The good news is 2015 was a much better year than 2014 for the restaurant industry; the bad news is same-store sales growth continued to decelerate during Q4. Same-store sales growth for all of 2015 was 1.6 percent, a 1 percent jump from the growth rate reported for 2014 and a 2.3 percent improvement compared with 2013’s results. However, the industry seems to have crawled to the finish line this year with a small same-store sales growth of 0.4 percent during Q4, a 1.2 percent drop from the Q3 results and the lowest sales growth rate reported for any quarter since Q3 of 2014. This insight comes from data reported by TDn2K’s Black Box Intelligence through The Restaurant Industry Snapshot, based on weekly sales from over 23,000 restaurant units, 120-plus brands, representing $57 billion dollars in annual revenue.

“Although the industry has now experienced six consecutive quarters of positive same-store sales growth, it is important to mention that every quarter since Q1, we have seen lower sales growth rates than during the preceding quarter,” says Victor Fernandez, executive director of insights and knowledge for TDn2K. “What is most concerning when analyzing this persistent slowdown in sales, is that the 1.2 percent drop in year-over-year same-store sales growth experienced during Q4 compared with the previous quarter is the largest decline experienced by the industry in over two years.”

“The national economy continued to expand during the fourth quarter of 2015, with robust job gains, more spending on big-ticket items such as vehicles and houses and rebounding electronic purchases. However, there are holes in the expansion related to the collapse of energy prices and the jump in the value of the dollar. This has led to regional weakness in energy-dependent areas and a softening in the manufacturing sector,” says Joel Naroff, president of Naroff Economic Advisors and TDn2K’s retained economist. “The differentials in growth across areas created differentials in consumer spending. The TDn2K data clearly shows that some of the weakest areas line up with those states and metropolitan areas that are dependent on the energy sector, manufacturing, or tourism, which is hurt by the rising value of the dollar.”

The drop in same-store sales growth experienced during Q4 was largely a result of a sharp decline in same-store traffic during the quarter. Traffic growth was -2.2 percent during Q4, a 1.0 percent drop from the growth rate reported for Q3. The results for this last quarter of 2015 represent the worst traffic growth rate since Q1 2014. On a two-year basis, Q4 of 2015 posted a -2.3 percent same-store traffic growth rate when compared with the last quarter of 2013, evidence that post recession, the main challenge for chain restaurants has been holding on to their guests and the frequency by which they visit their collective restaurants.

For the fifth consecutive month, California was the best performing region during December; same-store sales were a robust 4.2 percent while achieving a small positive same-store traffic growth of 0.1 percent. This state has been among those leading the country in reduction of their unemployment rate and improvement of their personal income. On the opposite end of the spectrum is the Southwest region, which has now been the worst performing in the country for four consecutive months. Same-store sales growth in the Southwest was -4.4 percent during December while traffic growth weakened to -6.2 percent during the month. The challenges faced by the energy sector seem to be translating to declining restaurant spending in most of the Southwestern states (Oklahoma, Arkansas, Louisiana, and New Mexico).

When looking at the performance by individual market, it is obvious that the industry has been facing increased regional challenges during the fourth quarter. Out of the 193 DMAs tracked by Black Box Intelligence, 55 percent of them achieved positive same-store sales during December. On average only half of the DMAs tracked attained positive sales growth during the last three months of the year, while the average for the first nine months was a much healthier 73 percent of all DMAs with positive same-store sales growth.

The economy produced some very strong job gains during Q4 and the restaurant industry followed suit with the fifth consecutive month of year-over-year job growth at 4.0 percent or above. Job growth was exactly 4.0 percent during November according to TDn2K’s People Report. The number of people employed in the overall workforce in non-farm jobs has been growing annually at a pace of only about 2.0 percent in recent months, reflecting how much of a challenge restaurants face when having to recruit their employees. Given the current labor market environment and the increased need for restaurant employees, coupled with high turnover levels experienced by the industry, expectations are for rising wage pressures in 2016.

Restaurant hourly employee turnover increased again in November, becoming the 27th consecutive month of rising turnover levels. Restaurant companies had a short period of flat turnover for their restaurant managers in recent months, but management turnover has started to increase again as job growth rebounded in the fourth quarter. The turnover rates for both hourly and management employees are now at historically high levels and present a major obstacle for effective restaurant operations in many brands.

From a consumer standpoint, according to TDn2K’s White Box Social Intelligence based on a sample of 8.3 million online mentions, sentiment towards chain restaurants tended to again be very positive during December (as first reported in November) compared with previous months. The percentage of “Intent to Return” mentions that were positive (48 percent) had a record breaking month during December, driven by positive conversations centered on the holidays and celebrating special occasions. Intent to return was strong across all industry segments.

Service-based mentions were less positive than usual during December with one notable exception. An impressive 58 percent of all service-related mentions were positive for fine dining brands during this month. This is likely a reflection of the positive sentiment around celebrating special occasions for the holiday season. Furthermore, the Fine Dining segment was the top-performing segment based on percentage of positive mentions on all three attributes tracked for TDn2K’s Restaurant Industry Snapshot (“food”, “service,” and “intent to return”). Fine Dining was not a top-performing segment based on any of these attributes during the months of Q3, which again highlights the importance of the holiday season in consumer perceptions.

“As we close the year, we find several key dynamics impacting chain restaurant results in 2015 and creating uncertainty for 2016,” says Wallace B. Doolin, founder and chairman of TDn2K. The macro issues of low unemployment, higher vacancy rates, and slower than expected wage growth all impacted the results. Additionally, we now face major regional differences in disposable personal income driven by the energy sector decline.

The U.S. consumer has returned to big ticket purchases for cars, homes, and technology all in competition for the all important disposable income necessary for restaurant sales and traffic growth. Obviously, lower fuel prices have boosted disposable income, but we compete for every cent available. The demographic shifts from Boomers to Millennials continues to challenge brands for prioritization of resources to gain or maintain relevance. Regarding the workforce, low unemployment, slow wage growth and hiring difficulty is impacting the results we see in service ratings, labor cost and sales growth.

Finally, the 23,000-plus chain restaurants tracked in Black Box Intelligence are in a share of stomach competition for the “food away from home” dollar. The best brands are expanding. The increase in prepared foods from progressive grocery store and C-Store operators all steal share from the lower quartile pack of chain restaurants. We also see growth in independent restaurants increasing supply and diluting demand.

We begin 2016 with many questions, but know this for certain: Best in class brands, regardless of segment, age, or location, continue to win share of stomach by creating a unique strategy, hiring and retaining the best employees and deploying effective technology ahead of their competitors.

Finance, Growth, News