The National Restaurant Association says industry performance softened in April. Foodservice operators kept hiring in May. Fast-casual sales are predicted to slow this year. Panera Bread found a way to achieve faster service. Shift in dining habits hurts lunch business. Some consumers are balking at the price of better burgers. These stories and a whole lot more This Week in Foodservice.
After a nice bounce upward in March, the National Restaurant Association’s Restaurant Performance Index fell in 1.5 percen in April to 100.3 – barely indicating expansion among the index of leading economic indicators for the restaurant industry.
Both major components of the RPI declined. The Current Situation Index plunged 2.3 percent to 99.1. This indicates business is contracting at least for the month. Operators reported lower same-store sales and less traffic.
The Expectations Index also declined, falling 0.7 percent but staying in a positive range of 101.5. This is the lowest level for this reading in 6 months. Fewer operators expect sales to increase in the next 6 months and fewer expect economic conditions to improve in the next 6 months.
And, while operators’ purchasing activity and intentions were lower than in March, it appears that a significant amount of investment remains in the works. Sixty-one percent of April survey participants reported capital expenditures for equipment, expansion and/or remodeling in the last three months. This was down only slightly from the 63 percent of those surveyed in March. And, better than half of operators plan on capital investments for equipment, expansion and/or remodeling in the next 6 months, with 56 percent stating they will make an investment in the future, versus 58 percent in March.
The May report will tell if either the March or the April RPI was an aberration.
Economic News This Week
- Personal income rose 0.4 percent in April. Personal spending also rose 0.4 percent. Both numbers matched the census forecasts.
- U.S. car and light truck sales rose 0.5 percent in May but it was mixed results with some manufacturers reporting increased sales while others saw sales fall. Industry watchers noted sales were driven by low profit fleet sales as well as a lot of rebates and promotions. Sales declined 2.1 percent for the first 5 months of this year.
- The Institute for Supply Management’s Production Manufacturing Index in May was virtually identical to the April reading. The May index stood at 54.9 compared with 54.8 in April (any number above 50 indicates expansion.) The New Orders Index rose to 2 points to 59.5 while the Production Index declined by 1.5 points to 57.1. The Order Backlog Index fell 2 points to 55. The Employment Index rose 1.5 points to 53.5.
- The Institute for Supply Management Non-Manufacturing Index slipped a bit in May, falling to 56.9 from 57.5 (a reading that exceeds 50 indicates expansion). This marks the 89th consecutive month where the index remained in expansion mode in the service sector. The New Orders Index fell 5.5 points for reading of 57.7 while the Order Backlog Index rose 3.5 points for a reading of 57.0. The Employment Index rose 6.4 points for a reading of 57.8. ISM reported that of the 18 non-manufacturing industries surveyed, 17 reported growth in May, including Accommodations & Food Service, which was the third fastest growing for the month.
- The Chicago Production Manufacturing Index rose in May to 59.4. This is a 1.1 point increase from April and the highest the index has been since November 2014 (any reading of more than 50 indicates increasing activity). The New Orders Index fell by 4.5 points but stayed well in the expansion range at 61.4. The Production Index rose 3.7 points to 63.2. The Employment Index rose 3.3 points.
- April construction spending fell 1.4 percent from March but was up 6.7 percent from April 2016. Residential Construction fell 0.7 percent from March.
- Unemployment claims rose by 13,000 to a level of 248,000 for the week ending May 27. The 4-week moving average rose 2,500 to a level of 238,000. This marks the lowest 4-week average since January 1974.
- ADP reports hiring was strong in May with employers adding 253,000 new workers. This was the largest number of new jobs since January. Small businesses (fewer than 50 employees) added 83,000 new employees, medium businesses (50-499 employees) added 113,000 new employees and large businesses (500-plus employees) added 57,000.
- The U.S. Bureau of Labor Statistics reported that employment rose 138,000 in May. This is well below average for the year and also below the estimate of 185,000. The private sector added 147,000 jobs but the number of government jobs declined by 9,000. The unemployment rate, determined by a different survey, fell to 4.3 percent. One economist called the May report disappointing but not disastrous. Another observer commented the lack of qualified employees is limiting workforce expansion. As for the wide spread between the government’s numbers and those of ADP (see above item), the one reasonable explanation is that the two are measured differnently.
- The Conference Board Consumer Confidence Index declined in May, falling slightly to 117.9 from 119.4 in April. The Present Situation Index held steady, rising very slightly in May to 140.7 from 140.3 in April. The Expectation Index fell to 102.6 from 105.4 April. The May decline followed a moderate decline in April. Still, a spokesperson noted that consumers “overall remain optimistic.”
Foodservice News This Week
- Foodservice operators hired 30,300 new workers in May. Since the private sector added a total of 138,000 employees in May, the foodservice industry was responsible for better than 1 out of 5 new hires. In the last 12 months, foodservice operations added 267,000 employees. Additionally, ADP says hospitality jobs declined by 11,000.
- Fast-casual dining growth will slow this year. Pentallect Inc. predicts sales growth between 6 percent and 7 percent n 2017 for the fast-casual sector. This is down from 8 percent in 2016. From 2011 to 2015 fast-casual sales grew between 10 percent to 11 percent. Some of the possible reasons for the slowdown are a natural maturation process, the large number of fast-casual concepts, realization that the food may not be as healthy as originally assumed and stronger competition from fast feeders like McDonald’s.
- The Panera Bread Company realized how to speed up service. The chain discovered that taking orders online helped reduce the line to place orders but led to more customization and employee errors, as well as turning the area where customers picked up their food into a “mosh pit.” As a result, Panera changed the way it processed orders and simplified kitchen display systems. Panera’s current CEO says the fast-casual chain had to change literally hundreds of little things.
- Lunch traffic falters. The NPD Group, the The Wall Street Journal and NBC’s “Today Show” all blame the slowdown in the restaurant business on one factor — people have decided not to eat lunch out. There are different reasons given for this. More people work from home, more bring their lunch to work, time constraints don’t allow workers to leave for lunch, and more people now have lunch delivered to their workplace. While it is true that delivered meals would frequently come from restaurants, The Wall Street Journal points out this doesn’t support the dining areas. Further, take-out customers are less likely to order high-margin soup, appetizers and desserts. And, as for the once-famous three-martini lunch, cocktails, beer and wine simply aren’t part of meal delivery. It seems the industry faces a culture shift that is very difficult to fix.
- Consumers rethink better-burgers. It appears that some consumers are balking at paying $8 or $9 for a burger. With fries and a drink, the tab can come to $13. That may be too pricey, at least for customers to eat regularly. The alternative? Fix a burger at home or trade down to a $3 or $4 hamburger at fast-food restaurant.
- McDonald’s tells franchisees about Phase 2 of equipment upgrades. First came the Experience of the Future modernization program, which could run as high as $700,000 per store. McD corporate offered to pay 55 percent of the cost, provided certain conditions were met, such as participation rates by franchisees. Now franchisees are also being asked to buy additional equipment, such as pressure fryers to improve chicken quality and new espresso machines. The new round of equipment purchases could run $100,000 per location.
- Little Caesars has no interest in delivery. The pizza chain feels its Hot & Ready business model precludes the necessity for offering delivery service. Little Caesars’ CEO also notes that many of its stores reside in lower-income neighborhoods where customers would not want to pay a delivery fee. However, the company is quite willing to work with third-party delivery services like Door Dash and GrubHub.
- Corporate Stirrings: Wendy’s resolved a lawsuit with a long-time franchisee when the 140 units owned by DavCo Restaurants LLC were purchased by NPC International. Wendy’s sued Maryland-based DavCo, a Wendy’s franchisee since 1976, in 2014 for allegedly not complying with the company’s remodeling and point-of-sale upgrade programs. NPC International now owns 386 Wendy’s locations and is the chain’s largest franchisee. The Ignite Restaurant Group, owner of Joe’s Crab Shack and Brick House Tavern & Tap, reportedly has 2 firms interested in purchasing the chains. One is Landry’s, which at one time owned Joe’s, and the other is Nashville-based American Blue Ribbon Holdings. American Blue Ribbon owns O’Charley’s, 99 Restaurants, and Baker’s Square. Neither has confirmed their interest. U.S. Foods announced an agreement to acquire F. Christiana, a broadline distributor located in Marrero, La. F. Christiana will continue to operate under its own name. The purchase price of the acquisition was not disclosed.
- Growth chains: Marco’s Pizza will open 15 locations in the Des Moines, Iowa, area. Capriotti’s Sandwich Shops has signed 3 franchise agreements for a total of 12 restaurants in the Salt Lake City area. Boston Market has signed a franchise agreement for “dozens” of restaurants in the Middle East. Dickey’s Barbecue Pit has will open two restaurants in Massachusetts, one in Andover and one in Burlington. Zoe’s Kitchen plans on doubling the number of restaurants in Houston, where the chain has 15 locations. Jamba Juice has opened its first unit in Thailand and plans on another 30 in the next 10 years. IHOP has opened its first location in India and plans to add 19 more in the next decade.
- Comparable store sales reports: CEC Entertainment down 2.8 percent, Fogo De Chao down 0.3 percent, and Texas Roadhouse (company-owned up 3.1 percent and franchised up 3.8 percent)
For details and same-store sales of other chains, refer to the Green Sheet.