The outlook for restaurants is looking up for the first time in almost a year, according to the National Restaurant Association’s Restaurant Performance Index.
The index number for April stood at 98.6, which indicates the restaurant industry is still contracting, but the expectations component of the survey indicated expansion for the first time in 18 months, according to the association. This suggests that the restaurant industry may be heading out of the downturn experienced over the last two years.
Same-store sales are still down compared to last year, with only 26 percent of restaurant operators seeing gains and 59 percent reporting negative same-store sales. Traffic also was negative for the 20th straight month, according to the index. Sixty percent of operators reported a decline in traffic in April, which was a slight improvement over the March numbers as a result of the Easter holiday falling in April this year.
Capital spending by restaurant operators increased in April, with 43 percent of operators responding that they had invested in equipment, expansion or remodeling within the previous three months. That was the highest level in the last 10 months, according to the RPI. And even more are planning on making expenditures. Almost half said they would be buying equipment, expanding or remodeling sometime in the next six months.
The increased spending may correlate to the Expectations Index, part of the overall RPI, which rose for the fifth straight month and indicated expansion for the first time in 18 months. When asked about sales in the next six months, 33 percent of restaurant operators expected to have higher sales than the same period last year – up from 30 percent the previous month. Only 30 percent of the responding operators expected lower sales – down from 38 percent the month before.
The operators were even more optimistic about the economy. Thirty-seven percent thought that the economy would improve within the next six months, the highest level in three years and up from 30 percent in March. Only 16 percent thought the economy was going to worsen, down five percentage points from the previous month.
The U.S. economy is showing some signs of life. The unemployment rate sat at 9.4 percent in May, but job losses have slowed. In May, 345,000 jobs were lost, an improvement over the previous six months that each saw job losses over 500,000. The restaurant industry helped those figures, according to the Bureau of Labor Statistics. Eating and drinking establishments, which account for three quarters of the restaurant and foodservice sector, added almost 9,000 jobs in May. That was the first time the sector has grown since July 2008.
Fresh and fresh-cut produce businesses have been affected by the tightened credit market, fluctuating fuel prices and reduced consumer spending, but some have benefited during the recession.
“The produce industry really gets to straddle the fence,” said Julia Stewart, director of public relations for the Produce Marketing Association. “At foodservice, checks and visits are down and there’s even more pressure than usual to keep costs down. I think in this economy produce offers a great opportunity.”
During tight times, consumers are making tougher choices about the food they eat, including where and how often they eat out. Many are trading down, choosing to eat at quick casual or fast food restaurants instead of high end white tablecloth restaurants. A few chains have benefited from trading down, including the McDonald’s Corp. The company announced in June that its sales for the month of May were up more than 5 percent globally, and were up almost 7 percent the month before. Much of that growth was from Europe and Asia, but U.S. sales grew more than 6 percent in April and almost 3 percent in May. McDonald’s credits the growth to the value consumers find in its core menu items.
”May’s strong performance tells us that customers around the world continue to choose McDonald’s for the convenience, menu choice, quality and value we offer. Our focus on the customer and alignment around the Plan to Win are driving our ongoing success,” McDonald’s chief executive office Jim Skinner said in a statement.
But not only are consumers trading down, they’re also trading out of restaurant dining altogether. In addition to buying produce at retail to prepare meals at home, consumers also are buying prepared meals at grocery stores to consume at home. Meals prepared away from home offer consumers convenience and freshness at a value price, but there’s no guarantee that the strong growth in the segment will continue if consumers begin eating out again.
“The challenge is retailers can’t just expect that if they open the doors, people will just come in,” Stewart said. “They’ll have to work harder to keep customers when the economy picks up.”
Even though the economy is finally showing positive signs, restaurant operators will have to keep providing value and variety to grow same-store sales. Offering options to feed a family on a budget and providing menu items that consumers can’t replicate at home could be the key to growing sales in a market that is hopefully on the upswing.