The chain restaurant industry’s sales growth continued to decline during April, the worst month since January 2014. Same-store sales growth was -1.0 percent, a drop of 0.3 percent below sales reported in March. This insight comes from data reported by TDn2K’s Black Box Intelligence through The Restaurant Industry Snapshot, based on weekly sales from over 24,000 restaurant units, 120-plus brands, representing $61 billion dollars in annual revenue.
“April 2015 was relatively strong from a sales growth perspective, which made for a tough comparison this year. However, April’s disappointing results cannot be explained just by this high hurdle,” says Victor Fernandez, executive director of Insights and Knowledge for TDn2K. “From a two-year growth perspective, same-store sales growth averaged 0.9 percent for March and April of 2016 when compared with the same months back in 2014. The two-year average for all months in 2015 was a much more robust 2.5 percent.”
The industry has now reported two consecutive months of negative year-over-year growth and the average rate for all months since the beginning of Q4 2015 is 0.0 percent, fueling concerns that 2016 may be another year of contraction for chain restaurants; year-to-date sales growth a disappointing -0.5 percent.
TDn2K economist Joel Naroff believes that consumer spending could pick up during the rest of the year. “Despite solid income growth, the consumer continues to spend cautiously. Retail sales have been soft through the first quarter of the year but the less than stellar April jobs report shouldn’t be interpreted as a sign that the economy is faltering. Wage gains were robust and the latest improving data on job openings point to an economy where businesses are still looking for a lot of workers. It is likely that the rising compensation will soon be spent. It is just not clear when that turnaround will begin,” Naroff says.
The main concern for the industry continues to be guest counts. April’s same-store traffic growth was -3.5 percent, the worst results since February of 2014 and a 0.8 percent drop in traffic from March’s growth rate. April’s growth in average guest checks was 2.6 percent year-over-year, after two months of guest check increases of less than 2.0 percent. More importantly, the 0.8 percent acceleration in year-over-year average guest check in April compared with March is the largest increase reported in consecutive months since December of 2013. Average guest checks increased considerably in April as we recorded the worst traffic numbers in two years.
The importance of value for consumers can readily be perceived when analyzing sales results by industry segment. For the last two months, as the industry’s overall sales growth dropped into negative territory, the best performing segment by far has been quick service. Additionally, according to Black Box Intelligence research, Quick Service was also the only segment that significantly gained sales market share year-over-year by the end of 2015.
April’s soft sales were widespread from a market perspective. Out of the 193 individual DMAs tracked by Black Box Intelligence, 132 of them (68 percent) reported negative sales growth during April 2016. As a comparison, a year ago only 22 percent of DMAs experienced negative sales growth rates.
In addition to restaurant sales and traffic challenges so far this year, workforce related difficulties also continue to escalate. According to a recent poll by TDn2K, the biggest workforce related concern of restaurant operators currently is finding enough qualified employees to fill their vacancies; almost 75 percent of restaurant companies reported this as their biggest worry for the year. The drivers behind this concern are the rapid job growth recently experienced by the industry coupled with alarmingly high employee turnover and vacancy rates.
Data from TDn2K’s People Report shows that the number of jobs in the chain restaurant industry grew at a pace of 4.4 percent year-over-year during March. The average growth rate since the beginning of the year has been 4.0 percent. For over two years now the restaurant industry has been outpacing both the overall economy and the retail industry in job creation, which highlights why filling vacancies is such a challenge for restaurants.
Restaurant hourly employee turnover rose again during March, the 31st consecutive month in which turnover has increased or stayed flat. Restaurant management turnover is another crucial challenge for operators as turnover rates have returned to pre-recession levels, and are now exceeding those rates. “As we approach full employment, and new vacancies are likely going to be filled by someone who already has a job, turnover rates will continue to be a challenge and not likely to drop any time soon,” Fernandez says.
As restaurant sales continue to fall, the impact of employee and management turnover on profitability becomes even more troublesome. In addition to the significant direct costs associated with turnover, TDn2K research has continuously shown that those companies with lower turnover levels tend to perform better based in same-store sales and traffic. The data also proves a link between service, guest satisfaction and turnover.
TDn2K’s White Box Social Intelligence tracked particularly interesting results in April. For the first time since October, casual dining was the industry segment with the highest percentage of positive food-based mentions. Fine dining dominated (“food,” “service,” and “intent to return”) for the last six months. This could indicate that casual dining’s focus on food quality and advertising of quality food is starting to pay off in the eyes of the consumer. This segment has struggled recently based on sales growth, so this could be very welcome news and a leading indicator that some improvement is ahead.
TDn2K’s White Box Social Intelligence is closely following an overall trend of increasing online service related mentions, with the percentage of negative mentions also increasing. It seems that guest satisfaction is sinking when it comes to service and people are talking about it online. As the industry continues to struggle with vacancies and turnover, a continued negative effect on service levels and guest satisfaction is to be expected. The connection of the employee experience and the guest experience has never been clearer or more important to get right.
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