Finance | January 2018 | By Danny Klein

Restaurant Industry Reports 1st Quarter of Growth in 2 Years

Same-store sales are finally on the rise again. Also, fast casual was in the green for the first time since 2016.
The restaurant industry has experienced a rough year when it comes to sales and performance. But thanks to a positive fourth quarter, things are on the rise.
Fast casual experienced its first positive quarter of growth since the first quarter of 2016. flickr: avlxyz
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The restaurant industry received a jolt of good news in the fourth quarter. Same-store sales increased 0.4 percent, marking the first quarter of growth in the last two years, according to TDn2K’s The Restaurant Industry Snapshot.

In November, the industry reported positive momentum for the second consecutive month, and that improvement continued through December. Same-store sales increased 0.3 percent across the industry in the quarter, based on weekly sales from more than 30,000 units, 170-plus brands, and $68 billion in annual revenue.

The 0.3 percent increased was the second best month based on sales growth since March 2016. Only October 2017 was better.

Traffic declined 1.8 percent in December—the second best performance in almost two years as well—and nearly 0.7 percentage points better than November. Same-store traffic dropped 1.9 percent in the fourth quarter of 2017, which is also the best result in the last two years. It was a 260 basis point improvement from the third—a particularly rough period for restaurants thanks to weather. The industry has enjoyed a steady incline since same-store sales and traffic plummeted 2.8 percent and 4.7 percent, respectively, in July.

However, as Victor Fernandez, executive director of insights and knowledge at TDn2K points out, some of the progress should be kept in perspective. Guest checks increased 2.1 percent, year-over-year, compared with a 2.5 percent for the previous two months. Were discounts and promotions to credit for the traffic boost?

“December of 2016 had very soft same-store sales and traffic results, so lapping over those results didn’t pose much of a challenge,” Fernandez said in a statement. “Over a longer view, same-store sales declined by 2 percent during the fourth quarter of 2017 when compared with that same quarter in 2015. Furthermore, the trend of declining guest traffic continues to plague the industry and is one that seems unlikely to reverse any time soon.”

Even with a positive quarter, 2017 as a whole was a challenging one for restaurants. Same-store sales declined 1.1 percent for the year, which mirrored 2016’s performance. Traffic fell 3.2 percent across 2017—a 0.1 percent decline from the previous year.

Despite discounting strategies, average guest check, year-over-year, increased in the fourth quarter for casual dining and fine dining. Upscale casual, to a lesser extent, experienced the same. On the flip side, quick service and fast casual reported a decrease in average guest check, year-over-year, in the fourth quarter compared with the third, hinting at the ever-accelerating value wars. That doesn’t appear to be slowing anytime soon, with leaders like McDonald’s, Wendy’s, Taco Bell, Sonic, and others expanding their discounted offers in recent reports.

“It is a welcome change to report a positive quarter for our industry,” said Wallace Doolin, founder and chairman of TDn2K, in a statement. “Our research leads us to conclude that not only the industry has changed, but the performance results continue to change. In 2018, we expect the macro economic climate to improve for the industry; however, it will not be a rising tide for all brands. Here is to a new year and a bigger share.”

Fine dining and upscale casual were the best performing segments based on sales in the fourth quarter, which matched a trend seen throughout 2017. Casual dining, fast casual, and family dining all achieved positive sales for the quarter. This was welcome news for fast casual and family dining. The segments hadn’t seen a quarter of growth since the first quarter of 2016. Casual dining had eight consecutive quarters of negative sales growth before reporting positive in this quarter.

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Joel Naroff, president of Naroff Economic Advisors and TDn2K economist, said the economy ended the year on a high note.

“Despite what appears, at least on the surface, to have been a disappointing December job gain, the economy did end the year on a high note. The payroll data are volatile, so you need to look at the trend over time,” Naroff said in a statement. “Job gains averaged a very strong 204,000 per month during the final quarter of the year. Given the lack of workers, that pace is likely to be unsustainable. The strong demand for new employees boosted hourly wages, though adjusted for inflation, the increase was not great.”

“Still, with optimism sky high and incomes rising, consumer spending was strong during the holiday shopping season,” he added. “As the tax cuts slowly bolster worker paychecks, the improvement in consumption should continue. With business investment also likely to improve, we could see growth of the economy in 2018 approach 3 percent. That creates expectations the recent rebound in restaurant spending will not only continue but possibly accelerate.”

There were some labor improvements as well. For the third consecutive month, the industry reported small decreases in turnover rates in November. Turnover is still, however, at historically high marks. Turnover for all levels of management rose in November. “Restaurants have not been able to reverse the trend of rising management turnover rates which have afflicted the industry since the end of the recession. This is especially problematic since, according to TDn2K’s People Report research, management retention is one of the metrics that are most related to a restaurant’s sales and traffic performance and a big differentiator for top performing brands,” the report said.