Technomic: Expect a more competitive environment in 2019

The restaurant industry is expected to grow 3.9% this year, even as real growth remains more modest.
Photograph: Shutterstock

Restaurant industry sales grew modestly last year, driven mostly by price increases, as chains slowed unit-count growth and the U.S. market grew saturated.

Expect more of the same this year.

Or so says Technomic, a sister company of Restaurant Business. Speaking at the Restaurant Leadership Conference on Tuesday, Technomic Managing Principal Joe Pawlak and Executive Vice President Patrick Noone said industry sales would rise 3.9% this year.

“Competition will intensify, fueled by tech and delivery,” Pawlak said. “Despite favorable economic indicators, restaurant growth will remain modest.”

He also said that smaller concepts will encroach upon larger chains’ markets.

Specifically, he noted that Chick-fil-A will likely finish 2019 as the third-largest restaurant chain in the U.S. And he said newer chains, such as Chipotle Mexican Grill, Jersey Mike’s and MOD Pizza, will continue to grow and take sales from older concepts.

The restaurant industry has been relying largely on price increases in recent years. Top 500 chains’ sales rose 3.3% last year, but Noone noted that menu prices rose 2.5%. “Real growth is low,” he said.

Part of the reason for the low growth is slowing overall development. Some restaurant chains have increasingly closed units, and others have slowed their development rates. Growth in the number of locations has been slowing since 2014, when unit count rose by 2.2%.

In 2017, unit count grew by 1.2%. Last year, units grew 0.7%.

Pawlak said that the industry has grown saturated. He noted that, since 2003, the U.S. population has grown by 13%, while the number of restaurants in Technomic's Top 500 has grown by 29%.

“We kind of outkicked our coverage,” Pawlak said. “There are too many seats chasing too few butts.”

To be sure, the overall economy has not necessarily encouraged more restaurant spending per capita.

For one thing, despite years of economic growth, wages and earnings have only started increasing more recently, said Tim Quinlan, chief economist with Wells Fargo. That only started changing because employees have only recently become confident enough to quit their jobs for other jobs, which prompts wage growth.

For another, consumers have more competition for their dollars. Healthcare costs, even for people with existing coverage, have skyrocketed in recent years.

“Even people who have good benefits, the share they’re having to kick in out of every paycheck has increased by almost half of where it was just 10 years ago,” Quinlan said.

A recession would definitely hurt restaurant sales this year, but Quinlan doesn’t expect that to happen, though he says that gross domestic product should grow at a “moderating” pace over the next couple of years.

At restaurants, moderating growth has been the norm in recent years. Each sector last year underperformed its five-year average, according to Technomic.

Full-service sales in particular were challenged, with sales up 1.4%. Noone said that from 2014 to 2017, full-service chains took up 26% of Top 500 sales. That fell to 24% last year. That share went to fast-casual chains and, to a lesser extent, QSRs.

Interestingly, however, Technomic is far more bullish on the overall future of casual dining when small chains and independents are added to the mix.

Overall casual-dining sales are expected to rise 3.5% this year, Technomic says. That’s because consumers love going to those smaller casual diners.

“There’s more innovation there,” Pawlak said. “Consumers love going to those types of restaurants.”

That provides a good lesson to operators looking to compete in a saturated market. Those that win will be differentiated.

“Differentiation is key,” Pawlak said. “Being the one customers choose. Consumers have a lot of restaurants to choose from.”

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