Restaurant Industry

Restaurants face their demographic dilemmas.

Phillip Nones Business, Demographics, Economics, Sales, Social Commentary , , , , , , , ,

There’s no question that the U.S. economy has been on a roll the past two years. And yet, we’re not seeing similar momentum in the restaurant industry.

What gives?

As it turns out, the challenges that restaurants face are due to forces and factors that are a lot more fundamental than the shape of the economy.

It’s about demographics.  More specifically, two things are happening: Baby boomers are hitting retirement age … and millennials are having children.  Both of these developments impact restaurants in consequential ways.

Baby boomers – the generation born between 1946 and 1964 – total nearly 75 million people. They’ve been the engine driving the consumer economy in this country for decades.  But this big group is eating out less as they age.

The difference in behavior is significant. Broadly speaking, Americans spend ~44% of their food dollar away from home.  But for people under the age of 25 the percentage is ~50% spent away from home, whereas for older Americans it’s just 38%.

Moreover, seniors spend less money on food than younger people. According to 2017 data compiled by the federal government, people between the age of 35 and 44 spend more than $4,200 each year in restaurants, on average.  For people age 65 and older, the average is just $2,500 (~40% less).

Why the difference? The generally smaller appetites of people who are older may explain some of it, but I suspect it’s also due to lower disposable income.

For a myriad of reasons, significant numbers of seniors haven’t planned well financially for their retirement.  Far too many have saved exactly $0, and another ~25% enter retirement with less than $50,000 in personal savings.  Social security payments alone were never going to support a robust regime of eating out, and for these people in particular, what dollars they have in reserve amount to precious little.

Bottom line, restaurateurs who think they can rely on seniors to generate sufficient revenues and profits for their operations are kidding themselves.

As for the millennial generation – the 75 million+ people born between 1981 and 1996 – this group just barely outpaces Boomers as the biggest one of all. But having come of age during the Great Recession, it’s also a relatively poorer group.

In fact, the poverty rate among millennials is higher than for any other generation. They’re majorly in debt — to the tune of ~$42,000 per person on average (mostly not from student loans, either).  In many places they’ve had to face crushingly high real estate prices – whether buying or renting their residence.

Millennials are now at the prime age to have children, too, which means that more of their disposable income is being spent on things other than going out to eat.

If there is a silver lining, it’s that the oldest members of the millennial generation are now in their upper 30s – approaching the age when they’ll again start spending more on dining out.  But for most restaurants, that won’t supplant the lost revenues resulting from the baby boom population hitting retirement age.

Limp Fries: Restaurants Join Brick-and-Mortar Retailing in Facing Economic Challenges

Phillip Nones Business, Economics , , , , , ,

Press reports about the state of the retail industry have focused quite naturally on the travails of the retail segment, chronicling high-profile bankruptcies (most recently hhgregg) along with store closings by such big names as Macy’s, Sears, and even Target.

Less covered, but just as challenging, is the restaurant environment, where a number of high-profile chains have suffered over the past year, along with a general malaise experienced by the industry across-the-board.

This has now been quantified in a benchmarking report issued last month by accounting and business consulting firm BDO USA covering the operating results of publicly traded restaurants in 2016.

The BDO report found that same-store sales were flat overall, with many restaurants facing lower traffic counts.

The “fast casual” segment, which had experienced robust growth in 2015, experienced the largest loss of any restaurant segment in same-store sales in 2016 (nearly 1.5%), along with the highest cost of sales (nearly 31%).

Chipotle’s poor showing, thanks to persistent food contamination problems, didn’t help the category at all, but those results were counterbalanced by several other establishments which beat the category averages significantly (Shake Shack, Wingstop and Panera Bread).

The “casual dining” segment didn’t perform much better, with same-store sales declining nearly 1% over the year. By contrast, “upscale casual” restaurants reported an ever-so-slight same-store sales gain of 0.2%.

Better sales increases were charted at quick serve (fast food) restaurants, with same-store increases of nearly 1%. Even better results were experienced at pizza restaurants, where same-store sales were up nearly 5%.  This category was led by Domino’s with over 10% same-store sales growth, thanks in part to its Tweet-To-Order rollout and other digital innovations.  Well more than half of the Domino’s orders now come through digital channels.

What are some of the broader currents contributing to the mediocre performance of restaurant chains? Unlike retailing, where it’s easy to see how purchasing practices are migrating online from physical stores, people can hardly eat digitally.  And with “time” at an all-time premium in an economy that’s no longer in recession, it would seem that preparing meals at home hasn’t suddenly becoming easier.

The BDO analysis contends that the convenience economy and the continued attractive savings offered by dining at home combine to slow restaurant foot traffic: “To remain afloat, restaurants will need to drive sales by leveraging the very trends that are shaping this evolving consumer behaviors.”

Tactics cited by BDO as lucrative steps for restaurants include expanding delivery options, and embracing digital channels in a major way.  BDO reports that in 2016, digital food ordering accounted for nearly 2 billion restaurant transactions, and this figure is expected to continue to rise significantly.

Speaking personally, I think there is a glut of dining options presented to consumers across the various segments of the restaurant trade. One local example:  In one stretch of highway on the outskirts of a county seat just 20 miles from where I live (population ~20,000), no fewer than six national chain restaurant locations have opened up in the past 24 months strung out along the main highway, joining several others in a string of options like exhibit booths at a trade show

There’s no way that market demand can satisfy the new restaurant capacity in that town.  Something’s gotta give.

What are your thoughts about which chains are doing things right in the highly competitive restaurant environment today – and which ones are stumbling?