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Restaurant sales improve, but signs of weakness abound

Investment in the industry is up, along with same-store sales, but bankruptcies and store closures are more common. RB’s The Bottom Line tries to make sense of it.
Photograph courtesy of Chipotle Mexican Grill

the bottom line

It can be difficult to sort out where the restaurant industry stands so far in 2019. On one hand, restaurant industry sales appear to be picking up, and investment in the business has grown. On the other, hiring has slowed, and bankruptcies continue to cause problems.

Broad sales indexes suggest the industry is fine. According to the National Restaurant Association, 57% of operators say their same-store sales increased in June, though only 39% said traffic increased.

Restaurant sales are up 4.1% so far this year, according to federal retail sales data. Average monthly sales have improved considerably this year.

Strong reports from large restaurant chains have backed up that data. McDonald’s, Starbucks, Chipotle Mexican Grill and Taco Bell, among others, reported strong same-store sales in the second quarter.

And private-equity investors have apparently jumped back into the business, paying high prices for companies such Cooper's Hawk Winery & Restaurants and making big bets on chains such as Jack’s and Whataburger.

Public investors have all jumped on board: McDonald’s, Chipotle, Starbucks, Yum Brands and other stocks are all at or near record highs.

At the same time, however, some signs suggest that the industry may be on some weak footing—or at least that a stronger sales year has not been spread evenly.

Same-store sales at some casual-dining chains, such as Applebee’s and Chili’s Grill & Bar, as well as upscale brands such as Ruth’s Chris Steak House, slowed or declined. And the casual-dining-heavy Black Box Intelligence index has weakened in recent months, while traffic has been downright awful.

Bankruptcy filings have been fairly common this year. Kona Grill, Perkins & Marie Callender’s and Restaurants Unlimited have all sought debt protection in recent months, among others. Other companies, including Checkers & Rally’s, also have debt challenges. The burger chain Steak ‘n Shake has closed more than 100 locations amid its own profitability challenges. Boston Market has closed locations as it tries to avoid a bankruptcy filing of its own.

Large-scale franchisees are not immune. A large franchisee of Perkins filed for debt protection, and large Pizza Hut and Wendy’s operator NPC International—one of the largest restaurant operators of any sort in the U.S.—is itself in danger of a technical breach of its credit agreement.

The restaurant industry’s troubles have apparently caught the attention of bankers that have been flooding the business with debt in recent years.

Much of the sales more recently have come through price increases and not consumers eating out more often. Menu prices in July rose 3.2%. Given the 4.1% increase in restaurant sales so far this year, only 0.9% is left for traffic increases, menu mix and new units.

Consumers are clearly willing to pay these prices, but it remains to be seen how long they will do so, especially if the economy weakens.

Restaurant job growth is also slowing. The industry has added an average of 11,000 jobs a month since March—still growing, but less than half the rate of the previous eight months. That’s good news for an industry that has found it increasingly difficult to find workers and has had to increase pay rates and benefits to fill needed jobs. That could provide some operational relief.

But it also suggests that the industry’s growth has slowed.

What’s more, there are growing concerns about a potential recession, brought on by a combination of trade wars and inevitability.

All that said, the restaurant industry is saturated with competitors—probably oversaturated, really. Consumers are not increasing their dining occasions at the rate that restaurants have added units, so growth at one company means a decline at another.

In addition, technology and consumer trends mean the industry’s relationship with its diners is changing, and that evolution tends to pick winners and losers.

Add it all up, and it’s a complicated time in the restaurant business, particularly for operators.

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