This Week In Foodservice: More than Half of Restaurant Operators Report Sales Drop in August; Low-Income Areas Pay Off for Starbucks; and Ten Restaurants that Changed America

Weekly news that’s worth another look: The National Restaurant Association’s Performance Index fell into negative territory; Starbucks reports low-income neighborhood stores make money; and a new reflection on impact of Howard Johnson’s.

The National Restaurant Association’s Restaurant Performance Index (RPI) slid into contraction mode in August, posting a score of 99.6. Any reading less than 100 indicates a period of contraction in the restaurant industry. This marks the first time in eight months the industry saw business decline. The association says a 1.9 percent drop in the Current Situation Index, which posted a final reading of 98.6, represents the main culprit for the contraction. Operators reported both same-store sales and traffic were down in August. Only 30 percent of the operators surveyed said their sales were up over August 2015. In contrast, a hefty 53 percent said sales were down compared to August 2015. As for customer counts, just 21 percent said theirs were up and 59 percent reported lower traffic.

The other component of the RPI, the Expectations Index, declined by 0.2 percent. Overall, though, this index stayed in positive territory at 100.6.

Operators’ willingness to invest in their businesses was not as bleak. Fifty-six percent said they had made a capital expenditure in the last three months for new equipment, remodeling and/or expansion. This was down from 64 percent in July but close to the 55 percent reported in June.

As for the future, 62 percent said they were planning a capital investment in the next 6 months, down only slightly from the 65 percent who said they would be investing in the future, according to the July survey.

While no one wants to see any signs of consolidation, it is important to remember that one month doesn’t make a recession, either. Therefore, it is probably smart to wait and see two or three months worth of results to assess the overall health of the industry.

Economic News This Week

  • The Bureau of Economic Analysis’ third estimate puts gross domestic product at a 1.4 percent increase, a slight revision from the earlier second estimate that cited an increase of 1.1 percent. GDP in the first quarter was up a weak 0.8 percent. The second quarter’s most recent estimate was revised upward due in part to increased spending in structures such as office buildings, as well as increased exports. Some observers believe that the upward revision may indicate the second quarter ended better than it started, which could be a good sign for GDP in the third quarter.
  • Initial Jobless Claims totaled 254,000, an increase of 3,000 for the week ending Sept. 24. The 4-week moving average totaled 256,000, a decline of 2,500. As pointed out here every week, this indicator of the health of the employment situation continues to look very good.
  • Personal income increased 0.2 percent in August, according to the Bureau of Economic Analysis. But, the increased funds in consumers’ wallets didn’t encourage them to spend more. Personal consumption expenditures were flat in August vs. July.
  • The Chicago Production Manufacturing Index jumped to 54.2 in September from 51.5 in August. Any reading greater than 50 indicates expansion. The New Orders Index edged up to 54.1 from 53.9. The Production Index rose to 59.8 from 52.5 but the Employment Index retreated from 53.7 in August to 49.2.
  • August new home sales were at a seasonally adjusted annual rate of 609,000. The Census Bureau reported this is down 7.6 percent from July but up 20.6 percent from August of 2015. 
  • The U.S. Census Bureau’s advance report on durable goods found new orders were virtually flat in August vs. July. Durable goods shipments fell 0.4 percent, driven by a 1.1 percent decrease in shipments of transportation equipment. Unfilled orders declined by 0.1 percent. Nondefense new orders for capital goods – goods used to manufacture other goods – decreased 4.4 percent with shipments down 1.9 percent and unfilled orders down 0.4 percent. Capital goods purchases are an indicator of businesses’ willingness to invest in their operations.
  • The Conference Board’s Consumer Confidence Index climbed to 104.1 in September. This is up from 101.8 in August and marks the second month in a row the index showed at least a moderate increase. The Present Situation Index increased to 128.5 from 125.3 in August while the Expectations Index rose to 87.8, up from 86.1.
  • The University of Michigan Index of Consumer Sentiment crept up to 91.2 in September, compared to 89.8 in August. The increase was the result of the Index of Consumer Expectations going up to 82.7 from 78.7 in August, while the Current Economic Conditions Index fell to 104.2 from the August reading of 107. A spokesman for the University said the change is due to gains among higher income households. Households with incomes under $75,000 have kept their answers to the indexes the same for the last 3 months.

Foodservice News This Week

  • Starbucks’ move to low-income areas pays off. The coffee chain giant says its stores in communities like Ferguson, Mo., and Englewood, Ill., are profitable and it plans to bring the program to at least 15 additional areas in order to create jobs.
  • Gas prices shot up in the southeastern U.S. The American Automobile Association reported gas prices rose 8 percent to 15 percent in some states due to the partial shutdown of a major pipeline. The national increase was just 3 percent in the same period. However, Bank of America Merrill Lynch’s restaurant stock analyst believes that gas price increases have an impact on eating out in the short run, but found that there is little longterm statistical correlation between gas prices and restaurant sales. 
  • One of the “Ten Restaurants That Changed America” include Howard Johnson’s, according to the new book by Paul Freedman. Looking back not that long ago, people flocked to eat from the standardized menu that included Ho Jo cola and 28 ice cream flavors. Many consumers who never ate out were lured to Howard Johnson’s clean and attractive operations. Along with the quality food, the chain created a loyal customer base of people who would even plan their vacation trips so they could eat three meals a day at Howard Johnson’s. Its 1,000 locations and high volume made it the number one restaurant chain in the country. Howard Johnson’s downfall, according to the author, was when Bud Johnson took over from his deceased father and decided to cut food quality. Newer chains – McDonald’s and KFC – hastened Ho Jo’s decline, which now has one restaurant left in the U.S.
  • US Foods to acquire Jeraci Foods, an Italian specialty distributor in Elmsford, N.Y., with annual sales of $26 million. After the first of next year the business will be switched to the US Foods location in Perth Amboy, N.J. The status of Jeraci executives and current employees and the terms of the sale were not disclosed.
  • Corporate Stirrings: Fiesta Restaurant Group announced it will suspend the sale of the Taco Cabana chain. Further, Fiesta will cease opening Pollo Tropical restaurants in Texas. The company is also looking to replace their current CEO and president, Tim Taft, who has retired. YUM’s board of directors has approved the spin-off of the company’s China operations. The chain announced the deal with Primavera Capital and Ant Financial Services Group for  $460 million  The latter is an affiliate of Chinese internet giant Alibaba Group Holdings Ltd. The COSI sandwich chain filed for Chapter 11 bankruptcy and hopes to sell itself to its lenders. The company has closed 29 stores but says the other 76 units will remain open using a $4 million loan from its lenders. Twelve of the 13 the Black-Eyed Pea restaurants in Texas closed abruptly leaving just the Arlington location as the only one open. The company had filed for Chapter 11 bankruptcy protection about 10 months ago. There are 9 Black Eye Pea restaurants in Colorado but they have different ownership and remain open.
  • Growth Chains: The Fiesta Restaurant Group will open 8 to 10 Taco Cabana restaurants in Texas and 14 to 17 Pollo Tropical restaurants in Florida in 2017. The Fresh to Order chain plans to open 10 restaurants in Indianapolis. Taco Bell will have 5 locations open in Brazil by the end of this year with a total of 25 by the end of 2017. Red Lobster is focusing on expanding internationally and will have 50 restaurants outside the U.S. by the end of 2017. California Pizza Kitchen has opened its first restaurant in Australia with plans to add two more in the next three years. Cameron Mitchell Restaurants will open a Marcella’s restaurant in Denver, making it the third unit for that chain. The multiconcept operator also plans to open its 25th Rusty Bucket location, this one in Miami, along with 2 additional Ocean Prime Locations. Charlie Grainger’s has signed agreements for 74 restaurants in Georgia and Alabama. Mike’s Nashville Hot has signed an agreement for a restaurant in Dayton, Ohio, with plans for at least two more. Old Chicago Taproom & Pizzeria has signed agreements with three existing franchisees for nearly two dozen restaurants in eight states.
  • Comparable Store Sales Reports: Rave Restaurant Group (Pie Five Pizza down 12.0 percent and Pizza Inn up 0.3 percent) and Sonic Drive Ins (system down 2.0 percent, company-owned down 3.0 percent and franchised down 1.8 percent.)

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

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