The downturn in restaurant sales continued during August as the industry faced its third consecutive month of negative same-store sales growth and the sixth month since the beginning of the year with declining year-over-year sales. Despite the negative 0.6 percent same-store sales growth posted during August, there was some good news in the fact that this result represented an improvement of 0.8 percentage points from the July result and is the second best month since April based on sales growth. This insight comes from data reported by TDn2K’s Black Box Intelligence through The Restaurant Industry Snapshot, based on weekly sales from nearly 25,000 restaurant units, 130-plus brands, representing $64 billion dollars in annual revenue.
Same-store traffic was down 2.7 percent during August, a slight improvement from negative 3.9 percent in July. Furthermore, that increase in traffic growth is the biggest move recorded in consecutive months since February of this year. Average guest checks increased by 2.3 percent in August, a 0.5 percentage point decrease from July and the lowest year-over-year change recorded since March of this year.
“The data from August again shows the relationship between average guest checks, sales and traffic, which we’ve studied in recent quarters,” says Victor Fernandez, executive director of insights and knowledge for TDn2K. “Given the current environment, characterized by a continued decline in traffic, drops in average guest check growth have been associated with a boost in traffic, but the impact on incremental sales is usually underwhelming.”
During August, those industry segments that experienced a drop in their average guest check growth rate from July to August (Fast Casual, Family Dining, and Casual Dining) all improved their traffic growth by more than 1 percentage points over their July results. Meanwhile, segments that experienced an increase in their average guest check growth from July to August posted an improvement in traffic growth of less than 1 percentage points over their July rate. The only exception was Fine Dining, which posted a robust improvement in traffic while slightly accelerating their growth in guest checks. However, the segments that saw the biggest improvements in their sales growth rates during the month were those that also experienced an acceleration in their average guest check growth.
Based on same-store sales, Quick Service was the best performing segment during August for the seventh consecutive month. Upscale Casual and Family Dining were the only other segments that achieved positive (albeit very small) positive sales growth. Fine Dining, Fast Casual, and Casual Dining all experienced negative same-store sales growth during August.
From a regional perspective, California was again the best performing region of the country based on same-store sales growth. It has been the top performing region during five of the last six months. The Southwest has been the worst performing region during the last six consecutive months. The improvement in sales was also perceived at the local level, with 74 (or 38 percent) of the 195 DMAs tracked posting positive same-store sales during August. In comparison, only 46 of those DMAs reported positive sales growth during the previous two months.
“The U.S. economy continues to confound,” says Joel Naroff, president of Naroff economic advisors and TDn2K economist. “Yes, growth is still okay, but each time it looks like it is starting to accelerate, something pulls it back. That appears to have been the case in August. Job growth accelerated sharply in June and July and while the pace was unsustainable, it did point to improving conditions. Payroll gains did slow in August, but that was totally expected. However, what was not anticipated was the apparent sharp August economic deceleration indicated by the closely-followed Institute for Supply Management surveys and a greater than expected moderation in vehicle demand. So, where are we? It still looks like third quarter GDP growth will be at least 3 percent. But the sustainability of that rate of expansion is not certain. Thus, job and income gains should be more moderate and that implies that going forward, consumer spending should be okay, but not great.”
While the industry encounters challenges to its topline results as sales slow down, the bottom line is also being challenged in the form of rising labor costs. According to TDn2K’s People Report annual Corporate Compensation and Benefits Survey, labor costs for restaurant employees as a percentage of restaurant chain revenues increased from an average 29 percent in 2010 to 32 percent on average for 2016. Labor costs in these estimates include salaries, bonuses, benefits, and labor related taxes for restaurant hourly employees and managers.
Significant costs continue to be incurred through having to hire new employees to fill the vacancies from new jobs being created by the industry but mainly due to the rising turnover levels. The number of chain restaurant jobs grew by 1.8 percent year-over-year during July. Although a significant drop from the over 3.0 percent growth rates reported over the last year, the latest growth still represents a large number of people that have to be recruited, onboarded and trained.
Furthermore, turnover continues rising and is a major concern for restaurant operators. Restaurant management turnover, which remains at levels higher than those tracked before the recession is especially troublesome, given its impact on hourly employee retention and its correlation to restaurant sales and traffic. With the latest results reported, restaurant hourly employee turnover has now increased for almost three consecutive years.
As a result of the rising turnover rates and new jobs, the number of new hires during the second quarter of 2016 represented between 30 and 33 percent of total workforce for the median company operating in Quick Service, Fast Casual, Family Dining, and Casual Dining.
Based on performance this year, it’s hard to foresee the sales environment for restaurants benefiting from modest improvements in general economic activity or labor pressures easing for the industry. In addition, the impact from the election cycle is difficult to assess. One factor in the industry’s favor is the relatively weak sales comparisons during the second half of 2015, particularly during the fourth quarter. Average same-store sales growth during the first six months of 2015 was 3 percent, while the industry’s sales growth slowed down to just 1.1 percent by the second half of the year.
Easier comparisons notwithstanding, at the end of August, quarter-to-date sales growth for Q3 is at negative 1 percent. If it continues at this pace it would be the worst quarter in over five years. Until brands find ways to reverse continually declining traffic counts, sales (and profit) expectations will be remain modest.
TDn2K (Transforming Data into Knowledge) is the parent company of People Report, Black Box Intelligence, and White Box Social Intelligence. People Report provides service-sector human capital and workforce analytics for its members on a monthly basis. Black Box Intelligence provides weekly financial and market level data for the restaurant industry. White Box Social Intelligence delivers consumer insights and reveals online brand health. Together they report on over 36,000 restaurant units, over 1.8 million employees and $64 billion in sales. They are also the producers of two leading restaurant industry conferences: Summer Brand Camp and the Global Best Practices Conference each held annually in Dallas, Texas.