The more things change, the more they stay the same in the restaurant industry. Despite significant evolution in the form of consumer dining preferences — including when, where and what they eat — and a growing reliance on technology among operators, overall industry sales continue to inch along during an extended period of moderate growth. That’s been the story the past few years and it seems the industry will maintain that status quo this year and next.
Sales at restaurants will hit $825 billion in 2018, according to the National Restaurant Association (NRA). This represents 4 percent nominal growth or 1.4 percent in real terms.
“2018 is the ninth consecutive year of sales growth for the restaurant industry,” says Hudson Riehle, senior vice president of the research and knowledge group for the NRA. “Not surprisingly, it’s another year characterized by moderate growth. When you look at the industry’s compound annual growth rate since the association started tracking it in 1970, it’s a solid 6.4 percent. However, if you look at it for the past decade, it drops down to 3.7 percent. There’s definitely a period of moderate growth in the post-recession environment.”
A period of moderate growth is exactly what most industry observers predicted heading into this year. “I think 2018 has gone to plan. I don’t think there’s anything that has changed dramatically,” says Darren Tristano, a longtime industry analyst. “The idea for 2018 was we were going to see 3 percent to 4 percent growth and 2.5 percent of that was inflationary. So very real little growth. I don’t expect very much change there.”
The restaurant industry’s moderate growth rate reflects the overall moderate growth rate of the U.S. economy, Riehle notes. In fact, according to data from the U.S. Bureau of Economic Analysis, gross domestic product has exceeded a 3 percent growth rate all of 4 times over the past 16 quarters. This includes a 4.1 percent growth rate for the second quarter of this year.
At the same time, the amount of money consumers have to spend on food continues to shrink. On average, consumers spend 12 percent to 13 percent of their budget on food. “If you go back a few decades, what consumers spent on food was considerably higher,” Riehle notes. The good news is that roughly half the money consumers spend on food goes to restaurants, he adds.
But restaurants can’t continue to live off a healthy bite of a shrinking pie. This will force operators to get creative as they look to acquire and retain customers. “Going forward you are going to see more consumers linking restaurant spending with other categories,” Riehle predicts. He points to the grocery segment as one example. Many grocers now entice shoppers by offering them discounts on their gasoline purchases. Another example is the way some financial services companies offer to lower insurance premiums for customers who purchase perceived healthy food. “You will see operators bundling restaurant spending with other necessary spending,” he adds.
In addition, restaurants may start leveraging technology to drive sales. For example, digital menu boards make it easier for restaurants to alter pricing based on daypart and other factors. It’s interesting to note that this approach seems to resonate with consumers. “When you ask consumers, roughly three out of four say they would patronize restaurants more if they could get different pricing from restaurants,” Riehle adds.
Emerging consumer groups such as Millennials and Generation Zers learned some valuable lessons during the last recession, and it shapes how they use restaurants. For example, they understand the need to manage their finances, including paying down debt such as student loans, but are finding ways to balance that with their desire to eat out as much as possible. “It’s trying to manage the cost so they can dine out with greater frequency,” Tristano says. “The mindset is ‘ “I am going to dine out as often as possible but take advantage of a deal, whether it’s a coupon, an incentive for checking in via social media or an app and other ways.’ ”
The whole concept of restaurant pricing could be ripe for change. “If you think about how restaurant meals are paid for it has not changed in 100 years,” Riehle says. They either pay right before or after their purchase. Younger consumers are more apt to like a Netflix-like subscription approach.”
For the foreseeable future, though, labor will remain a multifront battle for operators. In a very labor-intensive industry, operators continue to struggle with employee recruitment, retention and even cost. “Roughly one out of every two restaurant operators reports their top challenge is labor related,” Riehle notes. “It can vary by region and even within states by certain metropolitan areas.”
Is there anything on the horizon that might jolt the restaurant industry into a period of more accelerated growth? “I am not sure there’s anything that can do that,” Tristano says. “If we were looking at scenarios, one would be population growth and I don’t see that happening. And we may even see lower population growth.” The oversupply of restaurants is as big a contributor as anything. Still lots of bars and restaurants. Granted, they are smaller, but there’s still net positive openings each year. Until we see more closings, we will not see higher growth rates. I don’t foresee a scenario where we will have more people spending more money to eat food away from home.”
2019: New Year, Same Growth Rate
Looking ahead to 2019, we can expect more of the same. “There’s nothing to indicate falling off the cliff in 2019,” Riehle says. “Foodservice operators and equipment manufacturers and distributors should expect the same kind of growth environment in 2019 as they have in 2018. But history’s clear that certain externalities can act as a catalyst in altering the country’s economic growth.”
In other words, don’t be surprised if the industry hits a few potholes along the way. “I think there’s definitely things to be concerned with,” Tristano says. “We are starting to get used to the political anxiety, and there are an increasing number of stress points that affect the U.S. It could be global relationships, for example. Certainly, the environment is a threat. Flooding, droughts and wild fires are all things that could affect the supply chain and the economy. And we have such an oversupply of restaurants. Some operators are hanging on by a thread. It costs more to close than stay open.”
Traditional foodservice operators continue to face competition from new and different organizations
seemingly on a daily basis. At the same time, convenience stores and grocery stores continue to up their prepared food game. Companies like Wawa in the c-store space and Whole Foods in the grocery space continue to draw the most attention, but the growth in prepared-food sales spreads well beyond these two leaders. “When you look at all of the different spaces, there’s a ton of competition out there,” Tristano says.
In addition, the changing nature of corporate dining continues to impact the restaurant world. Tech giants like Google and Microsoft have long been the standard bearers for this segment, but in order to recruit and retain top talent many other companies have upped their dining plans. “There’s a lot of on-premise places that offer employees free food and that’s killing the business for some of these restaurants,” Tristano notes.
Taken individually, none of these developments seem too dramatic. Collectively, though, they continue to contribute to the industry’s meager growth rate.
Routes to Success
There’s only two ways for operators to influence their success: opening and closing stores and changing the menu, Tristano says. “If you are not doing either of those, it will be very difficult to grow.”
Fast-casual remains the darling of the chain restaurant segment and for good reason. Fast-casual restaurant units have grown at a compound annual growth rate of 7 percent over the past 5 years, per The NPD Group. Despite this growth, fast-casual remains susceptible to periods of slower customer traffic. For the year ending May 2018, NPD reports total restaurant visits remained flat, while visits to fast-casual concepts were up 5 percent. While fast-casual enjoyed a 7 percent increase in traffic during the third quarter of 2017, NPD reports it trailed off to 4 percent growth for the quarters ending in December 2017 and March 2018.
Looking at specific restaurant types, poke restaurants continue to enjoy a period of rapid growth. That said, Tristano compares their boom to that of frozen yogurt sites from a few years ago, meaning he anticipates that poke’s growth will eventually level off. The bar business continues to boom as specialized concepts focusing on craft beer and wine remain popular with consumers. “Adult beverage still has a very strong play in the world of the independent restaurant operator,” Tristano says.
Catering represents another segment with significant growth potential. “More people are deciding they want to have functions at their homes catered because they don’t want to cook,” Tristano notes.
The same notion applies to delivery. “We expect to see very strong growth in this area,” Tristano says. The anticipated growth of catering and delivery sales represents a larger trend affecting the industry: Off-premise is the new dining out. “One hundred percent of the growth we expect this industry to have in the next five years will be from off-premise,” Tristano notes. “Don’t expect dining in restaurants to grow.”
Off-premise restaurant sales, meaning purchases made from restaurants and other foodservice operators but consumed elsewhere, like a home or office, will account for 37 percent of industry sales in 2018, according to projections from CHD-Expert and Monkey Media. Takeout sales or pickup will total $124 billion in 2018, delivery $32 billion, and delivery from a third-party provider such as GrubHub or Ubereats $13 billion. Catering for pickup or delivery will hit $40 billion, according to CHD-Expert.
“More and more restaurant operators realize the industry is heading toward a greater focus on delivery. And when you think of it from a consumer perspective, there’s nothing more convenient than food delivered to them,” Riehle says. “Different operators are adopting different business strategies to deal with this. QSR has always been convenience driven but the tableside segment is starting to realize the potential for this segment moving forward.”
Another factor shaping the restaurant industry: the growing presence of private equity. “Over the past five years private equity has been very active in the restaurant space,” Tristano notes. “Traditionally, private equity would buy underperforming restaurants and it was a real estate play. Now they are buying stronger concepts and that has been a very good fit for their portfolios.”
The presence of private equity continues to impact not only restaurant merger and acquisition activity but also how these concepts go to market once the deal closes. “They are getting a little smarter by investing in companies that overlap,” Tristano says. “If they own a coffee business, for example, they are buying companies that sell coffee. So, there’s greater synergies and information-sharing among those companies.”
“There are two things a private equity company looks at differently,” Tristano adds. “First is moving into the retail space, and that has a lot of opportunity.” This allows the operators to create new revenue streams by licensing their products for sale in grocery stores and other retail outlets.
The second growth opportunity is not just franchising but also licensing and moving internationally, Tristano notes. The chain leverages its system by finding investors that want to open and run its restaurants in markets outside the U.S. “These steps give the brand opportunities to generate revenues without having to run restaurants and without pulling a lot of capital out of the system,” he adds.
If you are a fan of that familiar feeling that comes from watching reruns of old television shows, then you should enjoy the next 12 to 18 months in the restaurant industry.
One economic factor with potential to impact the foodservice industry is a series of tariffs imposed by the U.S. on goods made overseas.
The initial tariffs took effect in April and immediately raised the prices of aluminum and stainless steel, two key ingredients when making foodservice equipment. “And that caught everyone’s attention. It demonstrates that materials costs are going to rise, and the cost of finished products will rise,” says Charlie Souhrada, vice president, regulatory and technical affairs for the North American Association of Food Equipment Manufacturers (NAFEM).
The next round of tariffs were announced this summer and are designed to protect intellectual property and the high-tech interests in the U.S. These tariffs impact three different types of products: material inputs and component parts, tools used to make equipment and consumer goods coming from China. This round of tariffs includes items like polymers, resins, hoses and other items that factories use to manufacture foodservice equipment and supplies, Souhrada notes.
In addition, the amount of the tariff can vary by item. “It lends yet another level of overhead where manufacturers need these items to make their products. That’s why dealers, reps, operators and consultants should pay attention to this. The tariffs represent additional expense to produce these products,” Souhrada adds. “In many ways, it represents a supply chain challenge. Many of those items are available from other suppliers but NAFEM members rely on a very complex supply chain system that is integrated. It took years to build and it may take years to rework. But when you factor in the increasing steel and aluminum prices and rising freight costs, it makes it only more difficult for manufacturers to compete.”
How manufacturers of foodservice equipment and supplies will address the tariffs will likely vary by company. Some may choose to absorb the additional expense for as long as they can. Some may choose to pass them along immediately.
In an attempt to get ahead of this, some factories are discussing the tariffs with their rep networks to determine when to increase prices and by how much to offset the costs. Others have already raised prices. “Some manufacturers have been very fair,” says Jonathan Gustafson, director of purchasing and strategic sales for Ace Mart Restaurant Supply, San Antonio, Texas. “In some cases where we know the tariff is 10 percent, the factories are pushing through a 3 percent to 4 percent increase. In other instances, we are seeing some price grabs.”
In lieu of price increases, some manufacturers have established a surcharge on shipments after a certain date, adds Joe Ferri, a principal at Pecinka Ferri Associates, a New Jersey-based independent manufacturers’ rep firm. “The law of unintended consequences is certainly taking hold with profiteers doing what they do best,” he adds. “It’s created a lot of disruption and ill will.”
While this may seem like a manufacturing issue at the moment, the implementation of these tariffs could have a ripple effect throughout the industry. For example, higher equipment costs could impact operators’ budgets for replacement purchases, remodels and more. “We are seeing that on some projects,” says Jeff Couch, principal at Preferred Marketing Group, a California-based independent manufacturers’ rep firm. “With the chains who are remodeling and franchising, this is throwing their budgets out of whack.”
As a result, operators may need to brace for equipment and supplies costs that will be greater than the typical 3 percent to 5 percent most manufacturers implement on an annual basis. “Some customers are aware of this and want us to start exploring other options so they don’t get hit with a 20 percent increase,” Gustafson adds.
This comes at a time when operators face significant cost pressures related to other aspects of their business, including labor. “Mini wage increases are taking hold across the country and they are starting to look at that,” Couch says. “Now the equipment they are looking at is inflated by a certain percent and they have to weigh what to do.”
The tariffs could impact more than just the cost of new equipment. They could impact the cost of parts service agents use to maintain and repair existing equipment. “If raw materials are going up, then you can expect to see price of parts going up,” says John Schwindt, general manager and vice president of operations for Hawkins Commercial, a Colorado-based service agent. Schwindt also serves as president for the Commercial Food Equipment Service Association.
“Bottom line is we are bombarded with price increases literally every week,” Schwindt says. “Every once in a while, one will go down. Every time you order a part, prices are always subject to change depending on demand. Prices have been going up. Everyone wants to improve their margins and they will use this as an excuse to raise prices.”
How will the tariffs affect the industry over the long haul remains anyone’s guess. “There’s lots of uncertainty because we don’t know how it will end,” Couch says. “You are not laser focused any more. You are more shotgunned in your approach because there’s so much uncertainty. We are all talking about it but there’s so much uncertainty. Nobody’s really moving forward. You hear the economy is humming along but I don’t see a real building boom anywhere in my area.
“With the tariffs there’s a trickle-down impact that affects a lot of people, regardless of whether they are tied to steel,” Couch says. “Then there’s all the other tariffs that go on that affect other businesses that don’t allow consumers to spend more money at restaurants. If your costs go up then your disposable income changes. Because the announcements are not done yet, nobody knows exactly what it means yet.”