What does inflation have to do with it?
Restaurants should have done well in February. The economy created 235,000 jobs, according to the Bureau of Labor Statistics. The big gain was ascribed to the weather – the warmest February in 100 years. Weather-sensitive industries, such as construction, went on a hiring binge. The exuberance should have led to activity at restaurants. Compared to Februaries when people stayed home because polar vortices marauded much of the nation, this time, the weather invited them to head out.
But no. Folks stuck in the real economy and not benefiting from the surge in stocks, or those who’re paying with their last dime for the surge in housing costs, they’re cutting back on restaurant meals.
Same-store restaurant sales in February dropped 3.7% and foot traffic dropped 5.0% from a year ago, according to TDn2K’s Restaurant Industry Snapshot.
This comes after a January report, from which emanated for the first time in a while some sort of gloomy optimism, titled with delicious irony: “Flat Sales, Welcome Change for Restaurant Industry in January.” It went like this: “While same-store sales growth was flat (zero percent) in January, it represented a welcome break from the ten consecutive months of negative sales growth experienced by the industry.”
That gloomy optimism has now too fallen by the wayside, and it was “not a turning point in declining industry performance,” the report now specified.
Over the last three months – with the gloomily optimistic January in the middle of it – same-store sales fell 2.7% and foot traffic 4.7%.
“A macro view leaves little room for optimism,” the report said, whose data is based on sales from over 26,000 restaurant units and 145 brands, representing $66 billion dollars in annual revenue. “February’s results were among the weakest in the last four years,” it said.
The weakest region was the Southwest, where same-store sales plunged 7.6% and foot-traffic 9.2%. The least weak region was California where same-store sales edged up 0.5% and traffic fell “only” 2.3%. Across the nation, sales rose in only 8 markets and fell in 187 markets. A very broad-based decline.
Despite rising inflation, with headline CPI up 2.5%, guest checks inched up only 1.2% in February from a year ago, “the lowest rate in four years.”
By contrast, over the prior six months, checks had increased on average 2.3% year-over-year. February’s below-inflation increase was a function of:
- More conservative pricing
- Customer trade downs
- And discount promotions
Note the second item, “customer trade downs” People bought cheaper menu items than before. One of the common reactions to inflation, when price increases are not met by sufficient wage increases. You still go to your favorite restaurant, but you trade down.
All segments experienced a decline in the rate of check growth last month. Casual dining and quick service were virtually flat compared with the prior year. The bar and grill sub-segment actually experienced a drop in average checks versus 2016.
For people who benefited from the surging stock market, things are not so dire. In terms of same-store sales, “fine dining” was the only segment where same-store sales rose. It includes pricey steak-house chains. According to Restaurant Business, the segment generated about $3.5 billion in sales last year, but that’s less than 5% of the full-service restaurant market. That segment grew last year and is still doing well.
The weakest segments were casual dining and family dining, where same-store sales fell 4.0%. Perhaps these folks don’t have anything to celebrate on a day when stocks surge. They just see the rising costs in their lives, while their wages aren’t keeping up, and pressures build on their disposable income:
Consumers are spending, but they are being battered by rising inflation. The rebound in energy costs may be helping that sector, but it is not doing much for households. Indeed, spending power has flatlined as wage gains are barely offsetting price increases. That is putting additional pressure on the restaurant industry.
And there might have been another cause for the February debacle. The IRS, struggling with a massive problem of identity theft and fraud, has delayed sending out about 40 million tax refunds to filers that had claimed either the “Earned Income Tax Credit” or the “Additional Child Tax Credit.” These credits go mostly to people who spend every dime they earn. Hence, those tax refunds might have funded some restaurant meals. And so they might fund them over the next few weeks – that’s the hope.
Or the refunds might be spent on healthcare and other things whose prices have jumped, leaving restaurants high and dry once again.
Inflation is now popping up as a topic everywhere where consumers buy things – not inflation as something that is good and desirable, but as something that bites: inflation in nondiscretionary goods and services that forces consumers to trim down their discretionary spending. Restaurants are among the last in line and get what is left over.
The report warns on inflation from another direction: “The higher inflation has given the green light to the Fed to raise rates, and if Trump spending and tax policies are implemented, rates are likely to rise faster than most currently expect.”
Rising interest expenses will eat up more of the incomes of our debt-slave consumers who are already struggling with higher prices, and they will have even less left over for discretionary items, such as restaurant meals.
Where has all the optimism gone? Read… Atlanta Fed GDPNow Forecast Spirals Down in Amazing Manner