Stories worth a second look: Fresh perspective on the “restaurant recession.” Starbucks isn’t worried about the impact of people forsaking brick and mortar retailers. Starbuck’s Roastery is enjoying success. C-stores future is in foodservice. Burger King makes a commitment to grow in Canada.

What shape is the foodservice industry really in? According to some observers, there is a “restaurant recession.” Evidence to support this includes data from the NPD Group showing flat to declining customer traffic. (NPD surveys consumers regarding their eating patterns.) Various other researchers have provided data indicating slowing restaurant sales. Many sources site the recent bankruptcy filings by half a dozen small restaurant chains as evidence that the industry is in a recession.

After looking at all of the assertions that the industry is in a recession it appears there is no definitive evidence to support this. I say this for a variety of reasons.

First, the industry keeps hiring. For most of the year the restaurants and bars have been one of the leading industries for new jobs. It would seem unlikely that an industry in recession would keep hiring. It is true that restaurant hiring slowed in October to “only” 9,900 new positions created. This led one media source to proclaim that restaurant hiring had come to a “grinding halt.”

Second, major distributors report moderately healthy sales. Forgetting dollar sales and profits, in its most recent quarter Sysco reported case sales grew 1.8 percent, US Foods reported case sales rose 4 percent and the Performance Food Group saw case sales rise 6.5 percent. It is possible that these large distributors grew their case volume at the expense of smaller competitors and/or that while restaurants went into a recession, other foodservice segments — employee feeding, healthcare, education, etc. — grew fast enough to make up for lost restaurants. These may be possible explanations but probably not too likely.

Third, another theory is that people don’t stop eating out but they trade down. Look at recent sales numbers for McDonald’s, Wendy’s, Domino’s, and Papa John’s. No recession here. The slowdown continues to affect mid-price restaurants but not all of them. See the recent sales results for Texas Roadhouse and Wingstop as examples of this.

Finally, the U.S. Census Bureau of Department of Commerce is the most authoritative source for retail sales data and it continues to show restaurants and drinking places as one of the fastest growing retail segments. While restaurant and bar sales went negative in August by 0.2 percent, sales bounced back to grow by 0.6 percent in September. The advance October sales numbers show restaurant and bar sales fell 0.7 percent from September but were up 4.3 percent from October 2015. Full details will appear in next week’s newsletter.

Restaurant recession? Perhaps but more data is needed to make a definitive declaration.

Economic News This Week

• Small Businesses remain pessimistic. The National Federation of Independent Businesses reported its Small Business Optimism Index rose 0.8 points for a reading of 94.9. According to the survey, small business owners are struggling with government regulations, high taxes, and spiraling healthcare costs. They are also uncertain what actions government will take in the future.
• Consumer credit rose 6.3 percent in September at an adjusted annual rate. The U.S. Federal Reserve also reported that revolving credit (mostly credit card debt) increased an adjusted annual rate of 5.2 percent and non-revolving credit (auto loans, student loans, etc.) increased 6.7 percent on an adjusted annual basis. For the third quarter the Fed estimates consumer credit rose 7.0 percent.
• Initial jobless claims fell by 11,000 to 254,000 for the week ending Nov. 5. The 4-week moving average rose by 1, 750 for a reading of 259,750. Note the similarity in the weekly number of claims to the 4-week average. This indicates little volatility in the number of jobless claims being filed.
• The number of job openings— those workers voluntarily leaving their jobs — remained at 2.1percent and the layoffs and discharges remained at 1.0 percent. However, the number of hires fell by 187,000 from August, which is obviously not a good sign.
• University of Michigan Index of Consumer Sentiment bounced back in November after a decline in October. The preliminary November Index of Consumer Sentiment rose to 91.6 from 87.2 in October. The Current Economic Index increased to 105.9 from 103.2 in October while the Index of Consumer Expectations rose 82.5 from 76.8 in October. A spokesperson for the university cautions that this preliminary survey was completed before the election.

  Foodservice News This Week

• E-commerce will eat into brick-and-mortar retailers but Starbucks’ CEO is not worried. Howard Schultz believes that Starbuck’s has sense of community with their customers that will allow the chain’s stores to continue to thrive.
• Starbucks’ upscale Reserve Roastery concept is coming on strong. Starbucks reports  sales at its luxury brand rose 24 percent over the previous year and that the average customer spends 4 times as much at the Roastery than at the typical Starbucks. The chain may eventually have as many as 30  Roastery locations in “influential cities.”
• C-stores’ future is in foodservice according to the chairman of the National Association of Convenience Stores. Jack Kofdarali, who is the president of J&T Management Inc., an operator of c-stores on the West Coast, cautions that competition is fierce and c-stores will have to overcome misconceptions about their foodservice offerings.
• Burger King plans to grow in Canada. The chain, with just 281 locations in Canada, sees no reason the quick-service restaurant concept won’t be able to match McDonald’s 1,400  Canadian units. BK did not provide any timeline for its planned expansion.
• Wendy’s has reduced company-operated restaurants by 433 since last year. By the end of this year Wendy’s plans on selling 315 restaurants to franchisees, which will leave the company operating 5 percent of the total system’s units.
• Ruth’s Chris Steak House renovated its Austin location. The company spent more than $1 million to change the look from a dark speakeasy to an airy, open, contemporary appearance with humorous Texas design touches.
• US Foods announces layoffs.The foodservice distributor declined to give an exact number but said it would layoff a “small percentage” of its corporate employees. Earlier this year Sysco announced the company was eliminating 2.0 percent of its workforce.
• Corporate Stirrings: McDonald’s has received building permits for the foundation and underground parking garage in Chicago’s West Loop. The new McDonald’s headquarters is estimated to cost $250 million. Four Corners Property Trust, a real estate investment trust, has purchased 10 restaurant properties for $15.6 million. The operations involved consist of 2 Arby’s, 2 Wendy’s, 2 Steak ‘n Shake, as well as one each of the following: Burger King, Denny’s, Fazoli’s, and Zaxby’s. Matt Maloney, CEO of food delivery company GrubHub, sent out a strongly worded company-wide e-mail that was highly critical of president-elect Donald Trump. Maloney finished by saying that if any employees disagreed with the CEO’s sentiments they should turn in their resignations. As might have been foreseen, the e-mail was leaked to the media and a firestorm ensued.
• Growth Chains: Arby’s  signed an agreement with the Parikh Network, a major operator of another restaurant chain, to open 50 Arby’s in the next 8 years. Curito, a fast-casual burrito concept, plans to open a unit in Clarksburg, Md., two units in Orlando, and signed a franchise agreement for 10 units in the Chicago area. Dunkin’ Donuts signed a franchise agreement for 9 restaurants in the Greenville and Raleigh-Durham, N.C., areas. Shake Shack will open 21 or 22 restaurants in the U.S. in 2017. Hardee’s plans on adding 4 restaurants in the Dayton, Ohio, area.
• Comparable Store Sales Report: Carrols Restaurant Group flat, Diversified Restaurant Holdings (Buffalo Wild Wings down 1.8 percent), Fiesta Restaurant Group (Pollo Tropical down 1 percent & Taco Cabana down 4.1 percent), Fogo De Chao up 0.6 percent, Noodles & Company (system down 0.7 percent, company owned down 0.9 percent and franchised up 0.6 percent), NPC International (Pizza Hut down 2.7 percent and Wendy’s up 1.7 percent), Popeyes Louisiana Kitchen up 1.5 percent, Shake Shack up 2.9 percent, and Wendy’s up 1.4 percent.

For details and same-store sales of other chains, refer to Green Sheet.