s -0.3 percent sales growth is an improvement over the -1.1 percent same-store sales growth rate reported for 2017, sales growth rates are again negative and rise the concern that the relative strength exhibited by the industry in Q4 of last year could have been only an anomaly and the industry is still on its path of declining sales. However, favorable macroeconomic conditions, strong consumer confidence, and the fact that some of the decline in February sales could be attributed to several factors external to the industry and that won’t be present in upcoming months fuels optimism for increased restaurant spending in upcoming months.
The downturn in restaurant same-store sales growth during February was widespread from a geographic standpoint. Almost two thirds of the 195 DMAs (designated market areas) tracked by Black Box Intelligence suffered negative same-store sales growth during the month. By comparison, 57 percent of markets experienced positive same-store sales growth back in December. At the regional level, analysis shows similar results. Only five of the country’s eleven regions were able to achieve positive same-store sales growth during February. The best performing regions during the month based on sales growth were the Western Region, California, and Texas. All three of these regions posted positive sales growth during February. Worst performing regions of the country were the Midwest, Mid-Atlantic, and Southwest. A case can be made for weather being a contributing factor behind the poor results in some of these regions.
Turnover rates for restaurant hourly employees and restaurant managers increased again during January. Attraction and retention of qualified employees remains a top concern for restaurant operators, which have been experiencing historically high turnover rates for the last couple of years. As turnover rates continue to increase, a growing challenge for restaurants have been staffing levels. Over 70 percent of restaurant companies reported being continuously understaffed for their restaurant hourly employee positions. This growing number of vacancies plus a slowdown in restaurant location net growth has translated into flat to slightly negative job growth in chain restaurants.
UPWARD MOMENTUM STALLS AS RESTAURANT SALES SLIDE IN FEBRUARY
Restaurant same-store sales growth saw another disappointing month in February. The last two months have reversed the positive momentum we experienced in the fourth quarter of 2017 and have revived concerns that the industry may not yet be positioned for sustained growth. Same-store sales dipped -0.8 percent in February, a 0.5 percentage point decline from January and the weakest month since September of last year. These insights come from TDn2K™ data through The Restaurant Industry Snapshot™, based on weekly sales from over 30,000 restaurant units, 170+ brands and represent over $68 billion dollars in annual revenue.
Same-store traffic declined -3.1 percent in February; the worst month since September 2017. Although traffic growth dropped by only 0.1 percentage point compared to 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 a year ago in February. By contrast, the year-over-year growth in average spending was 3.0 percent in January.
“However, the trend that continues,” explained Victor Fernandez, executive director of insights and knowledge at TDn2K, “is higher guest check growth compared with the first three quarters of 2017. Since the beginning of Q4 2017, all months except December have posted year-over-year check growth of at least 2.4 percent. The average for the first nine months of 2017 was only 2.0 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.”
Too Early to Call It a Downturn
There is some concern about restaurant industry performance so far in 2018. The fact that prior year sales were very weak (-3.7%) makes the February 2018 results even more disappointing. Taking a longer view, sales last month were 4.5 percent lower than they were two years ago in February of 2016.
“It’s probably too soon to determine if this is an aberration or the start of a new trend,” continued Fernandez. “We had several external factors in February that cloud our view into the underlying performance. There were weather events that included winter storms as well as record rainfall in some areas. The Winter Olympics captured the attention of almost 20 million Americans nightly for two weeks. Plus, Valentine’s Day fell on Ash Wednesday, a time when many people were involved with church activities. Each of these events impacted sales to some degree. 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 economy has yet to accelerate as much as we hoped for when the tax cuts were passed,” said Joel Naroff, president of Naroff Economic Advisors and TDn2K economist. “It may be early, especially since income growth was robust in January. But that has not yet translated into strong retail spending.”
“Consumer confidence remains solid, but the chaos in Washington has created massive volatility in the equity markets that could be weighing on consumers. Nevertheless, with wage pressures rising from the strong demand for workers, look for consumer spending 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. Growth in the three percent range for this year is still likely and that means most sectors, including restaurants, should be in for better sales going forward.”
Fast Casual Climbed to The Top, Fine Dining Underperforms
February results were soft across the industry and all segments reported negative sales. Fast casual was the top performing segment in February, a welcomed improvement in its relative sales performance. Although fast casual continues to gain market share through new unit openings, it hadn’t been the top performing segment in comp sales since the beginning of 2015.
Fine dining, which led the industry in comp sales for 2017, experienced a dramatic downturn in February, posting its third-worst month in three years. The external factors noted earlier could have been particularly troublesome for this segment.
Counter Service Brands Continue to Capture Consumer Spending
Chain restaurants may have a same-store sales problem, but total sales continue to grow as the industry keeps generating net growth in its number of locations. According to TDn2K’s Market Share Report, which includes data representing over 125,000 individual restaurant locations, chain restaurants grew total sales by 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 on chain restaurants during the fourth quarter of 2017. Especially telling in the data is the fact that for years consumers have been slowly shifting their spending to these segments, signaling the increasing appeal of chain restaurant brands for value, convenience and off-premise based dining (over half of counter service sales are for food not consumed at the restaurant).
Top Performing Restaurant Brands Better at Containing Employee Turnover
Employee turnover throughout all levels of restaurant operations, from front-line hourly employees to restaurant managers, have climbed to historically high levels and show no signs of easing. In January, TDn2K’s 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 shows that the turnover challenges are worse for back-of-house hourly positions than for their front-of-house counterparts. As restaurants compete for kitchen talent they will have to look to their compensation plans as part of the strategy. Restaurant companies reported the number one 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 their employees and have been more successful in maintaining lower turnover rates. TDn2K analysis indicates that top-performing companies have experienced a drop in their management turnover rates. Not surprisingly, management turnover for brands in the group with the weakest sales performance has increased by about 10 percentage points during that same period.