Restaurant Industry Snapshot™ January, 2018

Restaurant Sales Slipped in January, But Optimism Remains

Published

Comp Sales & Traffic

Comp Sales

-0.3%
rolling 3 months
0.2%

Comp Traffic

-3%
rolling 3 months
-2.2%

Regional & Market Performance

Positive Markets 86 | 44% Negative Markets 109 | 56%

Strongest Region

Western
  • Sales 3.9%
  • Traffic 1.5%

Weakest Region

New England
  • Sales -2.3%
  • Traffic -5.4%

The Restaurant Workforce

job growth & turnover

Year/Year Job Growth*

0.4%
November
-0.2%

Manager Turnover*

Q4 '17
Roll 12
Dec
YTD

Hourly Turnover*

Q4 '17
Roll 12
Dec
YTD
*People Report, Human Capital Intelligence, December, 2017 Release

Restaurant same-store sales growth returned to negative territory in January after three straight months of flat or positive sales growth. Although this could spark some concerns regarding the recovery experienced during the fourth quarter of last year, January was plagued with some external factors that suggest it may be too soon to sound alarms. Same-store sales dipped -0.3 percent in the first month of the year, which represented a 0.6 percentage point drop from December. Again, the driving force behind the slowdown was the drop in same-store traffic, which at -3.0 percent year-over-year represented a 1.3 percentage point decline from the previous month.  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.

“Although January’s sales results are somewhat disappointing, we remain cautiously optimistic about the industry’s performance,” expressed Victor Fernandez, executive director of insights and knowledge for TDn2K. “Even if the month posted some small negative growth in sales, January’s results were better than for any other month in the February through September period last year. Furthermore, there were some extrinsic factors that added noise to the month’s results. The first week of the year was aided by a calendar shift regarding the New Year’s Day holiday, but more importantly, severe winter storms hit large regions, primarily in the east coast, causing significant losses in restaurant sales later in the month.”

 

January’s Restaurant Sales Hurt By Winter Storms

The three worst performing regions in January, all with same-store sales worse than -2.0 percent, were the Mid-Atlantic, Midwest and New England. These three regions also experienced drops in sales growth during January of at least 1.5 percentage points when compared with the average for the previous three months. Also suffering a decline in sales growth of 0.5 percentage points or worse compared with their previous 3-month average were Texas, the Southeast and Florida.

The biggest effects of the severe winter storms during the month were in many of those regions, particularly along the eastern coast and Midwest.

“If sales from those three weakest performing regions (Mid-Atlantic, Midwest, and New England) are excluded from all calculations,” continued Fernandez, “restaurant sales growth only dropped by 0.1 percentage points in January compared with the previous month. In other words, sales growth would have remained essentially flat. And that doesn’t remove the effect, albeit smaller, that weather had in other regions of the country.

 

Economic Conditions Suggest Increased Restaurant Spending Ahead

“The economy continues to grow solidly and tax cuts should be adding to the expansion soon,” stated Joel Naroff, president of Naroff Economic Advisors and TDn2K economist. “That is both the good news and the bad news.”

“Stronger growth in the 3 percent range looks likely this year and into 2019 as consumers spend the extra money in their paychecks and businesses increase their capital spending. But the added demand comes on top of an economy that was already good and labor markets were already tight. That has raised concerns wage and price inflation will accelerate and interest rates could rise higher and faster as a consequence.”

The growing uncertainty over inflation and interest rates explains, at least to some extent, the recent volatility in the equity markets, which had seen little worry for years. However, barring an unexpected market meltdown, the activity in the markets shouldn’t change the direction of growth significantly. It will be better the rest of this year and that should lead to more spending on all types of activity, including restaurants.

 

Guest Checks Growth Continued to Accelerate

Average guest checks grew by 3.0 percent year over year during January. The last time guest checks grew at a higher pace was almost three years ago. This jump in check average also represents a substantial increase from the 2.3 percent reported for the fourth quarter of 2017.

Leading the industry in guest check growth during the month was the casual dining segment. This seems to be a departure from the discounting strategy and low guest check growth experienced by this segment last year.

On the opposite end of the spectrum, the segment with the lowest guest check growth was fast casual. This segment has struggled with same-store sales and traffic for almost two years. The results since last October suggest a new strategy based on modest increases in average checks either through conservative price increases, price promotions and discounting, or perhaps both.

 

Fine Dining and Upscale Casual Continue to Win

The top performing industry segments and the only ones with positive sales in January were fine dining and upscale casual. These two segments have led the industry in sales growth since the beginning of last year. Consumers seem to be demonstrating a willingness to spend more on experience-based dining. Business-related dining has also been a contributing factor, especially in the case of fine dining.

Casual dining has seen a resurgence recently and was the third best-performing segment for the month. January’s results almost broke through into positive territory and the segment experienced its second-best month in the last year.

 

Staffing Difficulties Hurting Profitability

Optimism is hard to come by when it comes to restaurant staffing. When listing their biggest concerns for 2018, operators focus on two particular areas: restaurant traffic and employee staffing. They have reason to be concerned regarding the people side of the business. With the economy at full employment, turnover has reached historically high levels for both hourly and restaurant management employees.

The reason for concern is twofold: recent TDn2K research showed that during 2017, top performing restaurant brands based on same-store sales growth achieved turnover rates much lower than industry averages. The implication is that lower turnover rates are a leading indicator of superior revenues per restaurant.

On the cost end of the equation, turnover is also an enormous factor affecting profitability. According to the recent People Report™ Restaurant Recruiting and Turnover Survey, the hard costs associated with turning over one hourly, non-supervisory employee is on average about $2,000. With turnover rates well over 100 percent for most restaurant brands, the expense and disruption of business is an enormous operational cost.

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