Is the restaurant industry losing some of its spice? The economy lost 33,000 jobs in September, according to the Bureau of Labor Statistics (BLS). That’s the first pullback in job growth in 83 months—and much of it came from job losses in food services and drinking places, which lost some 105,000 jobs. Is this a reflection of the impact from recent hurricanes or is this the deflation of a reported “bubble” in the restaurant industry?
BLS indicated the losses came from temporary dislocations related to the hurricanes that hit Texas and Florida, which shuttered thousands of restaurants and leaving their workers jobless. If the history of major weather-related incidents on economic trends is any indicator, that is likely to be temporary. But how long it will take for eating establishments to recover and reopen is anyone’s guess.
And then there’s the question of whether some independent restaurants have the financial wherewithal to reopen. Meanwhile, chain restaurants, which have been closing stores in recent years, and even turning to bankruptcy, might consider the loss an opportunity to pare back.
Eating Our Way to Economic Recovery
The restaurant industry had been a bright spot in the economy since the recession, employing some 11.7 million people as wait staff, chefs, cooks, bus workers, management and more. Nearly 2.5 million of those jobs have been added since February of 2010 alone, according to BLS.
But what may be riling the industry is that sales growth appears to be slowing over the last two to three years, according to Technomic, an industry research group. In its recently released Top 250 Fast-Casual Restaurant Report, fast-casual sales—the industry’s largest restaurant segment and sales king—grew at a cumulative 8.4% in 2016.
High single-digit growth is good, right? “Despite industry-leading growth, the fast-casual segment is not immune to the challenging operating conditions facing the broader restaurant marketplace,” the report said. “While this growth significantly outpaces other industry segments, it lags compared to the 11.9% sales growth in 2015 and 13.8% growth in 2014.” Other segments have seen deeper falls.
Technomic ascribes the sales downturn to a slowdown in new-unit development at fast-food chains. When a franchised restaurant chain is growing, it tends to open new stores at a rapid pace, which leads to a natural uptick in sales. That's why same-store sales, or sales at restaurants open longer than a year, are such an important industry metric.
Are Restaurant Sales Slowing?
But even before the hurricanes hit, August sales were hardly exemplary, according to TDn2K, another food sector research group. Same-stores sales across the industry were down 2%, following three straight months of negative sales. Traffic into restaurants was off 3.9%, which was just ahead of the three-month rolling decline of 3.8%.
Same-store sales in Texas dropped 15% that last week of the month, which apparently was directly tied to the hurricane there. And, according to TDn2K, Texas was indeed the weakest region, with sales down 5.2% and traffic slowing by 7%. But the strongest region was the West, where sales inched up only 0.1% but overall traffic was lower by 1.9%.
Interestingly, the group also attributed the slowdown to the Mayweather-McGregor fight on the final Saturday of the month, a night that is typically busy at all kinds of restaurants. “With an estimated 4.5 million pay-per-views at about $100 each, the spectacle had roughly a $450 million impact on that single evening,” according to the report. “Millions of potential restaurant consumers modified their plans because of the event.” Casual dining bar and grill concepts did well, but fine-dining and casual upscale restaurants “saw a severe negative impact.”
One Trend That Might Not Be a Friend
Many think the falling trends might be tied to the trend to eat at home, whether this is consumers making their own meals or the growth in home-delivered meals from meal-making companies or traditional restaurants themselves. Many restaurants, facing higher leasing costs, are opening up small drive-through spots for quick pickup. And, the Millennials’ need for “experiences” rather than “things” appears to be having an effect on meal service, according to industry analysts.
According to NPD Group, a consumer research organization, the average American made 57 dinner visits to restaurants in the last year. That’s down from 62 in 2013. Though the quick-service segment did better than others, it was still flat for the last two years.
What About that Purported Bubble?
In late December, the site Thrillist published a year-long study on the trends in the restaurant industry, declaring that the industry “bubble” of new restaurant openings in every segment was about to burst. That has led to a number of analyst reports and industry explorations about what is happening in world of eating.
Last week, a story on the food site Eater asserted that the casual-dining segment is collapsing “as the American middle class and its enormous purchasing power withers away in real time, with the country’s population dividing into a vast class of low-wage earners who cannot afford the indulgence of sit-down meal…and a smaller cluster of high-income households for whom a (whisky) sampler platter at Fridays is no longer good enough.”
Moody’s Analytics debunks those theories with a don’t-worry thesis. Restaurants, it notes, are a relatively high-turnover industry. Anyone who goes out to eat is bound to notice when their favorite restaurant closes unexpectedly. Restaurants go in and out of business for all kinds of reasons: the owners retire, the lease gets too expensive, the competition is fierce, a once-trendy concept has matured, food prices sometimes rise, the economy weakens, etc.
Moreover, restaurants as a share of employment have increased consistently—August results notwithstanding—since the 1970s. “Looking more broadly, the leisure and hospitality industry—which includes restaurants as well as accommodations and recreation/entertainment—has grown as a share of employment consistently since 1950,” as Moody’s says, at nearly 11% of the workforce today from barely 6% in 1950.
“While it’s notoriously difficult to predict trends by extrapolating from the past, as leisure and hospitality enters 70-plus years of growing as a share of the economy I think it is safe to say that growth is more likely than not to continue,” the Moody’s analyst says.
Whether the analyst is right or not remains to be seen—one month of declining employment in one sector does not make a trend. The Millennials have changed a lot of the ways we do things as an economy, but so did the Baby Boomers. And this new upcoming generation Z may do the same.