For the fifth consecutive year, the restaurant industry has grown since the end of the Great Recession. Growth was measured by analyzing the average per check, traffic and net new restaurants on the market. Overall, there was a 3.3-percent rise in the industry for 2014, according to the GE Capital Franchise Finance 2015 Chain Restaurant Industry Review. The chief reason was the per-check increase of 2.1 percent. Traffic was up slightly at 0.2 percent, while the advent of new restaurants on the market was down 0.6 percent.
Operators of restaurants have an increasingly good outlook and believe the trend of the consecutive years of growth will stick. The National Restaurant Association’s Restaurant Performance Index survey reached its highest level since 2004 at 102.9 in December of last year. The tepid recovery has, however, left many consumers still feeling concern and is giving operators a bit of uncertainty despite feeling optimistic that sales will continue to rise.
With fundamental overall economic improvements being felt in the jobs market, and with unemployment falling back to 2008 levels, operators have reason to feel optimistic. And with this are other indicators that are improving. Home prices increasing by 5 percent, a rising stock market up by 11 percent and lower interest rates are reasons operators are beginning to see improved balance sheets.
The largest demographic are millennials, who, however, are having economic challenges. For younger workers, unemployment remains high. That and student loan debt are proving to set this generation up for hard times and will curtail their discretionary spending.
Among other factors that restaurant operators are voicing concern over are the spiraling prices of food and labor. The concept of serving great food at a great price is increasingly difficult for smaller purveyors to realize, and the corporations are also likely to feel that pinch in sustaining profits. In response to these market conditions, restaurant segments are changing. The emergence of fast casual chains began this trend. Restaurant innovators realized a market existed between the traditional operators emphasizing speed and cost and chains offering a generally higher-quality, server-based experience. Fast casual chains offer value to consumers not necessarily through lower price. As an example, Chipotle’s average check is 53 percent higher than Taco Bell — but gives consumers value for their dollars with higher-quality food or a perceived better dining experience.
Other changes affecting the restaurant industry come via technology, which is impacting how restaurants operate and compete. By enhancing operations and productivity, in most cases, it is also connecting new customers through innovative marketing and social media. Reviews, specials and other digital media are helping smaller operators and the independents as well as franchises.
Source: GE Capital, Franchise Finance
Operators raise menu prices for different reasons — some to compensate for cost of goods (COGS) and labor inflation, others to increase profitability. Although variance occurs between brands and operational environments, macro-economic statistics indicated in 2014 that quick service restaurant (QSR) operators needed to raise menu prices at least 1.5 percent to break even and compensate for both COGS and labor inflation, an increase of 80 basis points from 2013. QSR operators actually increased menu prices 2.5 percent, according to Consumer Price Index measures, so, theoretically, they have 1.0 percent of sales to apply toward increases in occupancy costs, operating costs or overhead.
FSR operators also gained 0.7 percent in margin in 2014; COGS increased 0.8 percent and labor 1.0 percent, which were offset by the 2.5 percent increase in check.
For the average restaurant, about 60 percent of all expenses relate to labor and cost of goods (COGS). Across the industry, labor expense as a percentage of sales typically has more variability than does COGS.
