Published on Tuesday, 10 November 2015
Written by Jerry Stiegler
Merrill Lynch examines the restaurant market. Foodservice operators hired heavily in October. Sysco and the Performance Food Group both reported strong financials. Putting calorie counts on the menu doesn’t seem to effect what fast food customers order. These stories plus comparable-store sales for 20 chains and more.
A primer on restaurants was recently published by Bank of America Merrill Lynch. Written by Joseph Buckley, the treatise doesn’t provide any earth-shaking insights into the business but, it is interesting to step back and take a look at the basics of foodservice.
Foodservice is described as “large, mature and fragmented.” Regarding the last point, Buckley calls it a “mom and pop industry.” The key economic factors that impact foodservice are disposable income and jobs. Like most industry observers, Buckley believes that the increase in two-wage households in the past few decades was the biggest factor in the long-term growth of the business. He points out correctly that the number of working wives and mothers is no longer increasing and even retreated a bit.
The report is not very positive or perhaps Buckley is just being cautious. He states foodservice growth the last few years has been “modest” and believes the National Restaurant Association’s forecast is too optimistic. Further, he points out that unit growth appears high relative to demand.
Buckley also sees supermarket take-out programs as a potentially serious challenge to restaurants.
He feels that the growth will primarily require operators to take share from competitors.
Forecasting the future for foodservice (or anything else) is a tricky business, but we can begin by pointing out the unusual economic conditions that existed in the U.S. for much of the decade. We experienced an extremely deep recession followed by a slow recovery. It is interesting to speculate on what the industry growth would have been in a stronger economy.
Buckley may be overlooking another aspect of the business. Foodservice operators have been very innovative in creating new concepts. From 15 cent hamburgers to “theme” restaurants to fast-casual to better burgers to home delivery, there are new ideas that catch the consumers’ attention in much the same way new cars and new gadgets do.
The basic pillars are still in play. People like to eat out. People don’t have time to cook. Some people don’t like to cook. And some don’t know how to cook.
Economic News This Week
- The ADP National Employment Report estimated the private sector of the economy added 183,000 new jobs in October. Almost half of the new jobs (90,000) were gained in businesses with fewer than 50 employees.
- Initial jobless claims rose 16,000 to 276,000 for the week ending October 31. The less volatile 4-week moving average rose 3,500 to 262,750. The number of claims has been running near historical lows for a couple of months and the bounce up is probably a statistical anomaly.
- Good news/bad news from “Jobs Friday.” The Bureau of Labor Statistics reported the economy added 271,000 new jobs in October, all but 3,000 of which were in the private sector. This made October the best month for new jobs so far this year. (September job creation was especially weak.) Unemployment declined from 5.1 percent in September to 5.0 percent last month, a level many economists consider to be “full employment.” Average hourly earnings rose 2.5 percent at an annual pace in October, the best performance since July 2009. Hourly wages had stubbornly resisted any significant increase since the end of the recession. The bad news is that it would appear that the Federal Reserve will probably take the October job numbers as a sign to increase interest rates in December.
- The Institute For Supply Management’s Manufacturing Index fell 0.1 percent to 50.1 in October. Since a reading of 50 indicates production activity is flat, the Index is just barely in expansion mode. The Production Index rose in October by 1.1 percent to 52.9. The Employment Index and the Order Backlog Index were in negative territory. The Institute reported that of 19 industries covered by the study, only 7 reported growing in October.
- The Institute For Supply Management’s Non-manufacturing Index rose 2.2 percentage points to 59.1 in October vs. September. The New Orders Index jumped 5.3 percentage points to 62.0 while the Employment Index increased 0.9 points to 59.2. Any reading over 50 indicates expansion. Of the 15 service industries studied by the Institute, 14 reported expanding activity in October, including the Accommodations & Food sector.
- Car and light truck sales shot up in October rising 13.6 percent over October last year. The industry is now on pace to sell 18 million vehicles, which would be an all-time record year. Led by sales of highly profitable SUVs and light trucks, most manufacturers reported increased sales, many of them in double digits. The strong sales month was attributed to large sales incentives from the automakers, low interest rates, an improving jobs picture and low gasoline prices.
- Voters in Tacoma, Washington, approved raising the city’s minimum wage to $12 an hour to be phased in over several years. Rejected was a $15 an hour minimum wage, which would have taken effect immediately. Meanwhile, voters in Portland, Maine, voted down a $15 an hour minimum wage and voters in McCall, Idaho, rejected increasing the minimum wage to $10.25 an hour.
- The Advance Estimate for Durable Goods Orders in September fell 1.2 percent. Without the transportation sector, new orders declined 0.4 percent. Durable Goods Shipments increased 0.2 percent for the month while Unfilled Orders decreased 0.6 percent.
- September construction spending rose 0.6 percent over August and increased 14.1 percent from September 2014. Residential construction rose 1.9 percent August.
- Productivity rose a solid 1.6 percent in the third quarter according to the Bureau of Labor Statistics. The increase was a surprise as the consensus forecast from economist was a 0.2 percent decline. However, there is speculation that manufacturers were producing for inventory that they will begin drawing down in the fourth quarter, causing a major decline in productivity. Further bad news was that hours worked declined by 0.5 percent, the first drop in hours since the end of the recession in 2009. Unit Labor Costs rose 1.4 percent in the third quarter and were up a slight 2.0 percent in the last 12 months.
Foodservice News This Week
- Foodservice operators hired 42,000 new employees in October according to the Labor Department. This is the highest increase in new jobs for the foodservice industry so far this year and represents over 15 percent of the all jobs added last month.
- Sysco reported sales grew 0.9 percent to $12.6 billion for the quarter ending September 26. U.S. broadline case sales rose 3.4 percent. Gross profit grew 2.3 percent and adjusted net income rose by $3 million to $312 million. Sales of Sysco label products rose to 37.06 as a percentage of total broadline sales.
- The Performance Food Group Company reported sales grew 6.3 percent to $3.9 billion in the quarter ending September 26. Case volume grew 5.1 percent. Gross profit increased 7.1 percent while net income increased 84.8 percent to 12.2 million. The company’s largest division, Performance Foodservice, saw sales rise 5.2 percent to $2.4 billion. This was primarily due to an increase in case volume “by securing new Street and Chain customers.”
- Posting calorie counts on fast food menus doesn’t affect consumers’ choices. A study of orders from McDonald’s, Burger King, KFC and Wendy’s in New York City, which have calories posted on their menu boards, were compared with orders from the same restaurant brands in New Jersey, which does not require calorie counts on the menu. Researchers found no statistical difference between the two. A professor at NYU cautioned that the results might be different at other types of restaurants. Of course, people who are sincerely interested in restricting their calorie intake probably don’t patronize fast food restaurants.
- The World Health Organization’s report stating red and processed meats are linked to cancer may not have much of effect on consumers’ diets. The NPD Group noted that a similar report from the American Cancer Society in 2002 has not seemed to have any long-term effect on the sales of these products.
- The impact of food poisoning incidents on sales is hard to predict. As Chipotle Mexican Grill struggles with an E. coli outbreak in the Pacific Northwest, Joseph Buckley, restaurant stock analyst for Bank of America Merrill Lynch, looked back at the history of restaurant food safety problems and found the impact on companies’ sales and stock prices varied greatly. Chipotle had a food safety issue in Minnesota in August, which didn’t seem to affect the company’s sales. In 1993 Jack in the Box had an E. coli outbreak that resulted in the deaths of four children and the reaction caused a “severe” drop in sales and stock prices. Taco Bell has had food related incidents more recently that hurt sales and stock prices but not as significantly. Domino’s and Chili’s had food safety problems that seemed to have little impact on sales.
- Gordon Foodservice will open a distribution center in Buffalo, NY. The 40,400-square-foot facility is an expansion of a 30,000-square-foot former Office Depot.
- Corporate Stirrings: The Flynn Restaurant Groupannounced the company has purchased 45 Panera Bread locations in the San Francisco area, the Sacramento area and in Washington State. The Flynn Restaurant Group operates over 700 restaurants including 481 Applebee’s. Kahala Brandsannounced the purchase of Maui Wowi Hawaiian, the operator of 400 retail carts and 29 standalone retail units. Jimmy John Liautaud, founder and owner of the Jimmy John’s Sandwichchain is wrestling with taking the company public, acknowledging that there are pro and cons. He told Ad Age that that he doesn’t enjoy receiving pressure from outside and doesn’t know if he has the stomach for running a publically held company. Zaxby’sis considering an initial public stock offering according to unnamed sources. Zaxby’s declined to comment on the matter. Lime Fresh Mexican Grill Brand’s parent company, Ruby Tuesday, announced they will sell 8 corporately owned Lime Fresh Mexican Grill locations in Florida to Rubio’s Restaurants Inc. and will close the remaining 11 corporate-owned restaurants. The 8 Lime Fresh Mexican Grill franchised units will remain open. The press release did not make clear if Ruby Tuesday intends to expand the Lime Fresh Mexican Grill through franchising.
- Growth Chains: Lou Malnati’s, a 42-unit pizza chain headquartered in Northbrook, Ill., has opened a location in Phoenix and hopes to add 9 more there. Pei Wei has opened their 200th restaurant. Red Robin will open 25 units next year, most of them the new smaller design with a central bar. Starbucks will open 900 operations in China. UFood Grille will open 5 restaurants on Air Force bases in the U.S. this year. Checkers will open 70 locations in Baltimore starting with 5 restaurants in 2016 and then with 7 to 10 openings per year after that. Dog Haus plans to expand to 8 with 25 franchisees opening 125 locations. Dunkin’ Donuts announced that 46 new restaurants will be developed in Georgia in the next few years. Shake Shack will expand to the East Coast with 20 to 25 restaurants with primary target areas being New Jersey, Washington D.C., and Florida. Black Bear Diner has opened 4 restaurants this year with a goal of having 100 locations by 2018.
- Comparable-Store Sales Reports: Arcos Dorados up 9.4 percent, Bojangles up 4.1 percent, Bravo Brio Restaurant Group (total down 3.5 percent, Bravo down 3.1 percent, and Brio down 3.8 percent), Carrols Restaurant Group up 6.5 percent, Chuy’s up 4.2 percent, COSI down 0.5 percent, Denny’s (system up 6.1 percent, company-owned up 7.0 percent and franchised up 5.9 percent), Diversified Restaurant Group (Buffalo Wild Wings up 1.5 percent and Bagger Dave’s down 1.5 percent). Famous Dave’s (company owned down 9.8 percent), Fogo De Chao up 2.8 percent, Habit Burger (company owned up 2.9 percent), Ignite Restaurant Group (Joe’s Crab Shack down 6.6 percent and Brick House Tavern down 0.7 percent), Kona Grill up 1.6 percent, Noodles & Co. (system down 0.9 percent, company-owned down 0.9 percent and franchised down 1.9 percent), Papa John’s (North America up 3.0 percent, company-owned up 4.7 percent, and franchised up 2.4 percent), Papa Murphy’s (domestic up 1.4 percent, company-owned flat, and franchised up 1.5 percent), Potbelly (company-owed up 3.7 percent), Red Robin (company-owned up 3.5 percent), Shake Shack up 17.1 percent, Texas Road House (company-owned up 6.9 percent and franchised up 7.7 percent), Wendy’s (company-owned up 1.7 percent and franchised up 3.1 percent), and Wingstop up 6.3 percent.
For details and same-store sales of other chains, please click here for the Green Sheet.