DC Advisory
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Operators and investors alike don’t expect much in the way of strong sales, and profits, in the winter months. Having said that (I hate that expression!) we can’t help but look toward January and February for clues as to consumer spending trends, and what it can tell us about the health of the general economy.

Weather can always be a factor this time of year, so these comments are not supposed to be precise. However, we have had enough feedback, from operators (mostly privately held), as well as our own observations relative to traffic and promotional activities, to conclude that there has been little or no pickup as yet from the sluggish sales trends already reported in the fourth quarter of ’16. Since this country is still in the honeymoon period following the election, and consumer surveys have improved markedly, we think it is noteworthy that consumers are not “walking” the “talk”. They may be cautiously optimistic, but their pocketbooks are still stretched, and they realize the economic improvement will be a while in coming, at best.

The dominance of value oriented deal driven offerings, both in quick service and full service casual dining are strong evidence to us that consumers are still strapped. Operators would not be this aggressive if traffic was easier to come by.  Lunch has become a $4.00-$5.00 ticket and dinner at full service casual diners is too often under $10.00 plus tax and tip.

McDonald’s is still pushing the Breakfast All Day, at a lower price point than their other protein offerings. Wendy’s is advertising “4 for 4” but 4 bucks now gets you a Double Stack, fries, and a drink. Jack in the Box gives you two tacos, a junior burger, small fries, and a drink for $4.00. Sonic provides a “Griller” (grilled cheese) for $1.00 and you can add to that with extras. Popeye’s has a “Classic Cajun Wings” offering, which is 6 wings for $3.99. How much money can a fast food operator make when staff has to be brought in for at least a couple of hours (with minimum wage up in 19 states) to serve customers who are too often going to spend no more than five or six dollars, tax included? Applebee’s, at lunch only, is offering a burger, fries, a soft drink, and a raffle ticket,  for $9.99, but their traffic has been weak, no doubt affected by the exorbitantly high  (a little humor) ticket with  tax and tip, compared to the fast food alternatives.

At dinner hour,  Applebee’s  Bourbon Chicken and Shrimp Combo, with fried red potatoes, onions and mushrooms, at $9.99 is their current offering. Red Robin is offering a Tavern Burger (a pretty good product) with bottomless fries for $6.99. (presumably all day). Chili’s best shot right now is offering a variety of 3 course meals for $10.00. If you want to go “upscale”,  Olive Garden is presenting  a variety of Italian dishes starting at $11.99.

How professional do you think the serving staff is going to be, when their tips are unlikley to be more than $1.50/person (at Red Robin or Applebee’s) and $2.00 at Olive Garden? Could help  to explain why delivery, food to go, and catering, are the fastest growing portions of meals prepared away from home.

Our conclusion is that sales and profits will be disappointing, not only in Q4’16 but likely in Q1’17. Spring comes every year, but will unlikely bring relief to the battle scarred participants within the restaurant industry. Conditions may not get worse, but they are unlikely to get much better any time real soon. This also indicates to us that the general economy will remain sluggish for the next three to six months at least.