This thermometer for discretionary spending is the first to react when consumers hit their limits.
Foot traffic at chain restaurants in March dropped 3.4% from a year ago. Menu prices couldn’t be increased enough to make up for it, and same-store sales fell 1.1%. The least bad region was the Western US, where sales inched up 1.2% year-over-year and traffic fell only 1.7%, according to TDn2K’s Restaurant Industry Snapshot. The worst was the NY-NJ Region, where sales plunged 4.6% and foot traffic 6.3%.
This comes after a dismal February, when foot traffic had dropped 5% year-over-year, and same-store sales 3.7%. The February debacle was blamed on $65 billion in delayed tax refunds from the IRS, as mandated by Congress, to allow the IRS to get its arms around a large-scale identity-theft problem. But by mid-February, the floodgates opened and record amounts of tax refunds started pouring out. By the end of February, the IRS was pretty much caught up. So March, with all this money sloshing around in bank accounts, was expected to be better. But no.
TDn2K’s Restaurant Industry Snapshot:
March’s results were disappointing for an industry desperately trying to reverse performance trends; sales have been negative in 11 out of the last 12 months.
This left first quarter foot traffic down 3.6% and same-store sales down 1.6% – with both food and alcohol sales down – the fifth quarter in a row of year-over-year sales declines. According to the report: “The last time the industry experienced a similar period was in 2009 and the first half of 2010.”
In Q4 2016 – which also should have been a stronger quarter, given the now dashed hopes of the economy picking up some steam – sales had already dropped 2.4%, “highlighting the difficult operating environment currently facing many operators.”
Average restaurant checks inched up in Q1 by 1.9%, down from the 2016 average increase of 2.3%. The report blames more promotions to bring in customers and “conservative menu price increases in response to continual declines in traffic.”
In the group, the best performers in the quarter where upscale casual, fine dining, and quick service. The weakest segments were family dining and fast casual. For them, it’s tough out there.
The data underlying TDn2K’s Restaurant Industry Snapshot is based on weekly sales from over 26,000 restaurant units and over 145 brands, with $66 billion in annual revenue. The crummy March performance was doubly disappointing:
- The industry had hoped that the flood of IRS tax refunds would goose March sales, but that didn’t happen.
- Easter holiday “represents a potential loss of sales” for the largest segments of the industry – quick service and casual dining. The holiday fell into March last year but into April this year. So this should have helped in March, but it didn’t.
It’s not totally surprising, given the decline in traffic and sales, that year-over-year job “growth” at chain restaurants was a negative -2.3%, with about 60% of the restaurants in the data reporting lower employee counts than a year ago. “This may not be good news for service scores and guest satisfaction,” the report observes dryly.
As always, there are winners and losers. According to Wallace Doolin, Chairman and founder of TDn2K:
“Our research does show there are real winners with impressive results. These ‘Top Box’ performers are across the segments, size and ownership of the brands. Brands investing in the customer experience and the employee experience with technology and staff development are stealing share to grow their businesses.”
Everyone who goes to restaurants has figured this out. Lousy service, crummy food, a mediocre experience, and menu prices that are rising too fast are all excellent methods of driving customers away. But that would only shift traffic from losers to winners.
The persistent sales declines – despite price increases – in the overall chain restaurant industry over the past five quarters must have other causes. This could be in form of competition from other sectors not represented in these numbers, such as taco trucks and independent restaurants, cafés, and delis.
Or it could be a reluctance or inability to eat out when money is getting tighter due to cost-of-living increases in other areas, such as rent or healthcare, as wages for large parts of the population are stuck. But then why didn’t these folks splurge on a hamburger in March when the tax-refund money was beckoning? Or was that money used to catch up on past-due car payments and rents?
Restaurant spending is a thermometer for discretionary spending, which varies with how well consumers are doing, and it’s the first to react. When consumers hit their limits, the first things they cut are discretionary items, such as eating out. So this is another warning sign percolating up from beneath the surface.
And there may well be more beneath the surface. Read… Great Debt Unwind: Consumer Bankruptcies Jump, First since 2010. Commercial Bankruptcies Spike