The Counter: Restaurant Industry Scorecard for Q2 2018

The restaurant industry experienced continued sales growth across nearly all segments through the second quarter of 2018. A strong economy coupled with increased consumer spending means that hungry customers are putting more dollars towards eating out. However, restaurant owners should note that growing consumer spending hasn’t necessarily distributed evenly amongst restaurants. Evolving market dynamics mean that those who struggle to capture this spending may face greater hurdles down the line.


Pizza Segment Misses out on Sales Gains

Across segments, restaurants’ same store sales rose at an average of 1.1 percent through Q2. Apart from strong consumer spending, higher menu prices and brands’ growing digital and delivery capabilities contributed to this growth. In the fast-casual segment, a strong 1.6 percent average sales increase can be attributed to solid performance by Chipotle (3.3%), as well as Noodles & Company (5%), who posted their most successful quarter in six years. Sales growth in the casual dining segment averaged 1.4 percent, just above quick service’s 1.3 percent overall gain. Upscale casual’s 0.7 percent sales uptick was carried by Stoney River Steakhouse, whose sales rose by 6.2 percent. Dominos’ continued sales streak, up 5.1 percent, was not enough to lift the pizza segment, which ended Q2 with a 0.3 percent overall dip in sales. While Dominos’ robust mobile ordering platform continues to drive impressive growth, soft performance from Pizza Hut and reputational challenges at Papa John’s prevented the segment from overall same-store sales gains.


Labor Costs Climb; Commodities in Flux

During the second quarter, a modest price spike was seen in wheat and beef, while prices for pork, cheese, and fresh vegetables dropped. Egg prices continued to stabilize, increasing 37.1 percent, following an extreme cost decline in 2016. In terms of labor, various states’ minimum wage hikes, combined with high turnover rates, led to a continued labor cost incline across the industry of 0.4 percent over Q2 2018. However, strategic investments in tech are helping some restaurants manage these labor market pressures.


M&A and Trade Tensions Heat Up

Apart from tax reform, a few key issues stand at the industry’s horizon. First, several significant M&A deals may materialize in the coming months, including an ongoing bid for Yum Brands’ China, which operates KFC, Taco Bell and Pizza Hut. If sold, this will likely represent China’s largest private equity deal ever. The restaurant industry continues to attract attention from private investors eager to take advantage of its relatively low post-acquisition general and administrative expenses.
Additionally, current commodities prices have not yet absorbed the full impact of tariffs and international trade tension. This uncertainty is a challenge that farmers are currently tackling, and its effects may trickle down to restaurants sooner than later.
Moving forward, a strong economy will continue to boost consumer spending at restaurants. And while it’s impossible to predict which restaurants will capture these dollars, it’s likely that those engaged in strategic delivery and tech investments, creative promotions, and measured expansion plans will see continued same-store sales gains.
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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