Restaurants Struggle to End Long Slump

Comparable sales and visits decline again

Author: Andria Cheng

August 11, 2017

US consumers can't seem to work up a growing appetite for restaurants.

Restaurant same-store sales fell 2.8% in July, a “sharp” decline of 1.8 percentage points from June, according to data released Friday from TDn2K. Its Restaurant Industry Snapshot tracks weekly sales from more than 28,500 US restaurants totaling $68 billion plus in annual sales. 

July's downward trend means that the sector hasn’t seen one month of positive same-store sales since February 2016. Meanwhile, comparable store traffic, or customer visits, declined 4.7% last month, worse than the 3% drop in June and continuing a streak of negative traffic pattern seen also since February 2016.

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The downward trend really began to take hold in early 2015. July's same-store sales were 4.2% below those of July 2015. Comparable traffic plunged 8.7% over the same two-year period. TDn2K said it had originally expected the tide would “turn a bit” because the industry was already comparing against weak results in 2016.

There are some broad economic reasons that restaurants have struggled to turn around. Most importantly, slow wage growth has held back discretionary consumer spending. But the industry downturn also reflects shifting consumer habits. In particular, consumers have been showing a preference for convenience, which translates into rising sales for prepared foods at supermarkets and other stores.    

Meanwhile, grocery stores are amping up their offerings of ready-to-cook meal kits, another option that could lead consumers away from restaurants. Kroger CFO Michael Schlotman, in a recent earning call, said the quality of the company's new meal kits is essentially “the same as going to a restaurant and getting the meal... but people like to prepare something at home and they find it easy.”

And that’s not even mentioning the mushrooming of online meal-kit providers like Blue Apron that are also eating into restaurant sales. 

Restaurants face “competition from more prepared meals from grocery stores, meal kits (delivery companies) and even from convenience stores and food trucks,” said Victor Fernandez, executive director of insights and knowledge at TDn2K, in an interview.

On top of that, there’s an oversupply of chain restaurants, he said, adding that the number of restaurants per person keeps rising. “There are too many options out there,” he said. For instance, he said the fast casual segment (such as  Chipotle) alone saw a 9% unit growth in 2016.

As a result of these various factors, restaurants are seeing declining lunch and dinner sales. Casual/family dining, fast-casual and quick service restaurants are among lagging performers, Fernandez said.

There are bright spots, he said. For one thing, consumers want “convenience, speed, to-go and delivery,” which have driven higher delivery, take-out and drive-through sales at restaurants.

Fine dining, or over $50 per check per person, and upscale casual dining, between $25 and $50 per check per person, are also bright spots, he said. “Those restaurants aren’t competing with the food truck and convenience stores or grocery stores,” he said. “You are looking for experience at that point."

But the segments in the middle are being squeezed. "They aren’t offering speed, value or experience," Fernandez said.

These trends can be seen playing out in recent earnings reports. DineEquity on Thursday reported a 2.1% US same-store sales drop at IHOP and a 7% decline at its Applebee’s chain for the first six months of the year. The company cut its full-year sales outlook for both chains and increased the number of both IHOP and Applebee’s stores it plans to close this year. At Applebee’s, the number of closings is now up to 135, more than double the previous plan.

DineEquity Chairman and interim CEO Richard Dahl said the company is rolling out initiatives including online ordering, delivery tests and a mobile app to “address the convenience needs of” customers at IHOP. “We believe these will create enhanced revenue channels," he said.

To lure customers and to keep up with the declining grocery prices, TDn2K said restaurants have also increased bundled meal and other promotions. That led to the slow growth in average spending per check, reversing the trend in 2015 and 2016 when restaurants raised prices to offset increased labor costs, it said.

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To be sure, while TDn2K’s data pointed to “softness” in the quick service segment, McDonald’s (whose sales TDn2K doesn’t track) appears to be bucking the trends.  The fast food giant, with such offers as $2 blended coffee or smoothie drinks, recently reported a 3.9% increase in Q2 same-store sales. 

“It’s a market share fight,” McDonald’s CEO Steve Easterbrook said at the time.