Now that you’ve officially settled into 2019, you’re probably thinking about business opportunities for your restaurant – how to grow sales, reduce turnover or maybe update your menu. As 2018 has come to an end, we want to take this opportunity to look back on the year for a state of the industry assessment to help you identify trends or changes that can benefit your bottom line. Strong same-store sales growth for the fourth quarter of 2018 helped close a positive 2018 for restaurants and the best performance by the industry since 2015. Cost of sales remained fairly constant and labor costs continued to challenge the industry with higher wages paid. Here’s a breakdown of the year in review and how it will impact your restaurant.
Same store sales
According to TDn2K, growth of 1.4 percent for the fourth quarter of 2018 was the best for any quarter in over three years, resulting in annual same-store sales growth of 0.7 percent. The industry, however, is still struggling with lower traffic counts with overall decreases of 0.9 percent for December 2018 and decreases of 1.6 percent for the fourth quarter 2018. However, this is offset by an increase in average checks being up over 3 percent for the fourth quarter 2018 over the same period in 2017. This resulted in annual sales growth of 0.7 percent for 2018.
What do the above results mean for the restaurant industry? While same-store sales growth of 0.7 percent is a good thing, there are some factors to consider that are keeping this growth somewhat in check and overall traffic counts in restaurants decreasing.
- Competition continues to be high with new restaurants and concepts popping up every day leading to market saturation. Private equity investment continues to be strong with high expectations of growth.
- Not only is there competition from new restaurants, but the trend of having meals that are quick and easy to prepare have resulted in supermarkets and other meal delivery services who provide already prepared meals that are quick and convenient for people to make at home.
At some point, those restaurants that are marginally profitable will struggle to stay in business as sales decrease and the fixed cost components of labor and occupancy costs stay the same. To be successful in today’s competitive environment, restaurant operators need to be creative and look to the future to take advantage of trends impacting the industry.
- Leveraging order taking technology where customers order food via an online app or kiosk in the store can reduce the labor costs of having to take a customer’s order.
- Delivery services are growing sales for many concepts. It’s important to balance your brand’s quality with the benefits of delivery.
- Catering services has opened a new stream of revenue for many concepts and can create new customers.
- Trending now for some concepts is delivery only locations. Outback and Chick-fil-A are currently testing this concept. Delivery only locations result in lower operating costs as there is no dining room resulting in less payroll costs and less overhead costs. Think of the traditional pizza delivery/carry out locations being a viable option for non-pizza brands.
Cost of sales
Commodity costs for 2018 for beef, chicken and pork were relatively stable due to ample supply. This is expected be the case throughout 2019 with the potential for modest increases later in the year, according to the USDA. Dairy and oil prices have also been low and have stayed consistent throughout 2018 and should remain so heading into 2019. The soy market has had some surpluses also due to the increases in the Chinese tariff. This has resulted in domestic growers sitting on large surpluses which has kept prices low. However, due to the volatile situation surrounding tariffs, no one really knows what to expect as we get further into 2019.
Speaking of the new U.S. tariff policies, the largest impact has been a reduction in exports for domestic farmers resulting in increased supply of livestock, corn, wheat and soybeans and a reduction in pricing domestically for most commodities except for seafood as the U.S. imports a significant amount of seafood. Increases in tariffs on seafood could have a significant impact on prices during 2019, so keep an eye out for what happens here.
Staffing continues to be a struggle for a lot of operators. Employee turnover continues to be high even as wages paid are well above minimum wage for entry-level and highly competitive for experienced employees. Operators are at war with each other to attract and retain great talent for both hourly employees and restaurant managers. This also goes back to the industry issue of market saturation as more and more restaurants are opening and employees are jumping ship for the next big thing.
According to TDn2K, during the first 11 months of 2018, median turnover increased for hourly employees and restaurant managers in both limited service brands (QSR and fast casual) and full-service brands (casual dining, upscale casual and fine dining). Restaurant operators will need to figure out a way to deal with the turnover issue and increased minimum wages as this problem is not going away and will continue into 2019. Some concepts have experimented with limiting hours or days opened to optimize sales and reduce labor cost. Restaurant operators also need to start exploring creative compensation packages, employee engagement activities and training and development opportunities for all employee ranks to help reduce turnover.
With 2018 closing out with positive same-store sales growth, the restaurant industry is poised to start 2019 off positive as well. Continued focus on traffic growth will be important as relying on menu price increases will only be tolerated by the consumer so much. We will keep you informed throughout the year on industry trends and results, so stay tuned to future updates!
Brian Campbell, CPA