Tag Archives: restaurant sales



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.

Roger Lipton

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.




I attended the well attended ICR Conference in Orlando last week and listened to restaurant companies, public and private, present their stories over the course of three days. Some reports have been positive but I read the tone as subdued. While customers are feeling more job security than in the recent past, translating to “gains” in same store sales, and operators are more constructive in terms of operating initiatives and expansion possibilities, I call the improved attitude a “relief rally”. As a country western tune put it “Down so far, down looks like up to me.” My view, probably in the minority right now, may  well prove to be overly cautious, but here are a few supporting facts.

Just because the economy has demonstrated real GDP growth of 3% or so over the last six months of ’17, it does not necessarily follow that this strength will continue. Q2 through Q4 of 2010 averaged 3.0%, Q3 and Q4 of 2013 were 3.1% and 4.0%, and Q2 and Q3 of 2014 were 4.6% and 5.2%, none of which lasted. However, I’ve said many times that the restaurant industry has proven to be a leading indicator for the economy as a whole, so perhaps November and December restaurant industry “strength” is a forerunner of continued economic growth.

Here’s the problem, and these statistics have been provided by David Rosenberg, the highly respected economist and stock market strategist. Over the last several months, the consumer savings rate has been drawn back down to 2.9%, a decade long low, from 3.7% a year ago and 6.1% only two years ago. At the same time, consumer credit balances soared at a 10.4% annual rate (up $8.3B) in October and a  14.1% annual rate ($11.2B) in November. Over the last four months, $30B of consumer spending has been financed by credit card debt (up 9.3% annualized), as Rosenberg puts it: “a binge we last saw a decade ago, and we know how that turned out”. Rosenberg also points out (1) that household debt service and rent payments now absorb close to 16% of household after tax income, which would be a six year high. (2) the delinquency rate for motor vehicle loans has climbed to their highest level since October 1011 (3) The average interest rate on over $1T of credit card debt is up 50 basis points in the last month, a $50B hit to consumers, the latest rate above 19% for the first time in five years (4) the delinquency rate on all personal loans is almost at 2%, a four year high, and a significant rise from 1.5% just six months ago. All of this supports the view that while the unemployment rate is down to 4%, lots of jobs are part time, wage rates are stagnant, and consumers are financially stretched out.

The question then becomes, how strong are the restaurant sales, and can they continue if consumers are financially strapped? The answer is: restaurant sales are only “strong” relative to the even worse trends of the last couple of years.  The sales, up 1.8% and 1.9% in November and December, do not account for the price increases that have negated the sales increases. Traffic and Transactions have in turn been flat, or worse, at almost all reporting chains. Add to the equation that 95% of restaurant chains are leaning heavily on value oriented promotions. Led by McDonald’s with their $1 through $5 specials, Burger King with 2 Whopper’s for $6.00, Wendy’s with 4 for $4, the various boxes or buckets for $5.00, Taco Bell’s $1.00 offerings, anybody selling lunch for more than $5.00  or dinner entrees for more than $10.00 has a real challenge.

We don’t know whether real GDP growth can be sustained at 3% (or better) or not. We do know, however that the “better” (but NOT MUCH) restaurant spending trend has been financed by consumers running down their saving rate and running up their credit card debt (with higher interest and default rates). The restaurant sales and traffic trends will likely continue to look firm, but the comparisons continue to be very easy versus the negative trends in the Q1 OF ’17. The average ticket at restaurant chains will be under pressure with the myriad of “value” offerings. Store level margins will be almost impossible to improve, with higher labor, higher rent, flat to higher cost of goods, and sluggish traffic. Sustainably better sales (and  traffic) trends may establish themselves over time, but we doubt that it will be over the next several months.

Roger Lipton