Each quarter, BDO USA, LLP compiles the operating results of publicly traded restaurant companies in order to help restaurants benchmark. In its most recent report, same-store sales through the third quarter decreased, mainly due to increased competition and declining foot traffic.
“The Northeast Ohio market has seen a similar decrease in same-store sales as the national market,” says Adam Berebitsky, tax partner and co-leader of the National Restaurant Practice at BDO USA, LLP.
While BDO’s study uses publicly traded restaurant company information, Berebitsky believes the private sector probably saw a similar decrease in its same-store sales.
Smart Business spoke with Berebitsky about trends in the restaurant industry.
What’s going on with same-store restaurant sales and profit margins?
Publicly held restaurant companies saw same-store sales decreases of 0.1 percent through the third quarter. This deceleration may be attributed to the widening pricing gap between grocery stores and restaurants, and subsequent shifts in consumers’ attitudes toward dining out. Also during the third quarter, pending labor regulations fueled uncertainty around workforce compensation among restaurant operators.
The fast casual segment has fallen into this decline, which is different from the growth reported in fiscal year 2015. Chipotle’s 24.9 percent decrease, for example, works against the average as the brand strives to restore its reputation and customer base by dedicating dollars to marketing and offering more promotions.
The two public restaurant sectors still reporting positive same-store sales are the pizza segment, where Domino’s is leading the charge, and the quick-serve segment.
While same-store sales remain a concern, declining commodity costs is a reason for optimism, most notably higher beef supplies. Lower commodity prices can be a double-edged sword, though. The savings generated for restaurants are also available to consumers through less expensive groceries.
In this highly competitive market, restaurants are reluctant to raise prices to combat declining sales. Price increases also won’t overcome the reduced foot traffic.
Where do things stand with labor costs?
Labor costs increased across all segments for the third consecutive quarter — most significantly in the fast casual segment.
The recent election has quieted some fears about regulated labor costs, especially since President-elect Trump’s nominee for Secretary of Labor is fast-food executive Andrew Puzder and the new Department of Labor overtime rules are suspended as a result of a recent Texas court ruling.
Despite this, labor concerns still exist due to a possible localized minimum wage hike, low unemployment — which means restaurant owners may have to pay higher wages to find workers — and rising health insurance costs. Many restaurants will have to return to the drawing board to identify strategies for reducing labor costs.
How do you think the restaurant market will perform, looking ahead?
As we head into the new year with an increasingly saturated market and labor regulation uncertainty, restaurants need to be more creative, such as utilizing technology to drive sales and provide quicker, more efficient ways to deliver food to the consumers at either the restaurant or their homes.
Despite the results through the third quarter, restaurant valuations continue to be strong and many speakers at the November Restaurant Finance & Development Conference were bullish on the industry’s outlook. Economic conditions remain healthy and consumer confidence trends upward post-election, suggesting the restaurant sector may benefit. Investments in emerging brand concepts continue to be strong throughout the country.
Businesses need to use lessons learned from 2016 to adapt their strategies for 2017. By keeping their finger on the pulse of consumer preferences and behaviors, as well as the competitive landscape, restaurants can ensure they’re cooking up and delivering offerings that meet consumers’ — and investors’ — evolving needs.
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