Restaurant sales increased again last month. According to the latest retail sales data from the U.S. Census, food services and drinking places topped $72 billion in July, up 1.7% from June and up more than 38% over last year. It was also up nearly 9% over February 2020, before the pandemic.
The strong recovery in industry sales is coming despite a number of challenges—notably the simple fact that many restaurants haven’t reopened yet. Many are still operating at reduced hours because of labor availability. And they haven’t brought menus back to where they were before the pandemic.
According to Black Box Intelligence, same-store sales in the restaurant industry have been steadily improving since March and hit 8.1% in July. It was the best month for restaurants in years.
All of which makes us, among others, wonder whether this can last. Some of this feels artificial, driven in large part by a combination of pent-up demand and a consumer that still has a lot of money. Government payments through excess unemployment benefits and stimulus checks—not to mention higher pay—have helped fuel a lot of those sales.
At some point this stops. What’s more, the delta variant could keep customers away. And indeed, Brinker CEO Wyman Roberts said on Wednesday that his chain has seen “some softening” in the past few weeks due to the new surge, as detailed here by my colleague Peter Romeo.
Yet some believe that this sales strength could last a while, even if some dine-in restaurants like Chili’s experience some of that softness. “I wouldn’t expect a major retrenchment in food-away-from-home sales,” Michael Swanson, an economist with Wells Fargo, said on this week’s episode of the Restaurant Business podcast “A Deeper Dive.”
Any impact from delta, he expects, will be temporary—Swanson believes that the latest wave is nearing its peak. “They may be hesitant for a while but it will be temporary and they will come back,” Swanson said.
The two of us discussed on the podcast exactly why industry sales could continue for a while. For one thing, consumers demonstrated strong demand for restaurants through the pandemic. Perhaps the biggest bright spot for the industry over the past year was the level of demand for restaurants even in the face of a global pandemic.
Another big bright spot is how the industry adapted. Restaurants quickly took to new service formats like curbside and quickly shifted to digital and drive-thru sales to make up for what they couldn’t get from dine-in business.
There are a few other practical matters as well, demonstrated by the aforementioned Black Box numbers. Same-store sales rose 8.1% last month, but traffic was down 3.7%. That implies an 11.8% increase in average check.
Some of that has come from sales of more premium items—and more items altogether—but a huge percentage of it came from price increases.
The danger in price increases is that it drives people away. That might be happening on the margins, but not yet at a rate that is having a discernable impact on sales.
That said, Swanson said, the sales that restaurants do get may not be as profitable as they were before. “We could see elevated sales for quite a while, but it might not mean elevated profitability,” he said.
That has an obvious culprit in the form of labor costs, which have skyrocketed at levels many operators have never seen before due to an unprecedented shortage of workers. Those aren’t the only costs going up. Some food costs are going up, and rent costs are going up, too. Nevertheless, many restaurants insist they have “pricing power” and have been able to offset higher costs with these higher prices.
Maybe the biggest challenge to this period of strong same-store sales could come from the restaurants themselves. The industry is rapidly developing new units—just about everybody is ramping up development, for instance—which in relative short order could result in more competition and marketing that leads to price wars that bring back discounts that ultimately hurt unit economics.
For now, however, the industry is enjoying a recovery that is stronger and quicker than expected. Renewed concerns about the virus may only be temporary.