TDn2K | Oct 10, 2019
The restaurant industry’s sales completed the gradual slowdown we’ve been witnessing since the beginning of the year and slipped into actual year-over-year contraction. For the first time in two years, growth was negative during the third quarter of 2019 with same-store sales growth of -0.4% (the first quarter of 2018 at -0.05% sales growth can be considered essentially flat). This update comes from Black Box Intelligence data from TDn2K, based on weekly sales from over 31,000 locations representing 170+ brands and $72 billion in annual sales.
There was a bit of good news amid the otherwise disappointing quarter. The trend of two consecutive months with declining year-over-year sales reversed, with small positive same-store sales growth in September. Even more encouraging for the industry was the fact that September’s positive growth, albeit small at 0.1%, was achieved even though the industry was lapping over a month with relatively strong sales last year.
“This is something we were expecting given the underlying relentless erosion of guest counts and the fact that the industry was headed toward tougher previous-year sales comparisons as we went into the second half of 2019,” said Victor Fernandez, vice president of insights and knowledge for TDn2K.
“However, if we stand back and look at the industry from a longer-term perspective, things have not changed much,” he continued. “Same-store sales growth calculated over two years has remained positive the last four quarters. At 0.7% for the third quarter of 2019, it doesn’t show much of a decline from the average 0.8% recorded for the first three quarters of the year.”
Traffic plummets, causing sales stumble
Despite average guest checks growing at the same pace year over year for the last three quarters, same-store sales growth has been declining during each of those quarters. This is attributed to worsening same-store traffic growth. Same-store traffic growth in the third quarter was -3.5%, the worst result in the last two years and the only time guest counts declined by more than 3.0% during the same period.
Same-store traffic growth during September was -3.0%, which despite being a weak result, did represent an 0.8 percentage point improvement over the average results posted by the previous two months, providing further argument for September actually being a small recovery for a beleaguered restaurant industry.
Restaurant sales worsened by hurricane effect
As predicted, restaurant sales suffered the effect of the massive storms hitting the southeastern part of the country during September. The hardest hit region was Florida, which experienced -3.1% same-store sales growth during September. Sales growth declined by 1.6% in that region compared with August, while every other region of the country experienced an improvement during September.
September’s same-store traffic growth in Florida was an abysmal -5.2%, which also represented a 1.6 percentage point drop from the previous month’s results.
Other regions affected by evacuations may have benefited from the effect of severe weather, as people were displaced and forced to purchase more meals away from home within the same region but at more inland locations. The Southeast was the best-performing region based on same-store sales growth during September as well as one of the top regions based on year-over-year sales growth improvement compared with August.
Fine dining still winning in sales growth
Fine dining continues its dominance as the best-performing segment in the industry based on same-store sales growth. This segment had the highest growth during the third quarter and also is the top performer year to date. Furthermore, if the trend holds through the end of the year it would be the third consecutive year of positive growth for fine dining.
The only other industry segment that was able to achieve positive same-store sales growth during the third quarter was family dining. This segment has been experiencing a resurgence lately, posting five consecutive quarters of positive growth, currently the longest streak of positive same-store sales growth by any restaurant segment.
However, it is important to note that the traffic loss problem is widespread throughout the industry. Not even these top-performing segments can escape from eroding guest counts. All segments experienced negative same-store sales growth during the third quarter of 2019.
Concerns for restaurant spending
According to Joel Naroff, president of Naroff Economic Advisors and TDn2K economist, the outlook for the economy remains uncertain and dependent upon tariff actions. “The negative effects of the trade war are spreading across the economy, largely driven by business uncertainty,” he said. “Manufacturing has already moved into a downturn. Job growth has slowed, due to businesses willing to leave job openings unfilled as well as the lowest unemployment rate in nearly 50 years limiting the supply of qualified workers. The result is that household incomes are growing more slowly, making it difficult for consumption to expand strongly. It looks like growth in the third quarter, which was just completed, will be in the 2.0% range.”
He continued, “Unless there is a breakthrough in the trade negotiations so that the threatened additional tariffs do not come into play, 2.0% growth might be the best we could see for quite a while. That is a warning that discretionary consumer spending, of which restaurants are a component, is likely to continue being soft going forward.”
Small relief for retention, but staffing still concerning
Arguably the two biggest headwinds faced by restaurants today are declining traffic and keeping restaurants staffed with enough qualified employees. TDn2K research shows there may be a lot of connection between the two. A recent study of restaurant brands achieving consistent positive traffic growth revealed these companies get much better guest sentiment scores based on their service, according to White Box Social Intelligence. They are also better at retaining their employees, particularly at the management level. Data indicates that those brands that get rewarded by incremental guest visits are perceived differently by their guests when it comes to service, and having a stable and engaged workforce is a great starting point.
Unfortunately for most restaurants, that is not the case. Turnover for hourly, non-management employees increased again during August and remains at historically high levels, according to People Report. A large percentage of restaurants remain understaffed, especially in back-of-house positions, which have emerged as the largest pain point regarding staffing in restaurants.
There is a little bit of good news from the latest workforce results: Restaurant management turnover decreased slightly during the latest month, an indication that increases may have plateaued. However, turnover for managers also remains at historically high levels and continues to be a concern, particularly because of the influence of management on hourly retention and engagement.
Same-store sales growth is expected to continue to be sluggish during the fourth quarter given the softening economic conditions and the fact that the fourth quarter of 2018 was the strongest in terms of same-store sales with 1.4% growth. Slightly negative sales, as seen during the third quarter, are likely to occur again in the last quarter of 2019.
Staffing woes are expected to continue. Historically high turnover for both hourly and management employees continues to be the norm and a large percentage of restaurants will continue to be understaffed as a result.
Data has shown that those companies investing in employee training, career development (particularly for their managers) and crafting a strong sense of purpose throughout their workforce will be those positioned to fare better in retaining and engaging their workforce. They will also provide a superior service experience to their guests, which ultimately is what wins the restaurant market share battle.