Still-cautious clientele keep casual-dining sector in slump
Malcolm M. Knapp
Hampered by still-slumping guest traffic, casual-dining restaurants sustained another decline in same-store sales in September, which we estimate was an average dip of 1.1 percent–the fifth-worst monthly slippage of 2007.
The dismal results for the month provided yet another indication that economic pressures continue to suppress consumers’ discretionary appetites for sitdown eateries.
By comparison, the casual sector’s same-store sales rose 0.8 percent in September 2006, last year’s third-highest monthly result. Thus, the year-to-year slippage in same-store performance was an overall 1.9 percentage points.
Knapp-Track’s estimate for same-restaurant guest counts for September 2007 was that they fell 3.5 percent, on top of a 1.8-percent decline in the prior September.
It should be noted that the latest estimates are based on weekly data. The final accounting for September will depend in large part on shifts in results for individual casual-dining brands based on the specific weeks included in their accounting month.
All five weeks of September had negative same-restaurant sales results and guest counts. The spread between the best week of the five and the worst week was 1.5 percentage points, with the best week being the first and the third and fifth weeks tied for the worst result.
The reduction in same-store sales results for September, versus the 1.7-percent gain for August, can be attributed in part to very hot weather in that month, which boosted air conditioning-related energy bills that showed up in September. In addition to that effect on consumer behavior, the casual sector spent much less on advertising in September than it had in the same month last year.
Conditions were especially troubling in California, which is home to a large concentration of underperforming subprime mortgages–17 percent of all such mortgages and 19 percent of all foreclosure starts in the second quarter were in that state.
High-rate mortgages represented 29 percent of all new home loans in 2006. From 2004 through 2006, 10.3 million high-rate loans were made, or 23.6 percent of some 43.6 million mortgages. High-rate or subprime mortgages are not just the province of low-income households. Higher income households took out high-rate mortgages to buy more expensive homes than their financial position would allow with conventional financing.
Fort Meyers, Fla., is a prime example of an area in subprime trouble. In 2006, 40 percent of all mortgages in that market were subprime loans. Since December 2005, the area’s median selling price has fallen 22 percent. This year through July, the Fort Meyers area has had the second highest mortgage default and foreclosure rate in the nation. It is no accident that the Fort Meyers-Naples TV market has posted the worst results in Knapp-Track comparisons.
The casual-dining sector’s September same-store slump was below the weighted-average same-store retail industry increase of 1.2 percent for the month, as measured by Bear Stearns’ retail analysts. The pattern of the period from April 2003 through August 2007 was that Bear Stearns’ retail same-store results outperformed the casual-dining sector in all but seven months: November 2004, January 2005, April 2005, May 2005, January 2006, March 2006 and April 2007.
Hotter weather than usual in September was a major factor in lowered sales of fall clothing. That negative factor showed up clearly in the so-called softlines category, which was up 2.8 percent in August and down 3.4 percent in September. It was even more dramatic in the apparel category, whose sales fell 0.9 percent in August and another 8.6 percent in September.
For September, drug stores led retail’s same-store sales with a gain of 3.3 percent, followed by discounters, up 2 percent; department stores, down 2.4 percent, the softlines category’s 3.4-percent decline; and home furnishings, off a steep 16.2 percent from September 2006. Off-price apparel led in the softlines merchandise category with comparable sales gains of 1.5 percent, followed by junior apparel, down 1.1 percent, and apparel stores, the worst niche, with a decline of 8.6 percent.
“Higher-demographic” department stores, discounters and drug stores were the best retail performers in August 2007.
Value propositions for most restaurants will continue to be very important as pressure on households earning less than $50,000 continues to come from inflation in general, and increased energy, education, medical and drug costs.
The most recent 2005 Consumer Expenditures Survey from the Bureau of Labor Statistics showed that households with pretax incomes of at least $70,000 account for 28.5 percent of all households but account for 50.1 percent of all personal dollars spent on meals away from home, an index number of 176.0. The casual-dining concepts that do not increase the proportion of their overall patronage coming from $70,000-plus-income households will not fare well in the next turn of the “retail wheel.”
Just-released Internal Revenue Service data for 2005 show that the top 1 percent of tax tilers that year earned 21.2 percent of all adjusted gross income–which is income after some deductions such as contributions to individual pension accounts and alimony. That was up from 19 percent in 2004 and exceeded the prior high of 20.8 percent in 2000. The bottom 50 percent earned 12.8 percent of all adjusted gross income.
The IRS data also show that between 2000 and 2005, the median tax filer’s income fell 2 percent, adjusted for inflation, to $30,881 while the income for the threshold filer at the bottom of the top 1 percent of tax tilers rose 3 percent to $364,657.
The actual average income in 2005 by income group showed the adjusted gross income of the top 1 percent of all tilers averaged $1.2 million; the average for the top 95 percent to 99 percent of all tilers was $202,471; for those in the 90 percent to 95 percent range it was $121,117; the 75 percent to 90 percent group’s was $79,553; the 50 percent to 75 percent segment’s was $44,502; and the bottom half’s was $14,526.
The third and “final” estimate for growth in real Gross Domestic Product for the first quarter was just 0.6 percent, the slowest rate since the fourth quarter of 2002. However, the third and “final’ estimate of the second quarter’s real GDP growth was a much stronger 3.8 percent.
The Manufacturing Index, as measured by the Institute for Supply Management, was 52.0 in September 2007, down 0.9 index points from 52.9 in August 2007. An index number above 50.0 indicates an expansion of manufacturing activity. The average Manufacturing Index for the prior 12 months was 52.5. The basic good news in manufacturing was that export orders were still expanding, with a September index number of 54.5, down 2.5 index points from August. Export orders had expanded for 58 months as of September.
The Non-Manufacturing Business Activity Index of the Institute for Supply Management was down 1.0 index points with an index of 54.8 in September 2007, versus 55.8 in August 2007. Services have expanded since March 2003, a consecutive increase of 54 months. The average Non-Manufacturing Index for the prior 12 months was 56.7.
The upbeat news is that from September 2006 through September 2007 the number of payroll jobs increased by a revised 1.63 million, for an increase of 1.19 percent in the number of jobs.
The Household Survey showed an increase of 463,000 jobs in August 2007, versus a gain of 110,000 in the Establishment Survey. The unemployment numbers rose 0.1 percentage point to 4.7 percent because there was an increase of 573,000 people in the civilian labor force.
On September 3, regular-grade gasoline prices averaged $2.796 per gallon, down 4.2 cents from August 6. On October 8, gasoline prices were $2.770 per gallon, down 2.6 cents from September 3.
From the 2007 low on Jan. 29 of $2.165 per gallon to Oct. 8, gasoline was up 60.5 cents a gallon, or 27.94 percent. From a year ago, gasoline was up 50.9 cents per gallon, or 22.51 percent. The gasoline price on May 21 was $3.218, an all-time high. Since May 21, prices through Oct. 8 were down 44.8 cents a gallon, or 13.92 percent.
Crude oil prices hit a 20-month low of $49.90 a barrel on Jan. 18, 2007, and by Oct. 12 had rebounded 57.86 percent to an intraday high of $84.05 per barrel, due to the increase in worldwide demand and speculation that Turkey might invade northern Iraq to suppress Kurdish rebels.
Iraq has the world’s thirdlargest oil reserves.
The price per barrel settled at an all-time high of $83.69 on Oct. 12, an increase of 67.72 percent from the Jan. 18 low of $49.90 a barrel.
Consumers’ emotional climate is still not good and continues to hurt casual-dining sales.
A positive for the restaurant industry is the growing difference between the Consumer Price Index for restaurant meals and grocery food sales.
On a year-to-date over year-to-date basis, through August the inflation increase for restaurant meals was 0.3 percentage points lower than the inflation increase for grocery food. Given the increase in wholesale food prices, I expect the favorable spread to continue for several months. This differential may provide some pricing power for restaurants, as consumers know that the cost of food is substantially increased.
August 2007’s final comparable-restaurant sales result for the casual-dining sector was an average increase of 1.7 percent. That was 3.3 percentage points better than the below-trend August 2006 figure, a 1.6-percent decline, which tied for the third worst month of 2006. August 2007’s comparable-restaurant guest counts were down 1.5 percent, compared with the 3.7-percent decline in guest counts in August 2006. Year-todate comparable sales through August 2007 were down 0.6 percent, versus 0.1 percent through the first eight months of 2006.
Year-to-date comparable guest counts through August 2007 were down 2.9 percent, versus a decline of 2.8 percent for the eight months through August 2006.
The casual sector’s year-to-date all-restaurant sales through August 2007 rose by an average 5.1 percent, versus 6.4 percent through August 2006. Its year-to-date all-store guest counts through August 2007 rose 2.9 percent, compared with 3.7 percent through August 2006.
The Consumer Confidence Index decreased in September 2007 by 5.8 index points to 99.8. The index figure for that month was at its lowest level since reaching 98.3 in November 2005. Compared with September 2006, this year’s September 2007 index figure was down 6.1 points.
The Present Situation Index fell by 8.4 index points to 121.7 for September, which was down 6.6 index points from September 2006. The Expectations Index–how people think the economy will perform in March 2008–fell by 4 index points to 85.2. That was a decrease of 5.8 index points from September 2006, when the Expectation figure was 37.3 index points below the Present Situation result. By September 2007, Present Situation still exceeded Expectations by a substantial 36.5 index points.
The unemployment rate in September 2007 was 4.7 percent, up 0.1 percentage point from August 2007. Unemployment has been between 4.5 percent and 5.5 percent in each month since July 2004, with the exception of the March 2007 rate of 4.4 percent, which matched the May 2001 unemployment low.
As of September, 1.28 million persons had been unemployed for 27 weeks or more, 17.6 percent of the unemployment total. In September 2006 the percentage was 18.1 percent.
This persistence in long-term unemployment remains a negative pressure on consumer confidence.
Employment in the service-providing sector–which includes retailing, services and government–increased by 143,000 jobs. The service sector was up 1.93 million jobs, or 1.69 percent, for the prior 12 months.
Foodservice and drinking place employment rose by 25,400 jobs in September. Over the preceding 12 months, foodservice and drinking place employment increased by 355,100 jobs, or 3.76 percent.
Seasonally adjusted hourly earnings were up 7 cents in September to $17.57, a rise of 4.09 percent from September 2006. Seasonally adjusted average weekly earnings were up $2.37 in September 2007 to $593.87, also a 4.09-percent year-over-year increase for the month.
In August, 10 of 11 KnappTrack regions showed positive same-store sales gains among the casual-dining sector. One region, California, had negative comparable-restaurant sales results. Ten regions had better comparable sales results in August 2007 than in July 2007. One region, New England, had worse results in August than in July.
The spread between the high and low regions for comparable-restaurant sales in August was 5.2 percentage points, versus the 6.0 points of July 2007.
The best performing region was Texas, followed by Pacific Northwest, Middle Atlantic, West North Central, East North Central and East and part of West South Central. Those six regions had better or equal comparable-restaurant sales results than the national average of 1.7 percent in August. The worst performing region was California, followed by Florida, New England, Mountain and South Atlantic.
Year-to-date through August, the highest region for comparable sales was the Pacific Northwest and the lowest was Florida. The spread between the two year-to-date regions was 4.1 percentage points. The median-concept same-store sales change was 1.7 percent. Olive Garden had the highest comparable sales result in August for concepts with over $300 million in sales.
With regard to comparable restaurants in August, the spread between same-store sales and guest counts was a negative 3.2 percentage points. The national average for same-store guest counts in August was a negative 1.5 percent. The best performing region was Texas. The worst-performing region was California. Two of 11 regions had positive guest counts. Nine of 11 regions had negative guest counts. The spread between the best- and worst-performing region was a negative 5.5 percentage points.
Casual dining’s all-restaurant sales in August were up 7.2 percent. By that yardstick, all 11 regions were positive. One region had a double-digit increase. The spread between all-restaurant and comparable-restaurant sales was a negative 5.5 percentage points.
All-restaurant guest counts in August were up 3.8 percent. All regions were positive. The spread between all-restaurant and same-store guest count gains was 5.3 percentage points.
Year-to-date comparable-restaurant sales in August were down 0.6 percent. Year-to-date comparable-restaurant guest counts were down 2.9 percent.
Through the first eight months of 2007, all-restaurant sales for the sector rose 5.1 percent. Year-to-date all-restaurant guest counts were up 2.9 percent through August.
For the first quarter of the year, comparable-restaurant sales fell 1.9 percent; for the second quarter they dipped 0.2 percent
Guest counts for the first quarter, on a same-store basis, fell 4 percent. They were off 2.3 percent for the second quarter.
All-restaurant sales gains for the sector rose 3.7 percent for the first quarter and 5.6 percent for the second quarter. All-restaurant guest counts for the two periods rose 1.8 percent and 3.6 percent, respectively.
Malcolm M. Knapp is president of Malcolm M. Knapp Inc. Knapp-Track[TM] is an exclusive report on the casual-theme and dinnerhouse segment, presented on a monthly basis. Based on actual, unpublished results received from key chains, Knapp- Track[TM] offers a realistic gauge of the segment’s performance. All percentage changes reflect nominal dollars.
The monthly same-store sales data are indicative of basic industry health, while the same-store customer traffic reflects the underlying strength of consumer demand.
Monthly all-store sales provide a benchmark against which the reported sales change of published quarterly reports can be measured; monthly all-store customer traffic is a proxy for real growth.
The year-to-date comparisons for all four categories provide perspective as the year unfolds, giving a fix on where the business is at any point in time.
Knapp- Track[TM] subscribers, representing more than $29 billion in sales, include Acapulco, Applebee’s, Benihana, Bennigan ‘s, Buca di Beppo, Chevys, Chili’s, Don Pablo’s, LongHorn Steakhouse, Lone Star Steakhouse & Saloon, The Olive Garden, On The Border, Outback Steak House, P.F. Chang’s, Pizzeria Uno, Red Lobster, Smokey Bones, Macaroni Grill. and T G.I. Friday’s.
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