Chain restaurant operators and observers are anxiously searching for clues into the steady decline in comp sales and traffic. Despite generally positive economic news, results for July show a continued downward slide that began after a strong start in 2015. According to TDn2K’s Black Box Intelligence, encompassing nearly 25,000 restaurant units and representing $64 billion in sales, restaurant comp sales declined -1.4 percent in July. Comp traffic was -3.9 percent. July represents the weakest performance for both metrics since December 2013.

The downward trend in sales has been gradual and consistent. Since January 2015, comp sales have slipped an average of .25 percent per month. Soft July results might have been anticipated given the difficult rollover comparisons to a relatively strong 2015. And the Fourth of July holiday this year did create some headwind, instead of the being included in June as it was in 2015. Nonetheless, the sales environment is complex and there is little consensus that it’s reached the bottom.

Segment performance is uneven. Casual dining still mirrors the industry, but consistently trails by about 0.7 percentage points. Fast-casual’s decline has been more modest. However, in July, fast-casual sales dropped -2.3 percent, the first time it has lagged the industry since January 2015. Higher ticket segments such as upscale casual and fine dining also under-performed the industry in July, falling -1.6 and -5.8 percentage points, respectively.

Quick-service is still the one segment with consistently positive sales. Quick-service restaurant sales trend hovers around 2.0 percent in 2016 and exceeds the industry by roughly 2.5 percentage points. It was the only segment up in sales in July, at 1.3 percent.

The performance malaise cuts across most geographic regions. Texas and the Southwest have the deepest declines in sales and traffic. Though results aren’t as strong as 2015, California is consistently the best-performing region. It has only experienced one month of negative comp sales in the past two years.

Operators are perplexed by the apparent disconnect between macroeconomic indicators and results. Restaurant sales typically reflect changes in disposable income and unemployment. But consumer spending, confidence, GDP growth, income growth, and unemployment all point to a modestly stronger economy. Even the rising stock market contributes to the “wealth effect.” Yet as an industry, chain restaurants don’t seem to be sharing in the upside.

Joel Naroff, president of Naroff Economic Advisors and TDn2K economist, has expressed generally positive views on the intermediate outlook.

“The U.S. economy continues to wander along its modest to moderate growth pace,” Naroff says. “There is a great divide between business and household spending. Consumer demand was strong in the second quarter, driven by decent job and wage gains. However, business investment was down sharply, in part because of inventory adjustments. As that dissipates, investment should improve. The outlook is for GDP growth to be in the 2.5 percent range for the second half of the year. That should create solid income gains as the labor market tightens further. As for restaurant sales, there is now a more even distribution of consumer spending between durables, nondurables and services. This rotation in demand was one factor in the deceleration of restaurant spending growth. As this process slows, so should the restaurant sales growth decline.”

The uphill battle for sales traction among chains is also somewhat at odds with government data showing overall growth from food and drinking establishments. Government data doesn’t focus on specific restaurant segments, but one implication is that chains are losing the battle at a local level with independents and/or other food-away-from-home or take-out and delivery services. There is growing evidence that these options are taking share from legacy restaurant brands. If these scenarios play out, it could mean a meaningful shift in the chain restaurant “share of stomach.”

The difficulty operators face attracting and retaining talent cannot be overstated. With unemployment low, finding qualified employees to staff and manage restaurants is a huge focus of operators. Data from TDn2K’s People Report shows continued growth in restaurant jobs, but also points to hourly turnover figures that are higher than at any point since the recession. Management turnover is greater than 30 percent in every segment. Employees have multiple options in today’s environment and wage pressures (from minimum wage and tight supply) make it very difficult to get and retain employees. TDn2K’s analysis has long documented the linkage between turnover, compensation and operating results. Based on this, there is little question that recent restaurant performance is at least in part attributable to issues of staffing, training, and execution.

As recent earning statements suggest, several factors limit profit growth. Modest or declining comp sales coupled with higher labor costs, driven by market conditions and minimum wage, more than offset savings from commodities and food cost. Operators face a difficult environment that calls for bold actions to consistently deliver brand equities and also produce margins that provide the fuel for growth and expansion.

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