Posted by on October 15, 2016 10:28 pm
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Categories: bank of america Capital Expenditures Demographics Economy Market Share obamacare Same Store Sales

While the latest government retail spending data shows that while it is slowing down, consumer spending on “eating out” or retail and food service sales, hasn’t posted a sharp deterioration, secondary tracking sources beg to differ. A far more accurate tracker of real-time US Restaurant sales, that of the National Restaurant Association’s Restaurant performance index, paints a far more disturbing picture.

As the Natl Restaurant Association reports for its latest data, August restaurant sales tumbled in August, sliding to the lowest level since the financial crisis. As the restaurant association reports, due in large part to declines in both same-store sales and customer traffic, the National Restaurant Association’s Restaurant Performance Index (RPI) fell below 100 in August. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 99.6 in August, down 1.0 percent from a level of 100.6 in July.

Restaurant operators reported net declines in both same-store sales and customer traffic in August, along with corresponding dips in the labor indicators. The RPI is constructed so that the health of the restaurant industry is measured in relation to a steady-state level of 100. Index values above 100 indicate that key industry indicators are in a period of expansion, while index values below 100 represent a period of contraction for key industry indicators.

The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 98.6 in August – down 1.9 percent from a level of 100.4 in July. The August reading below 100 signifies contraction in the current situation indicators, and represented the the lowest

The details were just as troubling:

After three consecutive months of mixed results, restaurant operators’ reporting of same-store sales took a downward turn in August. Only 30 percent of restaurant operators reported a same-store sales increase between August 2015 and August 2016, while 53 percent reported a sales decline. During the previous three months, similar proportions of restaurant operators reported higher and lower same-store sales. Similarly, restaurant operators reported a net decline in customer traffic in August. Only 21 percent of restaurant operators reported an increase in customer traffic between August 2015 and August 2016, while 59 percent reported a traffic decline. August represented the fourth consecutive month in which restaurant operators reported a net decline in customer traffic.

Along with softer sales results, restaurant operators’ outlook for future business also dampened somewhat in recent months. Thirty-three percent of restaurant operators expect to have higher sales in six months (compared to the same period in the previous year), up slightly from 30 percent who reported similarly last month. Eighteen percent of restaurant operators expect their sales volume in six months to be lower than it was during the same period in the previous year, down from 21 percent last month.

Meanwhile, restaurant operators are not as optimistic about the overall economy. Only 17 percent of restaurant operators said they expect economic conditions to improve in six months, while 29 percent said they expect conditions to worsen. This represented the 10th consecutive month in which restaurant operators had a net negative outlook for the economy.

However, the pain did not end in August. According to the Knapp-Track index, casual dining same store sales were down 1.9% in September with guest counts down 4.2% showing sequential deterioration from July and August with the second worse monthly performance of 2016 with only June results softer.

As Bank of America reports, Knapp attributes the industry’s sales weakness mostly to pent-up spending on high ticket items siphoning off consumers’ cash away from every day purchases such as dining out but also to anxiety and distraction related to the raucous Presidential election.

One reason for the slowdown may be food inflation. Check average for Knapp-Track casual dining was up 2.3% in Sept. driven by in part by pricing but also likely by low income customers dining out less which can skew checks higher as demographics move to higher spending customers. This confirms that any food inflation trends are unlikely to persist as a result of the broader decling in sales forcing operators to once again cut prices to regain market share.

Knapp expects the allocation of spending to high ticket items to continue through the 1Q of next year. While Knapp expects business spending to pick up after the election, consumer anxiety may persist because of a polarization of political views with neither candidate popular with most Americans.

Regionally, Knapp noted that Texas same store sales remain especially soft as the weakest of 11 Knapp Track regions with the gap versus the national average widening in August (latest available regional data) to 270 bps which means Texas comps were down 3.7% versus overall Knapp-Track down 1%. In July, the gap was 150 bps with Texas down 2% versus Knapp-Track down 0.5%. Sales in the Dallas market are better than Houston and energy dominated market sales are weaker yet. Separately, Denver is also soft with August comps down 2.5%. California remains the strongest Knapp-Track region.

Whatever is the cause behind the adverse pressure in restaurant food trends, it does not appear to be going away, and in fact is deteriorating with every month. We expect this trend to deteriorate substantially in the near future, as a result of the November 1 Obamacare “price shock” which is expected to send the cost of health insurance across the nation by double digits, eliminating even more discretionary income from Americans’ pockets.

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