As restaurant trends go, 2018 is looking to be much like its predecessor, at least in terms of industry growth and financial forecast. The consumer price index remains strong, with discretionary income stable, maybe even ticking up.
Revenue for the restaurant industry was estimated at $799 billion at the end of 2017, up 4.3 percent from the previous year. That overall number, however, is deceptively high, and deflates to 1.7 percent growth when accounting for inflation. Those numbers break down further with $263 billion (3.5 percent growth) ascribed to full service establishments and $234 billion to quick service and fast casual (an impressive 5.3 percent growth).
However, the revised projection for the industry based on current performance is not meeting that 2017 forecast. Although new growth is expected in some segments with the opening of new stores and menu price adjustments, same store sales continue to remain a challenge with reported rolling three months average of -1.1 percent and -3.2 percent.
And with industry observers predicting macroeconomic indicators — unemployment level, disposable income — remaining largely unchanged or edged up only slightly, any period of rapid economic growth is expected to be out of reach in the next year.
In short, we’re looking at nearly flat growth for the restaurant industry as a whole in 2018.
An Independent Advantage
With the prediction of a flat overall industry, one thing is absolutely certain: competition for where dollars are being spent is tight.
Conventional wisdom dictates that if one dining establishment (or segment, such as fast casual) in a local market is doing substantially well in an environment as described above, it’s because business is shifting away from another one. Expectations are at an all-time high, but also, consumer behavior is also simply changing. And that can have a profound effect on what establishments flourish.
Overall the hardest hit so far, restaurant chains are continuing to pull back in development over the course of the year. Red Robin has responded to disappointing late 2017 sales with a pause on unit growth for 2018 — inciting some poor stock activity as a result of the announcement. Famous Dave’s is down 13 units going into 2018 with focus shifting to more franchise units (and thus shared financial burden).
Similarly, Papa Murphy has seen -4.1 percent same store sales with plans to cut staff and refocus on refranchising as well. And Pie Five is seeing its expected expansions offset by closings due to softening sales leading into the current year. BJ’s Restaurants, Zoe’s Kitchen, Chipotle, and Potbelly all have also expressed plans to curb development in 2018.
What this crunch could be indicating is an advantage for independent operators. Robert Veidenheimer, partner and president at Pentallect, a Chicago-based food industry consulting firm, said, “In contrast [to larger chains], some independent operators and regional chains continue to outperform the industry, with some growing at a rate of 4 percent to 5 percent.”
Engagement of customers — maintaining the quality of food, service, and atmosphere, as well as directly responding to customer concern in real time — is driving a lot of the long term independent restaurant success we’ve seen and expect to continue in 2018.
Expansion of Off-site Eating
Delivery was, without a doubt, one of the factors that drove growth for restaurant businesses large and small in 2017, and as a restaurant industry trend, it’s certainly not going anywhere. Consumers are simply eating in their homes more than ever before.
With an increase in working from home taking a bite out of the lunch market in major cities (and more and more options in to-go style eating from grocery competitors), the drive for take-out and delivery service is likely necessary to maintain profits in 2018, not simply additive.
As restaurant industry traffic has slowed, one possibility is that the grocery industry is picking up on the consumer trend to eat already prepared meals at home. This theory has some wind at its back with the latest USDA numbers. We are now seeing the greatest gap between restaurant menu prices and retail grocery prices of food since 2009, favoring the latter. Menu prices are going up to meet the demands of a service-based industry, while grocery stores are maximizing on their ability to be all things to all consumers.
With Amazon.com’s recent acquisition of Whole Foods, and planned expansion into grocery delivery, there’s some valid consternation that they could rival delivery services such as GrubHub, UberEats, and their own Amazon Restaurants for market share right out of the gate.
To combat this, we’re seeing a rising tide of delivery service introductions, expansion, and development of exclusive off-site dining outlets for some major restaurant brands.
Bloomin’ Brands, the parent company of both Outback Steakhouse and Carrabba’s Italian Grill, has opened new delivery-and-take-out only concepts, beginning in Hollywood, Florida, with slow roll-out to other municipalities over the next few months. Wendy’s has made a big push into its delivery partnership with Door Dash, with an expected 2,500 locations fully participating by the end of 2017.
And it’s no wonder why restaurant chains are making the leap now, and why it’s likely we’ll see even more by the end of 2018. Olive Garden has reported its delivery orders have risen 70 percent over four years, and Buffalo Wild Wings now reports that take-out and delivery accounts for 19.2 percent of its orders. With casual dining traffic down for all but four quarters since 2012, this revenue is absolutely critical to the continued success of full service establishments.
While many forecasters expected 2017’s plight of hurricanes to have strongly negative regional effects, particularly in Texas and Florida markets, the rebound was much faster than anticipated. There’s no question that third quarter profits in 2017 were adversely affected, but the long tail on that dip appears much shorter than it could have been.
What does that mean for regional markets in 2018, however? With no end in sight to these types of dramatic weather patterns, businesses large and small across the gulf region and eastern coast need to prepare themselves for worst case scenarios like they never have before.
Hurricane and winter storm preparedness isn’t just about protection of your physical assets. It’s also about maintaining a financial foundation in case of damage or environmental conditions that make it impossible to safely open an establishment for a prolonged period of time. If a significant portion of a local industry can’t survive that break in case of increasingly stronger storms, it could have a more dramatic effect on restaurant numbers and overall regional revenue.
Federal and Local Divide
Another factor that has already had a profound effect on some regional markets — and will only get more difficult going into a midterm election year — is the divide between federal and local government interests in regard to employment law (including the ongoing minimum wage debate) and immigration enforcement.
With workplace rules and pay levels growing potentially more unrestricted (or simply unaddressed) at the national level, local municipalities are filling in perceived gaps with new regulations. With 27 states and 40 localities with minimum wage laws setting pay above the national requirement, that number is only expected to grow as time goes on unless a larger federal law is put into place. However, the likelihood of that seems slim at this time.
Meanwhile, several lawsuits have been filed, most notably by Los Angeles and Chicago, against the U.S. Department of Justice for attempting to tie federal funding to cooperation with immigration enforcement. Eleven cities also have united in a pledge to provide legal assistance to all immigrants facing deportation. This makes for a very complex legal atmosphere for restaurant owners managing staff at risk of deportation.
It also raises the possibility of more turnover if staff members who are citizens themselves have to face the possibility of their family members being deported. Do they stay or do they go?
A Rise in Turnover
More broadly, a relatively positive economic environment overall has made turnover an increasingly difficult issue for restaurateurs to manage. After a brief plateau (at an already high level), post-summer 2017 has seen climbing numbers again:
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Part of the issue lies in what would otherwise be considered a positive economic statistic: the unemployment rate is at record low, resting at 4.2 percent nationally in September 2017. This is not expected to change appreciably as 2018 zooms ahead. With more options available in a stronger market, and less competition for positions, turnover is bound to stay high.
But unemployment numbers can’t be the sole factors behind the high turnover rate, as regional variances make clear. As Victor Fernandez, executive director of insights and knowledge for TDn2K, noted in TDn2K’s Workforce Index report, “Kentucky and Mississippi, which are among the states with the highest restaurant hourly turnover rates in the country, both have unemployment rates around 5.3 percent, well above the national number.”
Refocus on Baby Boomers
One of the ways the restaurant industry is adjusting to an evolving employment environment is looking back to an age bracket they may have slowed recruiting from in recent years — Baby Boomers.
According to the National Restaurant Association, people 55 and older are the fastest-growing sector of the industry’s work force. As Baby Boomers begin to exit the mainstream workforce, a traditional work ethic coupled with long term prospects for living well into their 80s and 90s has encouraged many retirees to take up employment in the restaurant industry. In fact, the U.S. Department of Labor predicts that people 65 and older will continue to enlarge this workforce at least until 2024.
But it’s not just employee manuals and shift schedules that could start shifting to accommodate Baby Boomers alongside the expanse of Millennial employees that now dominate the industry. Customers 55 and older remain income-positive and big spenders in the restaurant vertical, with an affinity for dining out, particularly with familiar brands and local establishments.
Franchise restaurants such as Chili’s and Applebee’s have recognized this development and begun to re-engineer their menu offerings — streamlining and simplifying — to appeal to the Baby Boomer aesthetic. Operators are hoping that returning to core values and recognizable branding, over trying to maximize on every fleeting trend, will turnaround soft sales in early 2018.
Overall, the restaurant industry as a whole is still positioned better than many going into 2018, but each restaurant and small business needs to take care to plan, weigh decisions carefully, and build a safety net in case economic conditions shift unexpectedly.
Want to explore more changes in the industry (and how they will affect your business)? Download our free ebook “Restaurant Trends in 2018” today:
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