Economic Climate at Year's End, Advertising's Effect on Sales and More

Technomic's "Final Chapter" looks at the impact of the economic climate on the restaurant community as we head toward the end of the year. This week's blog post also takes an early look at the financial impact of the government shutdown, the effectiveness of restaurant advertising and a lot more.

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Technomic's consulting economist, Arjun Chakravarti, offered a fairly balanced but slightly optimistic overview of the U.S. economy. Chakravarti takes issue with what he calls the "pent up demand" line of thought that says consumers are giving up small purchases in order to make major ones such as buying cars. (Malcolm Knapp calls his theory "Allocation Nation.") Instead Chakravarti sees this economy at its best point since the start of the financial crisis and believes people cutting back on their revolving credit are not the same ones buying big ticket items.

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He recognizes weakness in the employment sector but sees the recent pickup in the manufacturing segment as a positive factor as is the return to normal levels of short-term unemployment. But, Chakravarti does note high long-term unemployment levels continue to be a problem. He also is cautious about the housing market and the Federal Reserve policies. Chakravarti does look for the overall economy to grow at 2.5 percent, provided the housing market and Fed actions remain positive and "political theatrics" cease.

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While the impact of the partial government shutdown continues to come into focus, one early estimate pegs the cost of this chapter of U.S. history at $24 billion. The Goldman Sachs/International Council of Shopping Centers reported that weekly sales in October grew 1 percent vs. 2.2 percent in September while ShopperTrak said mall traffic was down 4.7 percent the first week in October. It is probably a safe bet that most of the people who were going to buy homes, cars and make other major purchases as well as a lot of small ones, i.e., clothing, etc. will probably do so. Unfortunately, certain spending such as meals, are gone and will not be made up. The good news? The shutdown was relatively short.

It is important to note that most government workers will be paid the days they didn't work and many may draw overtime to catch up on their work.

As for the long-term impact of the shutdown, opinions differ. Some observers state that the shutdown will take a "few clicks" off economic growth while others speak of a "ruined fourth quarter" or having the "health of the economy on ice." Societe Generale economists estimate that 0.5 percent was shaved off 4th quarter GDP growth.

And unless the politicians can start acting responsibly, we might get to go through the whole thing again after the first of the year.

Economic News This Week

Here is the news we can't bring you. Due to the government shutdown, a number of economic reports have been delayed. This includes Commerce Department reports for September retail sales, housing starts, building permits issued, new homes and industrial production. The Labor Department has postponed issuing reports for employment, unemployment, producer prices, and consumer prices. The Conference Board has delayed issuing its leading economic indicators because several data streams come from government reports. All of the reports should be released within a couple of weeks.

  • Initial jobless claims fell to 358,000, a decline of 15,000 for the week ending Oct. 12. This returns claims to the same level they were for the first half of the year. The more reliable 4-week average fell to 336, 500, a decline of 1,750. Government furloughs and continued processing problems in California get the blame for the high level of claims and experts warn that that the claims numbers may be unreliable for some time.
  • Despite dropping sharply to 1.5 in Oct. from 6.3 in Sept., the New York Empire Manufacturing Survey remains in expansion mode. This is the slowest growth in the N.Y. Fed's region in five months. New orders were up but shipments declined.
  • Although it dropped to 19.8 in Oct. from a robust 22.3 in Sept., the Philadelphia Business Activities Index continues to show strong growth. New orders were up while shipments declined. The employment index rose 5 points to 15.4, the highest it has been since May 2011.
  • Citing the political impasse in Washington, D.C. as the main driver, The National Home Builders Association Confidence Index fell to 55 in October from a revised 57 in September. Any number more than 50 is considered positive.
  • Mortgage applications increased 0.3 percent in the week ending October 11 according to the Mortgage Bankers Association.
  • U.S. economic confidence continued to plummet with Gallup's Index falling to minus 39, down 5 points last week. This comes after the index fell 12 points the first week of the government shutdown. This is significantly lower than any reading this year and is the worst reading since late 2011. The Index's lowest reading was minus 54 in August 2011. The study measures the difference between respondents who believe the economy is getting better vs. those who believe it is getting worse.

Foodservice News This Week

  • Advertising effect varies by company according to a new study by Technomic, Inc. Technomic surveyed 78,000 consumers asking about memorable advertising, whether they could relate to the advertising and if the ads made them hungry. The ads most chains run made people hungry but there were major differences among the chains on relatable ads and memorable ads. One of the conclusions of the study was that Subway's ads successfully connected to consumers due in large part to spokesman Jared Fogle. Olive Garden scored second highest followed (in order) by Sonic, Red Lobster, Popeyes, Chili's, Applebee's, Chick-fil-A, Red Robin and Little Caesars. Obvious major players — and advertisers — missing from the top 10 include McDonald's, Burger King, and Wendy's. Is this a cause for alarm for these heavy hitters? Maybe but maybe not. Measuring the effectiveness of advertising is an arcane art. Having people "remember" an ad or "like" an ad doesn't necessarily mean they will buy the product. The true test, of course, is the impact on sales. Chipotle attributes their 15 percent sales increase to their new ad campaign.
  • McDonald's has been getting bashed. In addition to the Technomic ad research (see above item), a Goldman Sach's survey of 2,000 consumers found that McDonald's appears to have a difficult time converting advertising into customer visits. This leads to questions about the strategy of marketing limited-time offerings (LTO) items which require a lot of ad support. Some franchisees feel that it not the advertising per se but that LTOs have lost their appeal. But Big Mac's third quarter results, while far from superlative, did come in slightly better than expected. Earnings per share of $1.52 were slightly better than projected. Global same-store sales were up 0.9 and were better than the consensus estimate of flat to minus 1 percent. U.S. store comparable sales were up 0.7 percent, also beating most forecasts. The company said the Monopoly Game and Mighty Wings helped sales growth. Overall corporate sales grew 2 percent for the quarter but McDonald's warned that same-store sales in October were running flat.
  • Taxpayers subsidize fast-food restaurant employees' wages and benefits according to a recently released study from the University of California at Berkeley. The report states that it costs taxpayers $7 billion a year because fast-food workers earn so little that they are eligible for public assistance programs. The full study is available on the University's website but it is not terribly clear how the authors were able to identify fast-food workers. The National Restaurant Association, not surprisingly, took issue with the study calling it misleading and accused the authors of selective use of data. The study was funded by Fast Food Forward, which is the organization that has been leading the recent work stoppages.
  • ADP said the U.S. added 15,000 franchise-related jobs in September and "job gains among restaurants were the primary driver" of franchise job growth. Next week we will report on government employment figures for September.
  • Restaurants partnerships with sports stars – and other celebrities as well – are very common but most of the time the operations fail. Perhaps having the celebrity take a more visible role in the restaurants can change that. Case in point: Bronco's quarterback Peyton Manning owns 21 Papa John's units in Denver. Since Manning became an owner, sales have risen from $3,000 to $4,000 per day to $5,000 to $6,000 per day. Mr. Manning does visit the stores and they also feature a life-sized cardboard cutout of him at each location. According to pizzamarketplace.com, other Papa John's restaurants in the Denver area have not experienced similar sales growth.
  • Burger King has expanded its delivery program again. Detroit is the latest city for the test. It appears that the chain has a limited number of locations in any market offering delivery service. In Detroit only one unit offers delivery and the company will use it as a training store.
  • Sbarro opened Pizza Cucinova, a new fast-casual concept in Columbus, Ohio. Columbus will also be the site of an updated Sbarro fast food model that they refer to as a makeover of the core brand. Called Sbarro Brooklyn Fresh, it emphasizes quality and fresh ingredients. The Columbus Business Journal notes that Sbarro's CEO, David Karam is a former Wendy's executive and is based in Columbus.
  • Growth Chains: Bonefish Grille plans nine new restaurants in the next year. Quaker Steak & Lube will open four new restaurants over the next few years. Fazoli's will open three new locations in Kentucky for a total of nine units this coming year. Togo's has signed a new franchisee to open three restaurants in the Phoenix area over the next two to three years. Smoothie King opened 34 new stores through the third quarter and is on track to open 25 more by year's end with a goal of having 1,000 stores in 5 years. Bowl of Heaven has signed a franchise agreement for 5 units in Santa Clara County, California. The parent company of Charley's Grilled Subs and Charley's Philly Steaks has a franchise agreement to open 25 restaurants in Russia.
  • Comparable Stores Sales Reports: Chipotle (up 6.2 percent), Domino's (up 5.4 percent), Frisch's (down 1.0 percent), and McDonald's (up 0.7 percent).

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

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