John Gordon – February 2020

Is There a Simple Explanation for the Negative Traffic Trend at Chain Restaurants?

by John A. Gordon, Principal and Founder, Pacific Management Consulting Group

We have heard it for years now: restaurants are running negative traffic. All of the publicly reported numbers say it except for the stars such as Chipotle (CMG),  Popeyes the last two quarters and steakhouse brands like the One Group (STKS) and Ruth Chris (RUTH) historically. The chain restaurant trackers (Knapp Track, Black Box, Miller Pulse) see it as well. But why is this happening? Even in January 2020, with mild winter weather and better sales, “traffic” was still negative. See the January Black Box report for the latest context:

https://www.nrn.com/consumer-trends/restaurants-see-best-sales-growth-four-years-amid-mild-winter-weather

EFFECT OF MARKETING PRACTICES

Why is traffic negative? The simple explanation is that people are eating at independents, or staying home, or that there are too many restaurants, Regarding independents, we have some visibility from the publicly traded food distribution houses such as Sysco (SYY), US Foods (USF) and others that the number of independents—they call them “local”- cases sold is up. One sure point is that every independent, every new exciting restaurant you see IS NOT reporting to a restaurant tracker. o that explains some same-store sales (SSS) and traffic loss there.

Chains are only about half of total restaurant sales activity. From month to month and year to year, there are no independent restaurant trackers as we have in the chain segment.

As restaurant marketing initiatives has changed to what has been working, most of the actions the last several years has been to increase check size and the so-called mix, the non-price increase component of sales. Think about these:

  • Kiosks: adds to average check in QSR and fast casuals
  • Delivery: adds to average check in all restaurant segments
  • Takeout: adds to party size and average check in all restaurant segments

RESTAURANT TRANSACTION

DEFINITIONS VARY

Because of historical practice and how POS systems were initially set up, there is a difference between “ticket”, also known as transactions versus true traffic, and its related value, per person average check. Some restaurant segments will be unable to report per person average ticket because they won’t know how many persons they are serving. Consider the following:

  • At McDonald’s, (MCD) a sale of 2 coffees count as one transaction while the sale of four bags of food through the drive-thru and 3 trays of drinks also counts as one transaction.
  • At Chipotle (MCD), a couple ordering two bowls, one chip, and two drinks counts as one transaction.
  • At Ruth Chris (RUTH) a corporate dinner with many rounds of drinks, appetizers, 10 main dishes, side dishes, and dessert, would be reported as 10 customers. RUTH uses entrée count as a proxy for customer count.

HOW CAN CHAIN RESTAURANT REPORTING IMPROVE

So the casual dining and fine dining chains menu built primarily around the entrée can continue to report entrée count as a proxy for customer traffic. The issue in that segment becomes what to do with catering. Every catering marketing document has a conversion table, e.g., this menu item serves x to y people. These conversion guides can be tightened up and used to calculate customers served. It could be called “proforma customers served”.

Fast Casual: the same catering convention can be used.  Fast Casual menus are primarily entrée based menus and it should be doable to count entrees—the POS system has this data after all.

In the QSR sector, food units are tracked by every publicly traded restaurant. A food unit is a sandwich, breakfast platter, drink, or side item. The food units sold trend can be reported periodically. McDonald’s has to track a boatload of global numbers as it as. But a periodic reporting of the trend of food units sold may answer the McDonald’s US traffic number debate, or at least, provide better information for future action.

About the author: John A. Gordon is a long time restaurant analyst with 45 years in operations, corporate staff financial management roles and the last 19 via his founded management consultancy, Pacific Management Consulting Group. You probably guessed it, he works complex restaurant operations and financial analysis engagements for clients. He is reachable at 619 379 5561, email, jgordon@pacificmanagementconsultinggroup.com.  Website: https://www.pacificmanagementconsultinggroup.com.

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