Most restaurateurs outside of a handful of ultra-popular concepts understand that, a few years ago, industry growth hit a wall.
Sales growth that recovered well after the recession suddenly seemed hard to come by. Same-store traffic, an all-important measure that shows whether your restaurant is gaining or losing customers, began to fall.
It has continued to fall despite two straight years of easy comparisons, leading many to wonder whether the industry is overbuilt or that consumers are somehow abandoning chain restaurants for smaller chains and independents.
According to the Technomic Chain Restaurant Index, total industry traffic has averaged a 3.8% decline in the past five months. That includes a 5.6% decline in September, when comparisons were allegedly easy.
But small chains aren’t doing well, either. In recent months we’ve seen the complete closure of Taylor Gourmet, the bankruptcy of Noon Mediterranean and Honeygrow’s pullback in the Chicago market. All three were at one time or another considered hot concepts that pulled in millions in investment.
The industry is now left with an odd dichotomy. Unemployment is at 3.7%. Operators are paying increasingly ridiculous wages. And yet that key traffic figure continues to be red. The higher pay consumers are getting doesn’t appear to be finding its way into restaurateurs’ coffers.
We are left with this simple reality: Despite a decadelong economic expansion, the vast majority of consumers simply don’t consider their finances strong enough to eat out more. And an industry that expanded aggressively in the post-recession era is now paying the price.
Todd Penegor, CEO of The Wendy’s Co., has been one of the leading voices arguing that the state of the consumer is not as strong as it appears on the surface.
The economy has “a lot of great tailwinds,” he said on the company’s earnings call earlier this month. He noted the 10-year recovery, low unemployment and growing consumer confidence. We’ll add two other elements, at least until recently: a booming stock market and rising home prices.
But, Penegor said, “income growth continues to be skewed to higher-income households. Workforce participation rates are still well below pre-recession levels. Real wage growth is not accelerating to the level we hoped for. And rent and healthcare is eating into some of the headway they’re making.”
Consumers might be working and their wages might be growing. But rent costs are going up. Prices for things like cable television and healthcare continue to rise. Inflation, as we noted in a previous post, is arguably making consumers’ overall finances weak.
Malcolm Knapp, the creator of the Knapp-Track casual-dining index, would call this “Allocation Nation,” suggesting that consumers on tight budgets would cut restaurant spending to pay for other things like car payments.
Noah Smith wrote in Bloomberg this week that real compensation per hour has not grown since the recession despite considerable growth in gross domestic product. He also notes that labor as a percentage of GDP has fallen in the years since.
“Stagnating wages are eating at the very heart of the free-market economy,” he wrote.
In other words, Smith’s numbers back up Penegor’s assertion that the lower-end consumer has not done well.
For restaurants such as Wendy’s, where much of its consumer base comes from households making $45,000 a year or less, that means an increasingly difficult market share game. And it probably means that restaurants, especially those on the lower end, will need to keep pushing value despite weak profits and heavily franchised systems. And rising labor costs.
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