This Week in Foodservice: Restaurants a Bright Spot in Declining August Sales, Higher Menu Prices Slowing Lunch Traffic, Consumer Shift Toward Smaller Chains

Weekly news that’s worth another look: While retail sales declined in August, restaurants were a bright spot; The NPD Group says higher menu prices are a factor in slowing lunch traffic; the spread between grocery store prices and foodservice prices continues; consumers may be shifting from major chains to smaller chains and independents.

U.S. retail sales fell 0.3 percent in August from July but were up 1.9 percent from August 2015. In the first 8 months of this year sales were up 2.9 percent. Excluding motor vehicle sales and motor vehicle parts, retail sales declined 0.1 percent from July but were up 2.0 percent from August last year. In the first 8 months of this year – again without motor vehicles and parts sales – sales were up 2.8 percent.

Restaurants and drinking places bounced back from a sales decline of 0.2 percent in July, rising 0.9 percent in August. Thus, restaurants clearly outperformed the total market but also showed the largest increase of any major retail segment.

Restaurant and bar sales were up 6.4 percent for the first 8 months of 2016 and rose 5.8 percent over August 2015.

With all the negative comments circulating about foodservice, the Census Bureau numbers are very encouraging.

There are limitations and caveats to the government data. The figures are projected from a sample of foodservice outlets and the rules of statistical variations apply. Second, the advance numbers are based on a very limited sample and can be, and frequently are, revised. (As pointed out above, July’s advance report was revised significantly upwards.) The Census Bureau samples only restaurants and bars. No hotels, resorts, clubs, employee feeding, military educational or healthcare operators are included. Finally, some of the numbers are adjusted for seasonal factors, weekends, and holidays, but not for menu price changes.

Economic News This Week

  • America got a raise – finally. The US Census Bureau reported that median household income rose 5.2 percent from 2014 in 2015 to $56,516. More good news: the increase was the largest since the bureau began collecting the data in 1967. The bad news: median household income remains 1.6 percent below the level of 2007 before the start of the Great Recession. The nation’s poverty rate declined by 1.2 percentage points to 13.5 percent. The income increase in 2015 is attributed to higher wages, longer hours worked and a very low rate of inflation. While the increase was spread over most demographic groups, lower income groups experienced the highest rate increase. This could be due in large part to increases in minimum wage. It remains to be seen if the economy will grow as employment continues to rise.
  • Initial jobless claims rose by 1,000 to 260,000 for the week ending Sept. 10. The 4-week moving average declined by 500 to 260,750. The Department of Labor reports this marks the 80th straight week that initial jobless claims were below 300. The last time this happened was 1970.
  • The August Producer Price Index was flat for final demand goods and services. The Index for final demand goods fell 0.4 percent. The “core” producer price index for final demand goods – all prices less food and energy – was up 0.1. The index for final demand services rose 0.1 percent in August.
  • The August Consumer Price Index increased 0.2 percent on a seasonally adjusted basis. In the past 12 months the index is up 1.1 percent. The “core” index – all items without food and energy prices – was up 0.3 percent in August and up 2.3 percent in the last 12 months. (Insight on the August Consumer Price Index data on food in the section below.)
  • The Empire State Manufacturing Survey found business conditions weakened in September. The general conditions index remained below zero, indicating business was contracting. The new orders index fell 8 points to minus 7.5 and the shipments index fell steeply, by 18 points to minus 9.4. The employment index also tumbled, down 13 points to minus 14.3.
  • The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey jumped 11 points to 12.8 (any number over zero indicates expansion). The Philadelphia Federal Reserve pointed out this is the first time since August of last year the index has registered two consecutive positive readings. The new orders index rose from minus 7.2 in August to 1.4, however, the current shipments index fell from 8.4 in August to minus 8.8.
  • The U.S. Federal Reserve reported industrial production fell 0.4 percent in August after increasing in both June and July. Capacity Utilization decreased 0.4 per in August a rate that is 4.5 percentage points below its long run (1972-2015) average.
  • The University of Michigan Index of Consumer Sentiment was flat in the preliminary September survey vs. the final August reading of 89.8. However, the component of indexes moved with the Current Economic Conditions Index, falling from 107.0 in August to 103.5 in September, while the Index of Consumer Expectations rose from 78.7 in August to 81.1 September. A spokesperson for the university sees the changes as “relatively minor” and that consumers “remain reasonably optimistic about their economic prospects.”
  • Foodservice News This Week

  • Menu price hikes, along with telecommuters and online shopping, diminished lunch traffic according to The NPD Group. Casual dining saw lunch visits drop by 6 percent in quarter ending in June while fast-casual restaurants – up to this point the “hot” segment – saw an even steeper decline in traffic of 9 percent. NPD notes that the number of people working from home has increased 24 percent in the last decade while online shopping has increased by 8 percent in the past year. Aggressive increases in menu pricing have been exacerbating the situation, with some operators charging 5 percent more. NPD believes many restaurants are charging more than customers wish to pay.
  • The Consumer Price Index for food was flat in August compared to July, but once again the food-away-from-home segment increased significantly more than retail grocery prices. Food-at-home prices fell 0.2 percent while food-away-from-home prices rose 0.2 percent. In the past 12 months, food-at-home prices were down 1.9 percent while food-away-from-home increased 2.8 percent. According to some observers, menu price increases are resulting in fewer meals away from home.
  • Are consumers abandoning larger chains for smaller chains and independents? An economist at Bank of America Merrill Lynch thinks so and has some research to support the theory. He says a restaurant slowdown may be less about personal economic situations or the upcoming election and more about a shift in consumers’ taste preferences.
  • Macy’s new CEO wants to expand the relationship with Starbucks. Starbucks is currently operating in 49 Macy’s stores but is offering alcohol only in the flagship Herald Square store in New York City. It appears food and beverage offerings may be expanding at Macy’s.
  • McDonald’s is everywhere in the U.S., but concentration is far from even. Ohio is No. 1 in McDonald’s units per 100,000 population with 7.1 stores while New Jersey is last with half the number of locations per 100,000 population – 3.5. Behind Ohio in concentration are Michigan, Kansas, Maryland, and Louisiana. To round out the bottom 5 behind New Jersey are Utah, California – despite being where the McDonald’s brothers started it all – New York and North Dakota. As for McDonald’s headquarter state of Illinois, it ranks just 13th with 5.7 units per 100,000 people.
  • Smashburger targets colleges and universities for expansion. After enjoying success on the campuses of Notre Dame and Texas AM Universities, Smashburger has opened restaurants at Eastern Michigan and Kean Universities and now seeks to expand at colleges and universities across the country.
  • Aramark chooses new location for its Philadelphia headquarters. The company will lease almost 300,000 square feet as the anchor tenant in a building that was originally a Hudson Motor Car plant. Aramark expects to relocate from its current offices to the new location in the fall of 2018.
  • State Fair Treats scheduled to open Sept. 20 at Walmart. Developed by Texas restauranteur Isaac Rousso, the restaurant concept will feature Mr. Rousso’s creations, many of which won awards at the Texas State Fair. State Fair Treats is scheduled for a regional rollout to be followed by a national expansion at Walmart stores.
  • Convenience stores saw an 80 percent increase in mergers and acquisitions in 2015 from 2014 and the most M&A activity since 2008 according to The Food Institute’s Food Business Mergers and Acquisitions 2015.
  • National DCP will open a distribution center in Northeast Ohio. National DCP, LLC is a $2 billion supply chain management company serving Dunkin’ Donuts franchisees. The Twinsburg facility, expected to open in October, is the company’s 8th facility.
  • Corporate stirrings: Oath Craft Pizza has closed a Series A investment with branding and venture capital fund Breakaway for $4.5 million. Breakaway was joined by co-investors. Oath Craft has raised $9 million in capital since its inception. The fast-casual operator lists 4 locations on their website.
  • Growth chains: Applebee’s will open their first restaurants in Hawaii starting with 2 units on the island of Oahu and 5 more to follow. MOD Pizza’s franchisee in Florida, BBX Capital, plans to open 70 restaurants in Central and South Florida. Pei Wei has opened their first location in Asia with a unit in South Korea and plan to have 10 more in that country by the end of 2017. Marco’s Pizza’s franchisee in Iowa plans to open 31 restaurants at a rate of 2 to 4 a year. Love’s Travel Stops & Country Store plans on adding 64 Godfather’s Pizza Express across 16 states with 46 in existing operations and the rest in new locations. Newk’s Eatery has signed a development agreement for 15 units in Indiana. Paris Baguette will open 15 stores in the U.S. this year.
  • Comparable store sales reports: Casey’s General Store up 5.1 percent, Cracker Barrel up 3.2 percent and Ruby Tuesday down 2.7 percent.

For details and same-store sales of other chains, see the Green Sheet.

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