Industry News | August 31, 2012

Operators Uncertain Over Future Business Conditions

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As a result of softer customer traffic and a dampened outlook among restaurant operators, the National Restaurant Association’s (NRA) Restaurant Performance Index (RPI) fell to its lowest level in nine months. 

The RPI—a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry—stood at 100.2 in July, down 1.1 percent from June and the lowest mark since a reading of 100.0 in October. 

However, July still represented the ninth consecutive month that the RPI stood above 100, which signifies continued expansion in the index of key industry indicators.

“Although restaurant operators reported positive same-store sales for the 14th consecutive month in July, their economic outlook for the months ahead continued to soften,” says Hudson Riehle, senior vice president of the Research and Knowledge Group for the Association. “Only 22 percent of restaurant operators expect economic conditions to improve in the next six months, the lowest level in 10 months.

“Despite their uncertainty, roughly one-half of restaurant operators still plan to make a capital expenditure for equipment, expansion, or remodeling in the next six months, which is a positive indicator for both the industry’s supply chain and the overall economy,” Riehle adds. 

The Restaurant Performance Index is constructed so that the health of the restaurant industry is measured in relation to a steady-state level of 100. Index values above 100 indicate that key industry indicators are in a period of expansion, while index values below 100 represent a period of contraction for key industry indicators. 

The Index consists of two components—the Current Situation Index and the Expectations Index. 

The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor, and capital expenditures), stood at 99.8 in July—down 1.7 percent from June’s level of 101.5. 

Although same-store sales remained positive in July, the softness in the labor and customer traffic indicators outweighed the performance, which led to a Current Situation Index reading below 100 for the first time in nine months. 

Although restaurant operators reported positive same-store sales for the 14th consecutive month in July, results were much softer than recent months. Fifty-three percent of restaurant operators reported a same-store sales gain between July 2011 and July 2012, down from 61 percent who reported positive sales in June. 

In comparison, 36 percent of operators reported lower same-store sales in July, up sharply from 24 percent in June.   

While sales remained positive overall, restaurant operators reported a net decline in customer traffic levels in July. Thirty-five percent of restaurant operators reported higher customer traffic levels between July 2011 and July 2012, down from 50 percent who reported positive traffic in June.

Meanwhile, 46 percent of operators reported lower customer traffic levels in July, up from 29 percent in June.

Restaurant operators reported relatively steady levels of capital spending. Forty-six percent of operators said they made a capital expenditure for equipment, expansion, or remodeling during the last three months, down slightly from 48 percent who reported similarly last month.

The Expectations Index, which measures restaurant operators’ six-month outlook for four industry indicators (same-store sales, employees, capital expenditures, and business conditions), stood at 100.7 in July—down 0.6 percent from June and the fourth consecutive monthly decline. 

Although July marked the 11th consecutive month that the Expectations Index stood above 100, it also represented the weakest level in nine months.      

Overall, restaurant operators remain cautiously optimistic that their sales levels will improve in the months ahead, though their outlook softened from recent months. 

Forty-two percent of restaurant operators expect to have higher sales in six months (compared to the same period in the previous year), down from 50 percent who reported similarly last month. 

Meanwhile, 15 percent of restaurant operators expect their sales volume in six months to be lower than it was during the same period in the previous year, up from 13 percent last month.

In contrast to their generally positive outlook for sales, restaurant operators are noticeably less optimistic about the direction of the overall economy. 

Only 22 percent of restaurant operators said they expect economic conditions to improve in six months, down from 28 percent last month and the lowest level in 10 months. 

Meanwhile, 22 percent of operators said they expect economic conditions to worsen in the next six months, while 56 percent think conditions will stay about the same. 

Despite the uneasiness about the economy, restaurant operators’ capital spending outlook remains relatively firm. Forty-nine percent of restaurant operators plan to make a capital expenditure for equipment, expansion, or remodeling in the next six months, down slightly from 51 percent who reported similarly last month.