Foodservice Equipment Reports

SPECIAL REPORT: Operators Look To Regain Footing

You know it’s a tough environment when reports of sustained soft sales and slightly improved operator optimism are the best headlines on the page. But that’s what we were looking at as the last months of 2011 came into view.

The National Restaurant Association’s Restaurant Performance Index for October told part of the story. October marked the fifth consecutive month of net positive same-store sales, though growth remained sluggish. Operators reported a net positive outlook for the economy for the first time in four months, and their outlook for capital spending rose for the third consecutive month, with 45% saying they planned to make a capital expenditure over the next six months.

Positive signs, and it took quite some time to get here. Since ’07, operator real sales have declined more than 10%, which translates into losses of nearly $60 billion after menu inflation. And several months during mid ’11 brought troubling declines in confidence, particularly after the debt-ceiling crisis. Now we’re looking at estimated real gains of just 0.1% for ’11 and 0.3% for this year, according to Technomic, the Chicago firm tasked with tracking this and other industry data.

“The restaurant operating environment this year will basically be a continuation of last year’s conditions, so we can expect to see continued moderate sales growth,” says Hudson Riehle, senior v.p. of research for the National Restaurant Association. “While we won’t see a rebound to prosperity in the immediate future, the longer term outlook is heading in the right direction.”

The Consumer Conundrum

Task number one may be to draw Americans back into restaurants. Rattled by political drama, a roiling stock market and thin wallets, consumers pulled back across all segments. According to The NPD Group’s CREST research, ’11 restaurant traffic fell to its lowest level since ’05, with midscale and casual dining hit the hardest.

Of course the stubborn unemployment rate was partly to blame for reduced traffic. With the national rate of unemployment hovering at or above 9% for much of ’11, millions of Americans simply didn’t have the disposable income to eat out.

Among those with jobs, restaurant visits may have been curbed by a steady stream of worrisome economic and political news. But there are signs that consumers may be tuning out the worst of it. On Nov. 29, the Conference Board said its Consumer Confidence Index had climbed 15 points in November to land at 56. That’s a boost to be sure, but the index still sits far below the level of 90 that indicates solidity in the economy.

“The good news is that there’s substantial pent-up demand for restaurant services, with two out of five Americans saying they are not using restaurants as often as they would like” on a daily basis, Riehle says. “Once national employment and disposable income pick up, that demand is likely to translate into strong restaurant sales growth.”

Managing Rising Costs, Closures

Meanwhile, operators have been juggling their own challenges. The run-up in wholesale food prices has created price pressures and cut into margins, and many ops are raising menu prices without knowing how that will impact sales in the long run.

And the recession’s aftereffects continue to cause unit closures. NPD’s ReCount census at the year ended September ’10 showed a net loss of more than 5,200 units, and by spring ’11 the closures had risen to 9,450. But note that nearly all of the closed units during this period were independent restaurants. Unit consolidation continues for the larger chains, especially those in quick service.

Where Do We Go From Here?

The largest chains continue to focus on two growth strategies: domestic renovations to stimulate sales, and overseas expansion. Some big chains are now tearing down and rebuilding as many units as they’re building new. Many noncommercial operations are renovating as well, particularly in corrections, healthcare and school foodservice. Ultimately the goal is to boost same-store sales with more attractive and upgraded environments.

On the international side, more than 150 of the Top 500 chains now have international units, according to Technomic, and there’s been a surge in non-U.S. casual-dining expansion. Chains also are focused on Eastern Europe and the Middle East in addition to Brazil, China and Turkey.

One key issue looms large on operator radar screens: the ’10 healthcare law, which is scheduled to go into full effect in ’14. Several challenges to the law have sprung up, and the U.S. Supreme Court has agreed to hear one of those challenges beginning in March. For now operators will have to live with the uncertainty of how the legislation might affect their future bottom lines.

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