Are We Entering A “Restaurant Recession?”

Paul Westra, a well-known restaurant market analyst for Chicago-based Stifel, set off quite a kerfuffle last week.  He downgraded 11 leading restaurant company stocks, noting a broad-based slowing of same-store sales since the first of the year, according to a survey his firm conducts. He said the trend “reflects the start of a U.S. restaurant recession.” He even suggested it “may also represent a harbinger to a U.S. recession in early 2017.”

His views were widely reported not only in the foodservice media, but throughout the general business press.

He’s right about the same-store sales trend, at least among leading publicly traded chains. In spite of the continuation of historically low gasoline prices and decent jobs growth, many chains saw their same-store sales peak the first quarter of 2015, according to data from Technomic Inc., which tracks data from 75 or so chains. McDonald’s improved results helped prop up limited-service same-store sales numbers in the second and third quarters last year. Full-service chains saw a slight bump up in the first quarter this year, the last quarter for which Technomic has complete results.

The MillerPulse survey of chains’ same-store sales and traffic shows a positive peak in February this year and a slow decline through June. Traffic has been negative since February. And the NRA’s Restaurant Performance Index tracking data, released for June last week, show a second consecutive month of same-store sales and traffic in contraction territory.

So is Westra right? I believe the foodservice market is indeed at an inflection point and has been most of this year. As I wrote a month ago (see FER Fortnightly July 6), the volatile ups and downs of indicators such as NRA’s RPI usually signal change. What’s confusing, as NRN’s Jonathan Maze noted in reporting Westra’s comments last week in his Blog, is that the economic fundamentals that drive commercial foodservice remain so positive. Gas prices keep sinking, and consumer confidence and consumers’ personal financial situations are better than they’ve been in more than a decade. So why are people eating out less, at least at leading chains?

One thing to keep in mind is that chains are not the entire foodservice world. Yes, they are dominant; yes, they are usually a leading indicator. We haven’t seen second-quarter traffic numbers from The NPD Group. Traffic was flat overall for restaurants in the first quarter as a 1% gain for limited service was offset by declines in all three full-service segments. NPD’s CREST numbers, based on consumer panels rather than store sales reports, are more broad-based. I suspect the reported depth of the declines in sales and traffic are a bit overblown. When applied to the entire restaurant universe. We’ll see.

I think it’s likely other factors are at work in the chain same-store sales declines. Chains have continued to build new units while per capita restaurant traffic continues to slip, according to NPD. They may simply have overbuilt demand and are cannibalizing visits. There is also wide concern that consumers are shifting food occasions to retail outlets. Grocery stores have cut prices, reflecting the two-year drop in wholesale food prices, while restaurants have continued to raise menu prices to try to deal with a perceived increase in labor costs. The price differential between food-at-home and food-away-from home has become quite pronounced. And the gas price declines have been going on for so long, consumers have now cooked the savings into their budgets. Some restaurant CEOs say things were so good in late 2014 and early 2015, it’s making for hard comparisons.

At the same time, one ignores signals like this at one’s peril. This foodservice market expansion, while very moderate like that of the general economy, is very long in the tooth. I think we are indeed experiencing a slowing of foodservice market growth that will soon slow foodservice capital spending, too. Just how much is one question, timing is another. Changes in operator sales trends usually take six to 18 months to work their way into capital spending.

For now, I don’t think we’re headed for actual declines in the E&S market in the foreseeable future.