The outlook for the restaurant industry softened in May, as the National Restaurant Association’s comprehensive index of restaurant activity fell below 100 for the first time in three months. The Association’s Restaurant Performance Index (RPI)—a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry—stood at 99.7 in May, down 0.7 percent from April’s level of 100.4. The RPI’s May drop came after strong index growth earlier this year and amid sharply increasing wholesale food prices.
“Although the sales and customer traffic indicators softened in May, capital expenditure activity rose to its highest level in nearly two years,” says Hudson Riehle, senior vice president of the Research and Knowledge Group for the Association. “This, along with a continued positive outlook for sales and the overall economy, signals that restaurant operators remain optimistic that business conditions will improve in the months ahead.”
Watch Riehle give an update on the restaurant industry below.
The RPI 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, and index values below 100 represent a period of contraction for key industry indicators. The RPI 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 98.7 in May—down 0.3 percent from its April level. The Current Situation Index remained below 100 for the 33rd consecutive month, which signifies contraction in the current situation indicators.
Restaurant operators reported a net decline in same-store sales for the second consecutive month in May. Thirty-five percent of restaurant operators reported a same-store sales gain between May 2009 and May 2010, down from 39 percent of operators who reported higher sales in April. In comparison, 46 percent of operators reported a same-store sales decline in May, up from 41 percent of operators who reported negative sales in April.
Restaurant operators also reported softer customer traffic results in May. Thirty-three percent of restaurant operators reported an increase in customer traffic between May 2009 and May 2010, down from 37 percent who reported higher customer traffic in April. Meanwhile, 43 percent of operators reported a traffic decline in May, up from 39 percent who reported lower traffic in April.
Although sales and traffic results softened in May, restaurant operators reported an uptick in capital spending activity. Forty-five percent of operators said they made a capital expenditure for equipment, expansion, or remodeling during the past three months, up from 40 percent last month and the highest level in nearly two years.
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 100.8 in May—down 1.0 percent from April’s level of 101.8. Despite the decline, the Expectations Index remained above 100 for the fifth consecutive month, which represents expansion in the forward-looking indicators.
Although restaurant operators remain optimistic about sales growth in the months ahead, their optimism slipped somewhat in recent months. Forty-three percent of restaurant operators expect to have higher sales in six months (compared with the same period in the previous year), down from 47 percent who reported similarly last month. In comparison, 18 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 12 percent who reported similarly last month and the highest level in four months.
Restaurant operators are also not as optimistic about the direction of the overall economy. Thirty-three percent of restaurant operators said they expect economic conditions to improve in six months, down from 41 percent who reported similarly last month and the lowest level in four months. In comparison, 15 percent of operators said they expect economic conditions to worsen in the next six months, up from 10 percent last month.
Restaurant operators’ plans for capital expenditures held relatively steady in recent months. Forty-six percent of restaurant operators plan to make a capital expenditure for equipment, expansion, or remodeling in the next six months, roughly on par with the levels reported in the previous three months.