Regulatory Report

Industry Report

Special Report: Are Restaurant (and E&S) Sales Softening?
Eating and drinking place sales declined 0.7% on a seasonably adjusted basis in March, according to the U.S. Department of Commerce’s monthly estimates of retail and foodservice sales. The overall softening of retail sales caught Wall Street by surprise last week and hammered stocks.

This raises the question of whether overall foodservice sales are beginning to show the effects of sustained high gasoline prices, higher interest rates and small declines in consumer confidence. And furthermore, is any operator softness undercutting equipment and supplies sales?

Last year’s spike in oil and gasoline prices did affect overall restaurant traffic and sales, particularly in the second quarter of 2004. Most of the effect was on smaller and independent operators, as the big chains continued to show strong growth.

Until now, there has been little sign the latest round of high gasoline prices and the gradual rise in interest rates were having any affect on restaurant sales. The National Restaurant Association’s Restaurant Performance Index dropped in January but bounced back in February. On the other hand, the survey’s measure of current and future capital expenditure has run flat to negative.

The big chains are still showing positive same-store sales gains, according to Michele Schmal, v.p. at Rosemont, Ill.-based NPD Foodworld, which monitors the sales of nearly 60 big quick-service and midscale chains through its weekly SalesTrac study.

At the same time, most measures of consumer confidence have been falling. The University of Michigan Index of Consumer Sentiment fell to 92.6 from 94.1 in February. It stood at 95.8 in March of ’04. The Index of Consumer Expectations, meanwhile, fell to 82.8 in March this year from 84.4 in February. Last year in March, it stood at 88.8.

"Although the overall level of confidence has remained at a relatively high level," said Richard Curtin, the university’s director of Surveys of Consumers, "the details indicate a significant shift in consumer spending is underway."

Other consumer confidence measures, including that fielded by ABC News/The Washington Post have also shown declines, particularly during the last weeks of March.

Still, overall foodservice sales and sales of E&S do not appear at great risk. As Hudson Riehle, NRA’s v.p. of research and information services, said referring to higher gas prices’ effect on foodservice: "Nothing good ever comes of taking more money out of consumers’ pockets." But he noted the association anticipated some "deceleration of growth" in the ’05 forecast and "overall the health and vitality of the industry continues."

Equipment and supplies sales seem so far unaffected. Jerry Hyman, president of Tri-Mark USA, says his company’s first quarter sales were "significantly ahead of the first quarter of ’04. Contract, national account and street sales were all up. We haven’t seen any sign that weakening sales are trickling down to the operators we call on."

The president of a distributor with national reach echoes this. "We’re up quite substantially versus last year in all the major metro markets we serve and this includes our smaller family-restaurant customers."

A leading broadbased manufacturer of supplies and equipment confirms that his company has seen no sign of softening. Sales through the first quarter just ended have been consistently strong, including those in recent weeks.

Ironically, the fact that gas prices have risen so high might actually be minimizing their effect on foodservice. Steve Grover, v.p. of food safety, quality assurance and regulatory compliance at Burger King, tells Fortnightly that quick-service sales usually come from pocket change. "Now that gas prices are so high," he says, "people have to use the credit card for gas. We think this is helping us maintain our positive trends."

And some of the forces retarding consumer spending and confidence should not affect the big chain and specification/contract segments of the E&S market, at least in the short-term. Chain business remains strong and numerous players have said the spec markets are rebounding finally.

Still, in the long run, some economists and most of those in the industry we spoke with are becoming concerned that the U.S. economy could soften if oil prices remain stubbornly high and the Federal Reserve is compelled to continue to raise interest rates to stifle any inflationary effects. As usual, time will tell.

Robin Ashton
Publisher
rashton@fermag.com