The first month of the fourth quarter was not a good one for the chain restaurant industry. Same-store sales growth dipped into negative territory for the first time since July 2014, breaking the streak of fourteen consecutive months of positive sales growth. Same-store sales growth was a disappointing -0.2 percent for October. More concerning is the fact that this represents the second consecutive month sales growth has deteriorated in comparison to the previous month. Furthermore, October’s drop of -1.4 percent compared with September’s same-store sales growth is the worst since June of 2013 when excluding the drops reported in December 2013 and in February 2015 (mostly attributed to unfavorable winter weather). This insight comes from data reported by TDn2K’s™ Black Box Intelligence™ through The Restaurant Industry Snapshot, based on weekly sales from over 22,000 restaurant units and 120 + brands representing $55 billion dollars in annual revenue.
“2015 year-to-date same-store sales growth is 1.9 percent; despite this vast improvement over the 0.6 percent growth reported for 2014, it is below our expectations for the year,” said Victor Fernandez, Executive Director of Insights and Knowledge for TDn2K. “Also noteworthy is that even though this year’s results are much better from a sales standpoint, this is a result of higher average guest checks and to a lesser extent the result of any improvement in traffic. Year-to-date traffic growth has improved by 0.5 percent compared with 2014, while the average guest check growth has improved by 0.8 percent.”
Same-store traffic growth was -2.8 percent for October, which represents a 1.5 percent decline from -1.3 percent growth rate reported for September. This October traffic growth rate is the worst result experienced by the industry since the December 2013 through February 2014 period which were significantly depressed due to the weather conditions. “It seems that the slowdown in the restaurant industry is real as we go into the fourth quarter,” continued Fernandez. “What complicates the situation even more for the industry is the fact that as we get into November and December, weather starts playing a bigger part in results. It will just take a few weeks of really bad sales and traffic due to winter storms for the fourth quarter to potentially end up being negative in same-store sales growth.”
Average guest checks in comparable stores grew by 2.6 percent during October, a small increase over the 2.3 percent year-over-year growth reported for September.
The best performing region during October was California with 3.7 percent same-store sales and -0.2 percent traffic growth. This is the third consecutive month in which California has been the top performing region of the country. Although the state’s unemployment rate is higher than the national average, year-over-year change in unemployment as well as increase in personal income rank among the highest in the country; resulting in superior restaurant sales performance. The worst performing region was the Southwest (Louisiana, Arkansas, Oklahoma and New Mexico) with -3.7 percent same-store sales and -5.4 percent traffic growth. This region has been the worst performing for the last two months and for seven of the first ten months of the year. This region, impacted by the weakness in the energy sector, is suffering the lowest disposable income growth compared to other areas of the country. The slowdown in sales was widespread at the market level. Out of the 193 DMAs tracked by Black Box Intelligence, 112 of them (58 percent) experienced negative same-store sales growth during October.
In terms of the six segments Black Box Intelligence tracks, Fine Dining continues to be the leader in comparable sales increases suggesting that corporate spending may be stronger than consumers using their own money dining in the other segments.
Although job growth seems to be slowing down in recent months, jobs are still being created at a very strong year-over-year pace in the chain restaurant industry according to TDn2K’s People Report™. Job growth for September was 4.8 percent, accelerating from the robust 4.6 percent reported for August. Restaurant job growth has surpassed the 4.0 percent mark the last three quarters and has averaged 3.5 percent over the last year. Restaurant brands continue opening new units as a means of increasing sales and this has created the need for this growing number of employees.
In addition to the need to recruit all these new positions, the staffing challenges for the industry continue to be amplified (and profitability negatively impacted) by the very high hourly employee and restaurant management turnover rates. Rolling 12-month hourly employee turnover continues to increase, as of the end of September, restaurants have experienced 25 consecutive months of increasing turnover levels. For restaurant management positions, rolling 12-month turnover rates have stabilized and have remained flat for the last three months. “Although that could seem as some relief for restaurant operators, management turnover rates are at historically high levels. So in reality, there is little relief in management turnover rates currently stagnating,” said Fernandez. “Management turnover is costing the industry millions of dollars and negatively impacting sales and traffic according to our research.”
As we look at restaurant industry performance from a social perspective we consider three key attributes “food”, “service” and “intent to return” tracked by TDn2K’s White Box Social Intelligence™. These results capture social media mentions from an average sample of over six million online posts each month. In October, there was a trend of an increasing percentage of service-based posts while the percentage of online mentions based on food was starting to decline (even though food posts represents the largest percentage of online mentions by a big margin). This trend was reversed in October and food posts represented 80 percent of all social media mentions, while service mentions dropped to 15 percent (from 27 percent in September). Intent to return represented only 5.0 percent of all mentions, another hint at the slowdown in restaurant traffic.
The attribute that generated the highest percentage of positive mentions continues to be “intent to return”. Fine Dining was the top performing segment during October regarding percentage of online mentions that reflect a positive sentiment on “service” and on “intent to return”. Upscale Casual was the top performing segment based on percentage of positive food mentions during October.
“The chain restaurant industry has experienced a period of expansion in the last twelve months, but that might be starting to change as the economy’s job and disposable income growth remain sluggish and the industry continues to lose guest traffic driven by the reality of a market share battle for the consumers’ visits, said Wallace Doolin, Founder and Chairman of TDn2K.” “We believe a key to competitive success for brands will be winning the workplace challenge of staffing effectively, in order to deliver their promise of service and operational execution in this very tough labor market. We also observe a cause and effect of retention and social mentions of execution impacting sales and traffic. It is not an even playing field by segment, geography or execution. Good operators, innovative marketers and the best employers are succeeding and thriving and will continue to do so.”