Web Exclusive | July 2016 | By Bruce Horovitz

6 Economic Warning Signs

Consumers and operators alike are growing anxious about the economy. Here’s what you need to know.
Fast casual and QSR chains have economic anxiety with recession on mind.
Chipotle used to be the standard bearer for an explosive fast-casual industry. Now both have hit a rough patch. Flickr / Ronald Woan

Consumers are growing anxious about the economy, and that’s leading to some unease in the restaurant industry, too.

Signs are ominous that almost every sector in the $783 billion restaurant industry is in trouble. Although breakfast sales at fast-food restaurants rose 2 percent during the first quarter of 2016, far more critical lunch sales were down 3 percent, while dinner sales were off 2 percent, reports The NPD Group.

It’s as if consumers who never fully recovered from the last recession are now preparing for the next one, says Bonnie Riggs, restaurant industry analyst at NPD. “I’m not an economist, but I’ve studied all the past recessions and how consumers behaved, and we’ve never experienced anything quite like this before,” she says.

If there’s one clear sign that something might be amiss in the restaurant industry, it’s this: even the high-flying fast-casual dining sector has hit turbulence.

For years, the fast-casual industry grew at an explosive pace. But uncertainty is settling in, as it has in the rest of the restaurant industry, and the onus is not just on troubled Chipotle, which has faced a series of health and safety-related issues.

Even with Chipotle factored out, fast-casual sales fell 1 percent in May of 2016 versus May of last year, according to NPD. With Chipotle factored in, the sector’s sales fell 4 percent in that time.

“I’ve never seen the fast-casual sector down since we started tracking it in 2004,” Riggs says. She adds that the sector’s annual sales were more commonly up 7–8 percent year after year. “The bloom might be off the rose.”

“I’m not an economist, but I’ve studied all the past recessions and how consumers behaved, and we’ve never experienced anything quite like this before.”

The National Restaurant Association (NRA) is also tracking consumer cautiousness. “There is an aura of uncertainty internationally, nationally, and among consumers,” says Hudson Riehle, senior vice president of research. “Uncertainly creates indecisiveness.”

Perhaps that’s why, for the first time in five months, restaurant operators reported a net decline in same-store sales in May, according to the NRA’s most recent industry report.

Riggs and Riehle rattled off a handful of key financial issues that are hitting consumers and restaurant owners alike:

Groceries look like a bargain. Grocery store food prices fell 0.5 percent through the first five months of 2016, even as menu price inflation at restaurants rose 2.7 percent during that same period, Riehle says. That’s a gap of 3 percentage points. For restaurants, of course, it’s preferable to have those numbers flipped so that consumers view eating out as a bargain, he adds.

Convenience stores are stealing share. Many regional convenience store chains have upped the quality of their food and are stealing share from quick service, Riggs says. That’s why in May, while quick-serve sales were flat, convenience store fresh food sales were up, she says.

Value wars have taken a toll. The major fast-food burger chains, in particular, have been embroiled in a price war for months—and it’s only growing. Other quick-service concepts, including sandwich shops and chicken chains, are expected to jump on soon, Riggs says.

In the meantime, she adds, some consumers are trading down from fast casual because they can’t resist the low prices of some of these quick-service deals.

Fast-casual prices grew too fast. As fast-casual chains have continued to explode, so have their prices. Many consumers now feel that they’ve been priced out of fast casual, Riggs says.

Labor costs have risen. The primary driver of menu price inflation is higher labor costs, which are up 3.9 percent through May in the industry, Riehle says. That’s the third consecutive year that labor costs have gone up in excess of 3 percent, he says.

Those labor costs may only increase more after December, when a new overtime rule will require some restaurants to pay more overtime to certain employees, Riggs adds.

Uncertainty breeds fear—and less spending. The uncertain political environment in the U.S. with the election in full swing, along with the international unease following Britain’s vote to exit the European Union, are unsettling to some consumers who are now more inclined to save than spend, Riehle says.

“It’s not surprising that restaurant industry sales performance remains choppy,” he says.

Comments

new overtime rule will require some restaurants to pay more overtime to certain employees,

I'm wondering, Would this signs/trends be affecting other retail industires as dry-cleaning? I have noticed a reduction of business in my area, wonderful New Jersey, drycleaners (including me) with lower trafic and lower sales.

Great article

I own a Advertising Company that deals directly with Fast Food , Fast -Casual , and fine dining and I feel their pain.

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