Despite Going Backward the Restaurant Industry Still Moved Forward in July

The National Restaurant Association's Restaurant Performance Index retreated for the second month in July but still was in positive territory, which signals growth among the key industry segments the survey tracks. The report also indicates that most operators continue to move forward with capital expenditures. Also, this week we take a look at why Gross Domestic Product data managed to be reassuring, alarming and a whole lot more.

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The National Restaurant Association reported the Restaurant Performance Index fell 0.6 percent in July to 100.7. Any number in excess of 100 indicates expansion. Both major components of the Index fell 0.6 from June, with the Current Situation Index now standing at 100.1 and the Expectations Index standing at 101.3.

Just 44 percent of operators said their same-store sales increased in July with 36 percent reporting lower same-store sales, which were the worst since March. Customer traffic performance was also disappointing with 35 percent of those responding saying their customer counts were up and 43 percent saying traffic declined. Operators' views of the future also were bleaker with just 37 percent stating they expect their sales to increase in 6 months.

Despite operators' pessimistic results and views, 58 percent reported they made a capital expenditure for equipment, remodeling or expansion in the last 3 months, up from 52 percent last month. And, 53 percent expect to make a capital expenditure for equipment, remodeling or expansion in the next 6 months. This is down moderately from 59 percent last month.

Economic News This Week:

  • For the second quarter, Gross Domestic Product increased 2.5 percent, according to the U.S. Department of Commerce's second estimate. While below the 3 percent to 3.5 percent economists consider normal, it is far better than the department's first estimate of 1.7 percent. The increase was based on upward adjustments in several areas including stronger exports and higher retail inventories. The bad news was personal spending increased just 0.1 percent in July, which resulted in some Wall Street firms and economists to quickly lower their estimates for third quarter GDP with many forecasts calling for increases in the 1 percent to 2 percent range.
  • The housing industry also reported mixed results with the S&P/Case-Schiller Index reporting home prices increased 12.1 percent in the past 12 months ending in June for the 20 major markets the study covers. Meanwhile, the National Association of Realtors reported that pending home sales for existing homes fell for the second straight month in July and were 1.3 percent below the June Index. The NAR blamed rising interest rates as the probable cause but did note the Index was up 6.7 percent compared to July 2012.
  • Initial jobless claims totaled 331,000, a decline of 6,000, for the week ending August 24. The 4-week moving average for claims increased slightly to 331,250. The last month or so first-time jobless claims have been moving in the fairly narrow range of 330,000, down significantly from the 350,000 average in the first 6 months of this year. However, claims remain above the averages for the years before the recession.
  • Recent polls of small business owners indicate increasing optimism, the results from NRA's RPI research (see above) notwithstanding. The Wall Street Journal/Vissage confidence index was 104.2 in August, up from 102.2 in July and 93.7 in July 2012. The Wells Fargo and the National Federation of Independent Business indices both increased and The Gallup Organization reported small business owners spending intentions over the next 12 months is up 20 percent compared to the end of 2012.
  • The Chicago Area Production Manufacturing Index from the Chicago Federal Reserve was 53.0 in August, up slightly from 52.3 in July. A number of more than 50 indicates expansion in production activity.
  • Consumer confidence is not exactly booming. The Conference Board's Consumer Confidence Index inched up to 81.5 in August from 80.3 in July. But the Reuters/University of Michigan Consumer Sentiment Index, which hit a 6-year high in July of 85.1, fell back to 82.1 for its final August reading. And, Gallup's U.S. Economic Confidence for the week was minus 14, down from minus 3 in early June.

Foodservice News This Week:

  • Thursday's job action aimed at foodservice and retail operations appears to have gone off without any major impact, generating only isolated reports of business interruptions. One Wall Street analyst believes it is "unlikely" that the protesters will attain a $15 an hour wage but the president and congress will be under pressure to raise the federal minimum wage. The administration has called for a $9 an hour minimum wage but history indicates that a compromise will be struck, possibly in the $8.50 to $8.80 range.
  • Increased technology has been suggested to replace manual labor if employees are successful in obtaining large wage increases. While some jobs may lend themselves to automation — having customers use ordering screen kiosks for example — a lot of foodservice jobs would require highly sophisticated and expensive robots. For example, grilling hamburgers requires a variety of motions and decisions. In contrast, the Wall Street Journal recently pointed out American companies have invested too little in technology in the past decade because labor rates have been so low. Inflation adjusted hourly compensation has risen just 0.6 percent over the last 10 years.
  • Myths about fast food restaurants have been destroyed by Mary Chapman's recent blog for Technomic. For example, Technomic's research points out that McDonald's is widely believed to be for kids and young families the burger giant's customer demographic actually skews older than the average QSR's patrons. Those more than 55 years old make up 23.5 percent of McDonald's customers vs. 15.1 percent for the average fast food chain. And, while many believe that males are by far the bigger consumers of fast food, Chapman reports the split is 52 percent male to 48 percent female.
  • Millennials — those roughly 17 to 32 years of age — are thought to be brand agnostic by many marketing professionals but a new study by Concentric Marketing found them to very nutritionally knowledgeable. The foodservice operations favored by this generation include Subway, Chick-Fil-A and Chipotle.
  • Why are chicken prices up? We can blame McDonald's, according to Boomberg Businessweek. The fast food chain's just announced Mighty Wing promotion initially drove chicken wing prices to more than $2 a pound from 90 cents per pound. The price has since fallen to about $1.46 a pound. One analyst believes it will be "hard for McDonald's to make wings a permanent menu item, as the company may have underestimated its own impact on the wing market."
  • Standex International reported that sales from its foodservice equipment group increased 2.4 percent in the firm's last quarter.
  • The U.S. Department of Agriculture forecasts menu prices increasing 2 percent to 3 percent this year and 3.5 percent in 2014.
  • Performance of National Football League teams has a direct impact on fans' eating habits, according to a study from INSEAD Business School. Fans of a losing team ate 16 percent more saturated fat the following Monday while fans of a winning team ate 9 percent less saturated fat based on normal Monday consumption. The article pointed out that prior research studies had shown sport outcomes influence reckless driving, heart attacks and domestic violence.
  • Brinker International named The Middleby Corporation and The Wasserstrom Company its Supplier Partners of the Year.
  • Burger King expanded its BK Delivery program to Minneapolis and Spokane raising to 16 the number of markets where certain BK operations provide home delivery.
  • Subway reached 40,000 Units with the opening of an operation in Ipswich, England.
  • Growth Chains: Tim Horton's plans to open 120 restaurants in Kuwait and other Middle Eastern locations. Domino's Pizza announced plans to have 100 stores in India by March 2014. McAlister's Deli's largest franchisee, The Saxton Group, has an agreement to develop 30 new restaurants in 3 states over the next 6 years. Pie Five announced that franchisees agreed to open a total of 10 units in the greater Louisville and Lexington, Ky., markets. Wingstop plans to open 70 units this year, including 10 stores opened in August in 8 different cities.
  • Comparable Store Sales Reports: Krispy Kreme (up 10.9 percent), Steak 'n Shake (up 4.2 percent), and Wingstop (up 10.0 percent).

For details and same store sales for other chains, please click here for the Green Sheet.

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