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Restaurants are in a slow-growth era

Sales recovery this year has been tepid, and delivery hasn't provided the boost many companies had hoped for, says RB’s The Bottom Line.
Photograph courtesy of Chipotle Mexican Grill

the bottom line

It would be easy to say that the restaurant industry is recovering this year. It certainly is, if you concentrate on a handful of chains, such as Chipotle, Wingstop and Popeyes, that have generated double-digit same-store sales through either digital strategies or by getting consumers excited about new products.

And yet the fuller picture is that of a slow overall recovery from the “restaurant recession” years of 2016 and 2017. If anything, the industry has hit a slow-growth patch, and sales-building efforts such as delivery aren’t providing the boost many executives are hoping for.

So far this year, median same-store sales growth for publicly traded chains has been 1.3%, according to a Restaurant Business analysis of Technomic data. That is not much more than the 1.2% from the year before. Both numbers are better than in 2017, when median same-store sales growth was 0.3%, and 2016, when it was 0.8%.

Since 2016, the industry’s median same-store sales growth has been 1%, down from 2.7% growth in the previous six years.

The more recent numbers are worse when considering how restaurants have been generating that growth. For the most part, the industry has been getting by through price increases and by convincing customers to order more premium items.

Food-away-from-home inflation has been increasing of late as many restaurants make up margins lost to rising wages. This year, menu prices are up 3.3%, according to federal data. By comparison, food-at-home prices are up 1%.

Menu price inflation compared with chains’ same-store sales suggests that the industry is losing customers on a same-store basis. Only 12 of 65 publicly traded chains reported same-store sales stronger than that menu price figure.

Look at McDonald’s, which has increased same-store sales by 5% this year despite an estimated traffic decline of about 2%.

Historically, it’s difficult for a brand to be losing customers when its same-store sales are up 5%. McDonald's has been both raising prices and deploying strategies such as fresh-beef Quarter Pounders and drive-thru ordering technology, all of which build average check but not necessarily traffic.

To be sure, many chains are thriving, as Chipotle, Wingstop and Popeyes have demonstrated. And they’ve done so with traffic as much as check.

But larger chains have been outperforming smaller companies this year. They have the marketing power to stand out and can invest in technology and menu innovation, all of which help build sales.

Yet the poor overall performance suggests an industry that simply isn’t growing the pie all that much. And it appears that this is the way things will be for some time, unless the industry can find a way to increase consumers’ overall restaurant visits.

Many chains have viewed delivery as one such option. And some chains have succeeded in getting customers to order that way. About 80% of restaurant chains have a delivery deal with a third-party provider as companies look for strategies to build sales and traffic growth.

But most large chains have yet to grow sales appreciably through delivery.

“It has been a slow build,” Starbucks CFO Patrick Grismer told investors at a conference Tuesday, according to a transcript of the presentation on financial services site Sentieo. “We aren’t seeing it mix at a very high rate.”

Starbucks, like many other chains, is banking on consumers increasingly ordering delivery as they seek more convenience, and Grismer said that what little delivery sales the chain has had have been largely incremental.

But it remains to be seen whether the service will in fact increase Americans’ overall appetite for restaurants or simply shift existing sales toward the stay-at-home option.

Given that delivery providers will probably have to raise prices more to get to profitability, growth for the broader restaurant industry appears doubtful. And this slow-growth period will continue.

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