December was another relatively strong month for restaurant sales and traffic growth. However, there was enough noise in the data to temper down some of the optimism that the topline results may produce. The month was one of the warmest Decembers on record, and in many regions of the country, it was the warmest ever while snowfall was also extremely moderate. But there is no doubt the year finished with an upswing for the industry, as year-over-year (YOY) traffic growth improved during every month beginning in September.
Same-store sales growth was 2.3% YOY in December, up from 1.9% in November and 1.4% in October. This was the strongest month based on sales growth since July. But while then, average guest checks were still growing at a very high rate (check growth averaged 6.0% growth YOY during the first three quarters of 2023), it has since moderated considerably. This means sales are now being lifted much less due to rising checks in recent months than they have been over the last three years. Average guest checks grew by only 3.4% in December.
As average check growth decelerates, driven primarily by smaller price increases, it has contributed to a slowdown in the erosion of restaurant traffic. Same-store traffic growth was -0.9% in December, an improvement from the -1.5% recorded in November and the -2.1% recorded in October. Yes, favorable weather may have helped December’s results, but all months in the fourth quarter of 2023 showed traffic growth as stronger than what we had seen in previous quarters. For context, the average same-store traffic growth for all months in the second and third quarter was a much softer -2.8%.
Limited-service restaurant brands continue to perform better, as they have throughout the COVID period and the highly inflationary environment that resulted after it. During December, the two segments with the best same-store traffic results were fast casual and quick service. While all full-service segments experienced negative traffic growth during December, fast casual was able to achieve strong growth, and in the case of quick service, the number of transactions remained flat compared to the same month the previous year.
However, there are brands that continue to buck the trends and perform strongly in this environment despite the challenges, and opportunities remain in the marketplace for those that can deliver an excellent guest experience that meets or exceeds expectations. In the case of full-service restaurants, Q4 data from GuestXM shows that those companies that have the strongest value sentiment scores are the ones that are driving the biggest gaps in traffic growth versus the competition. In the case of limited-service top-performing companies, the key differentiator remains their food.
Labor woes since 2020
Restaurant owners have found it more difficult to retain staff members since the pandemic and have been wondering when the labor market would “return to normal.” After years of instability due in part to the COVID-19 outbreak and its resulting economic effects, the labor market finally appears to be stabilizing, and restaurants hope to reap the rewards of an experienced workforce once again.
In 2021 and 2022, annual inflation rates rose to 7.0% and 6.5%, respectively. To put that into context, the previous eight years had an average annual inflation rate of just 1.6%. Many restaurant employees discovered that changing employment was the best way for them to receive raises that kept up with inflation. According to the U.S. Bureau of Labor Statistics, 2021 and 2022 saw an all-time high in workers voluntarily quitting. Workers switched jobs at such unprecedented levels that economists coined it the “Great Resignation.”
This trend hit the restaurant industry particularly hard; according to internal GuestXM data, both 2021 and 2022 had record turnover. In 2022, full service witnessed a 14% increase in turnover compared to 2019. Limited-service restaurants saw a whopping 24% spike. Each quarter in 2023 saw a gradual decline in turnover, but it was still higher than pre-pandemic norms. Non-management turnover for full-service restaurants in Q4 was only 5% higher than 2019; however, for limited-service brands, it was 17% higher pre-pandemic.
The present and near future labor market
While no one would accuse 2024 of being a “normal” year, a contentious election is likely to dominate the news cycle for the next 12 months, and several international crises have already put much of the world on edge. In terms of the state of labor, it may be the first “normal” year since the pandemic.
According to Forbes, most economists are cautiously optimistic that a recession has been avoided and that the labor market has finally settled. While inflation remains higher than ideal (3.3%), it is much closer to the Fed’s 2% target, which means interest rate hikes are likely behind us. Unemployment was 3.7% in November and December, with a 1% layoff rate in October, and it is expected to increase slightly in 2024 (barring a recession). According to the Atlanta Fed, in 2023 “job switchers” earned only 1% more in wages than “job stayers,” which is more in line with the historical average and likely a signal that an equilibrium has been reached since the days of the Great Resignation and massive inflation.
The advantages of an experienced workforce
This return to the mean is good news for restaurants. Not only is turnover costly but the data continuously shows that an experienced workforce is better for business. According to GuestXM’s Market Intelligence, restaurants that retained their general manager during the last 12 months had total employee turnover 24 percentage points lower and had YoY sales and traffic growth in the last quarter that was one percentage point higher than those restaurants that lost their general manager.
Higher tenure levels show similar results. General managers in the top quartile of tenure enjoyed total employee turnover 16 percentage points lower for their restaurant and outperformed on sales and traffic growth by one percentage point compared to those restaurants in the bottom three quartiles of general manager tenure. This remains true for hourly workers as well; both limited-service and full-service restaurants saw improvement in sales and traffic if they were in the top quartile of tenure of hourly workers compared to those that weren’t.
In terms of traffic and sales, 2024 is still anticipated to be a tougher year, even though experts are no longer forecasting a recession. In a softer year, restaurants that can capitalize on the favorable labor market and retain an experienced workforce are more likely to prosper.
