Wednesday, August 20, 2014

Restaurant indicators a mixed bag in 2014

The National Restaurant Association’s (NRA) Chief Economist Bruce Grindy looks back at trends in key indicators during the first half of 2014. Although overall sales are trending in a positive direction, rising food costs continue to pose challenges for restaurant operators.

Below is a breakdown of the trends in key indicators during the first half of the year, and what it all means for the restaurant industry in the months ahead.

Sales and Traffic
The NRA’s Restaurant Performance Index (RPI) stood above 100 during each of the first six months of the year, which represents expansion in the composite index of industry indicators.  Looking inside the RPI, the Current Situation indicators had a sluggish start to the year, which was due in large part to challenging weather conditions. 

As a result of soft same-store sales and customer traffic levels, the Current Situation component of the RPI fell below 100 in January and February, which signifies contraction.  However, sales and traffic results improved during the March – June period, and the Current Situation Index rose above 100 and into the expansion zone. 

Overall, restaurant industry sales trended in a generally positive direction during the first half of 2014.  Total eating and drinking place sales – which takes into account same-store sales as well as unit growth – reached a record high of $47.3 billion in July on a seasonally-adjusted basis, according to U.S. Census Bureau data.  Eating and drinking place sales were up 4.5 percent on a year-to-date basis through July, which is more than double the 2.2 percent increase in grocery store sales during the same period. 

Along with an improving sales environment, the restaurant industry continued to add jobs at a steady pace in recent months.  Eating and drinking places added more than 187,000 jobs during the first seven months of 2014, which brings their post-recession growth to a total of nearly 1.4 million jobs. 

Overall, eating and drinking places added jobs at a 3.1 percent rate on a year-to-date basis through July, which is more than a full percentage-point above the 1.8 percent gain in total U.S. employment during the same period.  In addition, it puts the restaurant industry on pace to post job growth above three percent for the third consecutive year, which would represent the first such occurrence since the 1993 – 1995 period.

Food Costs
Meanwhile, the restaurant industry continues to be challenged by soaring food costs.  Average wholesale food prices registered sharp gains in six of the first seven months of 2014, according to the Bureau of Labor Statistics.  As a result, wholesale food prices were up 7.1 percent in the 12 months ending July 2014, which represented the strongest 12-month gain in nearly three years.  Overall, wholesale food prices are on pace to post their strongest annual increase in three years, and fifth consecutive annual gain overall. 

Menu Prices
While food costs have trended sharply higher, menu price gains have remained relatively tame.  According to the Bureau of Labor Statistics, menu prices rose 2.4 percent in the 12 months ending July 2014.  This was slightly below the 2.7 percent increase in grocery store prices during the same 12-month period, but above the 2.0 percent gain in overall consumer prices. 

If the trend holds, 2014 will mark the continuation of an extended period of relatively modest growth in menu prices.  Between 2009 and 2014, menu prices increased at an average annual rate of just 2.2 percent, well below the 3.6 percent average annual gain registered during the previous five-year period (2004 – 2009).  Moreover, average wholesale food prices increased at a 4.4 percent average annual rate between 2009 and 2014, which put considerable pressure on bottom lines during a challenging economic environment. 

Despite the challenges, the underlying fundamentals point toward an improving business environment in the months ahead.  The national economy added more than 200,000 jobs in each of the last six months, which is a streak that last happened in 1997. 

In addition, real disposable personal income grew at annualized rates above 3 percent during the first two quarters of 2014.  We have to go back more than eight years to find consecutive quarters with income growth above the 3 percent level. 

An improving economy will help consumers become more confident in their personal financial situation, and put them in a better position to burn off their elevated pent-up demand for restaurants. 

For their part, restaurant operators are generally on board with an improving economic environment.  The RPI’s Expectations component, which measures restaurant operators’ six-month outlook for four industry indicators (same-store sales, employees, capital expenditures and business conditions), stood above 100 during each of the first six months of 2014.  This signifies that restaurant operators are generally optimistic about business conditions in the months ahead.

Read more from the Economist’s Notebook and get additional analysis of restaurant industry trends on the newly revamped Restaurant TrendMapper (subscription required)

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