The Disappearing Middle Ground: The Counter Q3 2018

Following a strong second quarter, the restaurant industry continued its steady growth with a 1.4 percent overall same-store sales increase through Q3. Many brands pointed to higher menu pricing and a slowdown in promotional discounting as key factors to their success. Increasingly, it appears that the industry’s middle ground is disappearing–successful brands either embrace new approaches or stand steadfastly by established concepts.
 
Strong Delivery Determines Success
Restaurants faced increased pressure to offer a seamless delivery experience in the third quarter–and quite a few appear to have risen to the challenge. Fast casual brands offset declining store traffic and posted a 2 percent uptick in same-store sales. Interestingly, Pollo Tropical (+5.3 percent) and Taco Cabana (+8.1 percent) saw sales boosts thanks to their rebranding and menu restructuring. Casual restaurants also saw a 1.6 percent overall same-store sales growth, with brands like Texas Roadhouse (+5.5 percent) and Applebee’s (+7.7 percent) attributing their success to the reintroduction of several limited-time offers. Upscale casual (+1.4 percent) continued to make a turnaround as brands like Stoney River Steakhouse & Grill (+5.6 percent) and The Cheesecake Factory (+1.5 percent) worked on perfecting their more traditional dining experiences. Quick serve’s 1.2 percent same store sales can be attributed to the aggressive push of some QSRs into delivery. Namely, McDonald’s (+2.4 percent) and Taco Bell (+6.0 percent) both benefitted from expanding their partnerships with third-party delivery services. Meanwhile, the pizza segment’s same-store sales continued to slip by 0.8 percent through quarter three, with Papa John’s reputational challenges impeding the sector’s overall growth.
 
Labor Costs’ and Tariffs’ Ripple Effects
The costs of labor averaged 31.2 percent through September as restaurants faced pressure from their competitors to pay their employees not just minimum wage but, in many cases, a few dollars higher. While turnover among restaurants is reaching historical levels, many are beginning to offer perks like maternity leave and mentorship programs in order to not only attain, but retain, qualified talent.
 
Through September, beef prices were up a modest 1.7 percent and cheese prices climbed 5 percent, while eggs prices rose 33 percent. Due to a reduction of U.S. pork exports to China and Mexico, the cost of pork declined a considerable 6 percent over the quarter, meaning many restaurants promoted limited time offers for pork items to take advantage of the potential savings. At the same time, a higher cost of sales through Q3, up to 28.8 percent, led to many restaurants strategically upping menu prices as they sought to offset higher labor expenses.
 
Next Quarter’s Menu: Tax Reform, M&A and Natural Disasters
In the months to come, restaurant IPO and M&A activity is expected to continue at a healthy pace, with deals such as Sonic’s sale to Inspire Brands underlining restaurants’ healthy valuations. 

Separately, while restaurants sales were not impacted by natural disasters through the third quarter, as they were in Q3 2017, they should be prepared to feel the impact of the devastating wildfires in California in their fourth quarter reporting.

Moving forward, it is important that restaurants consider their customers’ shifting priorities and expanding their delivery and digital capabilities. Facing intense pressure from competitors, restaurants may feel the need to charge toward innovation–but for innovation to be sustainable, sound financial and operational management must come first. 
 
To benchmark your organization or learn more about restaurant industry performance—including segment leaders and labor costs—view The Counter in full here.
 
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