The restaurant industry’s sales trends in recent quarters have been very challenging, as the Thursday report from Starbucks (NASDAQ:SBUX – Free Report ) shows. This makes it prudent for investors to take a closer look at the dampeners threatening growth in the restaurant industry. Particularly, negative comps growth, given sluggish traffic trends along with rising costs, are taking the sheen out of restaurateurs.
Below we discuss some of the downsides plaguing the restaurant industry:
High Expenses : Costs related to various sales and comps boosting initiatives along with restaurant re-imaging expenses are hurting margins for companies likeDomino's Pizza, Inc. (NYSE: DPZ – Free Report ). Though these initiatives offer long-term advantages, the costs related to them are expected to continue to dampen margins in the near term.
Also, there has been considerable debate in the recent past over restaurant workers’ wages. Workers at quick-service restaurants claim that their employers' profits have not trickled down to them proportionately, which is leading to strikes for wage hikes. These incidents significantly hurt the reputation of restaurants. As a result, the companies are compelled to make minimum wage increases, which again lead to narrower margins. Moreover, higher labor costs due to a competitive labor market are expected to continue to keep profits under pressure.
Restaurant management turnover is another critical headwind for operators as turnover rates are now at the highest level since the recession, according to a report by Black Box Intelligence. This is further compelling restaurants to either hike wages or provide benefits, again at the cost of margins, to retain or attract employees. Industry giants likeMcDonald's Corp. (NYSE: MCD – Free Report ) and Domino's are working on these lines.
Soft Comps & Traffic Trends : Over the past few quarters, consumer behavior has been volatile and their willingness to spend on most goods, especially eating out, is showing signs of decline. Most of the restaurateurs are thus bearing the brunt of soft comps and traffic trends. In fact, the first quarter of 2017 marked the fifth consecutive quarter of negative comparable sales for the restaurant industry as a whole, per a report by TDn2K’s Black Box Intelligence. Given the negative same-store sales, there has been a lot of buzz about the restaurant industry hitting recession.
But it is to be noted that the chief reason for the drop in same-store sales is an increased number of new restaurants amid limited growth in eating-out budgets. Moreover, per market analysts, diners are spending more per visit instead of visiting chain restaurants more often, which is hurting traffic. Also, increase in menu prices is at times preventing them from dining out. This unwillingness of Americans to dine out is thus pulling down restaurateurs’ sales.
Slowdown in New Restaurant Openings : As the operating environment has become increasingly challenging, the decline in sales volumes have begun to impact the returns on new restaurant openings. As a result, some of the restaurants are slowing down their development plan significantly for 2017.
Red Robin is one such company that has slowed down its unit growth plan and expects the first half of 2017 to be challenging.BJ's Restaurants, Inc. (NASDAQ: BJRI – Free Report ) has also reduced the number of planned restaurant openings to 10 in 2017 compared with 17 restaurant openings in 2016. The reduction is due to the company’s continued belief that the sales headwinds in the industry call for greater focus on traffic and sales building initiatives.
Such slowdown in their development plan in 2017 is likely to dent sales growth in the year.
Macro & Political Issues/Company-Specific Challenges : The restaurant industry is grappling with difficulties like intense competition in the U.S., decelerating growth in Asia along with weakness in some parts of Europe, where economic/political conditions are expected to be challenging after U.K.’s exit from the 28-member economic bloc. Naturally, restaurateurs like McDonald's andPapa John's International Inc. (NASDAQ: PZZA – Free Report ).
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