Falling Guests Counts is a Trend Restaurants Can't Escape
If you examine the past decade, the reality hasn’t changed all that much for restaurants. Guest counts have declined as brands flood units into a saturated system. Per the Bureau of Labor Statistics, the number of restaurants lifted nearly 16 percent in the last 10 years. And according to the Wall Street Journal, restaurants are now growing at twice the rate of the population.
If that balance sounds familiar, just look at retail. From 1970–2015, malls appreciated the same kind of boom. That’s a much larger sample size, naturally, but it led to a pretty similar result: Prime locations survived while some outlets took a traffic hit they couldn’t survive. There’s a lot more to this, mostly in regards to how ecommerce disrupted the dynamic, yet it’s worth exploring one other similarity. Big-box retailers thriving today aren’t doing so solely on the back of foot traffic anymore. The same is true of restaurants.
TDn2K’s latest Restaurant Industry Snapshot showed a summer slowdown in June, with same-store sales falling 0.1 percent.
The company’s vice president of insight and knowledge, Victory Fernandez, put June’s results against a larger backdrop. The positive sales trend over the last two years, he said, does not signal a sudden change in dine-in behavior. “Restaurants have suffered from declining guest counts, but the relatively stronger economy of the last two years has enabled rapidly accelerating guest checks to lift the industry into positive same-store sales growth,” he said in a statement. “That pattern continues today, especially when analyzing the results from a longer time perspective.”
This trend has matured for several quarters now: Guests spending more, restaurants charging more, and negative traffic getting partially offset by an industrywide rise in check.
But returning to the retail story, restaurants are finding growth in a disruptive element rather than sticking to past models. Those brands positing positive results, TDn2K said, tend to have higher to-go sales than the rest of the industry. “The trend of consumers shifting preferences toward off-premises dining does not appear to be going away,” the company said. “Restaurants looking to grow sales can find ways to strength to-go offerings to hold on to guests.”
Fernandez added restaurants would struggle to achieve same-store sales growth as long as they drop guest counts. “ … and we will likely continue to see anemic growth rates with 1 percent as a best-case scenario for sales,” he said.
“Given the existing oversupply in the number of restaurant locations and the fact that, although growing at a slower pace than in recent years, chain restaurants continue adding to their net number of units, falling guest counts on a same-store basis will likely remain the norm in the near-term.”
The notion flat is the new normal—it might not be so far off the mark. Where we’re headed now, as June’s sales show, is muted performance measured against strong comps. For many brands, igniting digital business and off-premises last year was akin to bouncing off the bottom. Some chains, especially in the casual-dining sector, were working off mid-single digit declines as they fell behind quick-serves, C-stores, grocers, and other convenience-driven operators. Adding those to-go and off-premises elements into the picture, as well as tech changes like digital ordering and loyalty, bumped same-store sales back into the green. But now brands are lapping those transformation efforts.
It doesn’t necessarily mean restaurants are suddenly sagging backward. It’s just a new normal, as Fernandez noted. If guest traffic continues to fall, brands will need to push top-line sales through additional pathways. One reason being that economy trend. How long can consumer confidence support higher checks? And is there a ceiling?
Joel Naroff, president of Naroff Economic Advisors and a TDn2K economist, said the economy is expanding moderately, but the inconsistencies in the data likely point to further easing in growth.
“Job gains have bounced around but are slowing. The same is happening with vehicle sales. There has been limited improvement in housing sales and business investment remains tepid. The uncertainty over trade overhangs the economy,” he said. “While a ‘cease fire’ between the U.S. and China has been called, there are few who expect a major breakthrough to occur anytime soon. Thus, it is likely that the days of 3 percent or more growth are behind us.”
“That said, now the longest expansion on record should be sustained through the remainder of the year, but at a pace closer to trend, approximately 2.25 percent,” he added. “The implication is that consumer incomes, which are still not growing rapidly, will continue to lag. For the restaurant industry, that means demand should also expand somewhat modestly.”
In the second quarter of 2019, the trend of consumers shifting more of their restaurant spending toward to-go offerings and away from dine-in continued, TDn2K’s data showed. It’s been even more emphatic recently. The last three quarters have seen the largest gap between to-go sales growth and dine-in sales. To-go has posted strong same-store sales growth. Dine-in has declined for years.
“It is to-go sales that are lifting overall same-store sales into positive territory,” Fernandez said. “And those brands that are posting the best sales growth results tend to be those that are achieving much higher to-go sales than the industry overall.”
Where does this take the industry? In the near-term, it’s probably much of the same. Declining traffic in comparable stores will be offset by rapid guest check growth. Restaurants will pass rising costs into menu prices and to consumers willing to spend more given the relatively strong consumer sentiment. The result: small positive same-store sales growth.
Comps growth for the second quarter of 2019 was 0.2 percent, per TDn2K. That represents a 0.7 percentage point drop from the growth rate reported for the first quarter. The industry’s sales growth has decelerated since the beginning of the year. Average same-store sales growth for the last two quarters of 2018 was 1.3 percent. The average for the first two quarters of 2019 is just 0.5 percent.
While that looks troublesome, Fernandez said, it doesn’t indicate much change for the industry. Restaurant same-store sales have been positive for the last seven quarters, with the exception of Q1 2018 at negative 0.1 percent). As noted earlier, the slowdown seems to be largely a result of the industry lapping over tougher numbers a year ago. When compared with sales two years ago, comps have been positive for the last three quarters.
Essentially, restaurants have progressed past the initial, positive shockwave of off-premises.
The first two quarters of the year posted exactly the same growth rate of 0.8 percent. When comparing sales over the two-year period, the slowdown in growth during the first half of 2019 disappears. Two-year same-store sales growth averaged 0.1 percent during the second half of 2019—the average for the first half of 2019 actually increased to 0.8 percent.
By area, seven of the 11 regions tracked by TDn2K posted positive same-store sales growth in June. Eight did so in May. Florida, the Mid-Atlantic, New York-New Jersey, and Texas reported negative runs last month. Only 55 percent of markets, though, recorded positive gains compared to 79 percent in May. Regionally, New England was the strongest with 1.12 percent comps growth and negative 2.29 percent traffic. Texas was the weakest at negative 1.57 percent sales and red traffic of 4.83 percent
One other constant is labor. Since the end of last year, the industry has added jobs at a pace above 2 percent, year-over-year, every month. This ratcheted up the pressure on restaurant staffing. Job growth was 2.2 percent in May.
According to a recent study by TDn2K’s People Report, almost one out of every five restaurant companies said they are continuously understaffed for their general manager position. Given the large effect management turnover has on hourly retention and engagement, it’s not surprising to find hourly turnover rates skyrocketing, TDn2K said.
“These top performing brands are creating opportunities for personal and career development for their employees, offering employee recognition that is mindful of the employees themselves and their personal preferences, offering opportunities for enhanced work-life balance and working on creating a strong sense of purpose their workforce can align with and thrive,” the company said.