Restaurants: Bumpy Road Into Fall

Restaurant Talk: Generally speaking, …

So, for years and years, September has not been a good month for restaurants. Back to school, colleges reopen, workloads and back to office become prime focus. Restaurants, often meeting the need of socialization, take it in the shorts if there is less. September restaurant sales v, YAG have slowly softened over September to date. The weakness began in late August.

There are many external factors affecting the US. It is important to note in the last quarter, many of the big international operators reported more positive SSS than here. The restaurant density here is far greater. The same patterns of US strong and weak brands remained the same…except for Cracker Barrel (CBRL) that continues to decline. Casual dining continues to outperform, up 3.7% via trackers last week, while quick service was down .7%. CAVA, First Watch, Dutch BROS, Outback (now on a roll) and Shake Shack lead the way. Papa John’s, Pizza Hut and Cracker Barrel were in sub-basement.

For the investors that were upset regarding Q2 SSS misses vs. expectations, a few things must be kept in respective. First, the current year SSS numbers are simply bounced against prior year values. This presumes prior years is the normalized expectation. As we all know, it is not—things happen. A 2-year or 5-year benchmark might be better. Or stacking the prior year results, for a 2- or 3-year period.

All of this is doable. The brand needs to disclose prior history, but they have the numbers. This might be preferable to the panic, stress and loss of shareholders’ investments that does result.

Reasons for Restaurant Spending Softening

Here are a few reasons for consumer spending softness:

·       Student Loan Repayments is causing stress. While not new news, when it hits, it becomes non-discretionary,

·       Lower FICO stores overall. This has a pyramid effect on personal consumer spending over time. Restaurant spending declines when income falls or debt is higher.

·       Health Insurance deductible: insights from Mac Brand, Founding Partner, Bellwether Food Group, and a 2-time author.

Incremental Health Insurance Deductibles – A Traffic Issue

Full-service traffic is challenged for most operators, no secret there. There are numerous reasons; you have already read about most of them. One that is rarely mentioned is the incremental health insurance deductible thresholds being cast on to consumers by their employers and/or health insurance providers.

The most credible data that we have been able to find suggests that the average annual deductible for individual employees has increased annually around 10% each year, since at least 2022.

This 30% increase in this annual deductible over three years means $662 per year less, per household member to spend on restaurant visits since then. A family of four now has $10,648 per year LESS for restaurant spending than they did 3 years ago. Assuming an average annual income for a family of 4 (both parents working) of $125,000, that is an 8.5% decrease in disposal income.

It all adds up quickly. Let us say the average family has decided to reduce restaurant spending by 20% of that amount ($2,219) next year to compensate for this incremental cost. If we use $125 per family (4 people) on average at casual dining restaurants, that means that about 17 fewer visits to each casual dining restaurant next year for that family.

As a result, each waitstaff person will lose approximately $382 less in tips next year for every family impacted by these incremental costs. That is a bunch of traffic, and a significant reduction in waitstaff tips. If this impacts just 20 regular family customers, that’s approximately $7,640 less income next year for the wait staff. That will not help team retention metrics!

To drive traffic, one option for consideration is the LTO approach. The successful LTO will drive traffic, attract lapsed or new customers, and give the team members something new to start the conversation with guests. Most guests will tip between 15-20%

If you are planning a conference, corporate training, leadership retreat, or team development session, Mac brings energy, clarity, and impact. A 2-time author, you can see more and connect with Mac at www.macbrandbooks.com or macbrand76@outlook.com

The Price v. Value Debate

The confusion by some in analyzing restaurant value continues. Are cheap prices the all-end-all when thinking about value? The answer by experts is mostly no. Some brands have been absolutely built on inexpensive products. White Castle is one, but they have adapted their merchandising, store operations, and store model to be aligned. The National Restaurant Association VP of Economic Analysis recently confirmed that value has more subsections than just price. Also lately, so has BTIG Analyst Peter Saleh in a recent note, as has TD Cowen’s Andrew Charles, which stressed the power of new product innovation.

If new product and concept innovation occurs, it must be (in my experience):

·       Meaningful and frequent enough.

·       Well supported by traditional and digit marketing

·       Be stress tested to insure guest intent to visit. Just the incidence rate goal is not good enough (see poor Wendy’s breakfast results, Cracker Barrel reimaging blowup).