The new NRN-MillerPulse restaurant operator surveys, which track sales trends and operator sentiment, reveal a foodservice industry in a precarious position.
While guest traffic and sales trends have remained steadily positive during the past few months, consumer sentiment and spending plans are falling, which could spell a decline in future restaurant industry fundamentals.
The MillerPulse surveys, created by Larry Miller, senior restaurant analyst at RBC Capital Markets Corp., poll more than 100 restaurant operators across the country monthly on sales and profit trends, expectations and concerns. The respondents include executives from major chains and regional brands that in aggregate represent about 16 percent of total industry sales. All segments of the restaurant industry, from fine dining to quick service, are represented. MillerPulse has exclusively partnered with Nation’s Restaurant News to provide this industry-leading benchmarking service.
A separate survey from Miller polls more than 1,000 consumers each month on sentiment and spending. Together, the latest surveys show the industry reaching a crossroads, with consumers indicating they plan to spend less on dining out during the next 90 days, just as restaurant operators were beginning to benefit from steady same-store sales gains.
“You’ve got to feel good that traffic is holding and restaurants are passing cost to the consumer,” Miller said. “But you can paint almost any scenario you want from here.”
Miller noted that many economic events could be responsible for consumers’ less-than-sunny outlook, from the debt troubles in Europe to high gas prices at home, as well as the, as of press time, still- unresolved U.S. budget talks.
“There has been a lot of macro noise,” Miller said. “I’m about as confused [on economic trends] as I have been during the past 18 months. … I’m just reading the tea leaves as they come in.”
Looking at the May, June and July operator surveys, which cover the operating months of April, May and June, respectively, Miller sees consistently positive sales trends. Respondents said same-store sales rose 2.0 percent in April, 2.5 percent in May and 3.1 percent in June.
The breadth of positive responses deteriorated in the July survey, however, with 38 percent of the companies reporting better same-store sales trends and 40 percent reporting worse trends, versus 47 percent and 32 percent, respectively, in the prior month’s survey. In addition, operators were more cautious on their outlook for July same-store sales, as 36 percent said they expected better results, versus the 45 percent who expected better results in the June survey.
Operators also said they expect margin contraction over the next six months, but at a lesser rate. About 42 percent of operators in the July survey said they expect worse margins, while 53 percent had expected worse margins in the June survey. Miller said many restaurant chains have already taken menu price increases to help stem rising costs. In addition, commodities have stabilized a bit, providing relief from the surges seen earlier this year.
Still, it is consumer sentiment and spending levels that will dictate restaurant performance in the months ahead. Job growth is stalling after a bit of an uptick in past months, and U.S. consumer confidence remains low.
The Conference Board Consumer Confidence Index declined in June and rose slightly in July, but did not reveal many favorable trends.
“Consumers’ appraisal of current business and employment conditions … was less favorable, as concerns about the labor market continue to weigh on consumers’ attitudes,” Lynn Franco, director of The Conference Board Consumer Research Center, said in a statement July 26.
Miller also sees weakness in the consumer environment.
“It is clear inflation is tugging on one arm of the U.S. consumer and job growth and the U.S. economy on the other,” he said.
Most restaurant companies that at press time had already reported second-quarter results remained positive about both sales and profit trends, as well as their ability to increase menu prices without deterring traffic. Chipotle Mexican Grill Inc., BJ’s Restaurants Inc. and McDonald’s Corp. had taken price increases or indicated they planned to, and continued to report positive trends. Ruby Tuesday Inc. and P.F. Chang’s China Bistro Inc. were two companies reporting weaker trends, but both said the lackluster performances were because of specific brand issues.
At Chipotle, the Denver-based operator of more than 1,130 fast-casual restaurants, food costs are expected to rise more than expected. The company said inflation should reach 7 percent for the year, more than the 5-percent increase officials had expected. The company has taken select price increases, which it acknowledged as risky considering the unreliable consumer environment.
“Achieving the high end of [our same-store sales targets] and finishing the year in double digits can only be achieved if we experience little or no resistance to the price increase and consumer confidence and spending habits hold up through the end of 2011,” John Hartung, Chipotle’s chief finance officer, said during a July conference call with investors.
Contact Sarah E. Lockeyer at sarah.lockyer@penton.com.
MillerPulse has teamed exclusively with NRN to provide industry-leading benchmark data on same-store sales trends and operator sentiment. Each month, participants take a short survey and receive a deep analytical report from analyst Larry Miller. Participation is free and confidential. Register at: www.nrn.com/industry-insight
