RESTAURANT SALES AND TRAFFIC TRENDS – QUICK HINT….NO SILVER BULLET !!
We will know more specifically, as companies start to report results, in the next several weeks how the second calendar quarter developed relative to sales and traffic. Anecdotally (see Postscript below), however, we hear nothing particularly encouraging. The late spring early summer numbers that showed sales up low single digits and traffic down low single digits seems to be continuing (see Postscript below), which has basically been the case for the last two years. Quick service restaurants that provide a midday (food) fuel stop seem to be holding up a bit better than full service casual dining companies that are required to provide an experience to help justify the much higher average ticket. While wage rates are moving higher, discretionary income is not. Five dollars is the favored price point at lunch, but when a family of four sits down for a full service meal at Applebee’s, it is going to run upwards of $50.00 with tax and tip and that is a noticeable after tax expenditure. The weather was unsettled in many parts of the country in the last couple of months and that can also affect traffic by a point or two which is the difference between “strong”, “mediocre”, or “weak” sales these days. A constant drumbeat from newscasters about tariffs is affecting not only the business world but dining customers who understand that budgets have to balance at some point. National economic discourse, where debt doesn’t matter to the existing administration and unlimited social programs are the mantra for the Democratic contenders, is no doubt further unsettling relative to consumer confidence. Without question, for any number of reasons, the economy is slowing. Sales and traffic trends are unlikely to buck this reality, and we will let you know when they do.
From an operator’s standpoint: they continue to be pleased by a more business friendly environment. However, you can’t pay the rent with an intangible such as “less regulation” and lower taxes was last year’s story. Wages move inexorably higher, and there is no material expense that is moving lower. The only thing that can help restaurant margins is higher sales, and one or two points of sales improvment is not enough to overcome higher costs. Our expectation, therefore, is for more of the same as Q2 reports are made public. The better operators will come close to maintaining margins, but most year to year comparisons will not look good. The lower tax rates last year allowed many companies to show strong year to year after tax earnings, though pretax operating earnings were down in many cases, but that will not be repeated in 2019. Stock repurchases could help some companies, but fewer than last year as some companies have already leveraged their balance sheets.
We leave you with some good news. (There had to be something, right?) Though too many operators are sitting with real estate that is fully utilized only on Friday and Saturday nights, there remains a great deal of opportunity relative to food consumed “offsite”. Curbside pickup, takeout, and catering all offer opportunity, though they are different business to a degree and must be managed accordingly. At least you don’t need more square footage. Furthermore, margins on delivery service should start to improve as Doordash, Ubereats, Grubhub and the others compete for business. Delivery is a necessary evil these days, but restaurant companies can’t afford to cut 20-30 points out of their gross margin. Many operators have suggested that delivery business is largely incremental. We accept that delivery is incremental, in part, but it stands to reason that if a customer has food delivered tonight, they are far less likely to visit that same restaurant tomorrow night. Delivery will be become more profitable (at least less of a burden on margins), and delivery companies will experience margin contraction, which they may or may not be able to offset with operating efficiencies.
P.S. No longer “anecdotal”. Just received the highly regarded Miller Pulse survey results through June. Headline is positive (“June Sales Cap Off a Solid Second Quarter”) but details show more of the same. Overall restaurant same store sales rose 2.0% in June, up 2.1% for Q2 as a whole. The QSR segment was up 2.3% and Casual Dining was up 0.4% in June. The 2.0% result in June was, as Miller Pulse put it “a model of consistency, remaining in the narrow 2.0-2.3% range since the dip in February”. Importantly, “traffic, as is the norm these days, was weak again at -1.7% for the month”. In summary, the numbers confirmed our anecdotal conclusions.