Summary
Improvement in restaurant company profits are currently being driven by an intense focus on operational efficiency and cost reductions, as well as a more favorable food cost inflation environment compared to the prior year. However, continued weakness in restaurant industry traffic, driven by weakness in consumer spending and lower grocery prices in supermarkets, will continue to hamper a foodservice industry recovery in 2010.
Analysis
Despite recent favorable earnings results at Darden Restaurants (NYSE: DRI) and Ruby Tuesday (NYSE: RT), and an increase in earnings guidance from California Pizza Kitchen (NASDAQ: CPKI), all three companies continued to experience negative same store sales trends in their restaurants. These trends mirror the same traffic declines across all restaurant segments throughout the summer season, reflecting persistent weakness in consumer spending, and an ongoing challenge for the foodservice industry in the 2010 year.
In the recent NPD Group report “Foodservice Traffic Declines for Fourth Consecutive Quarter”,
http://www.npd.com/press/releases/press_091027.html, total industry traffic declined by 3.6% in the summer quarter of June, July, and August versus the same period in the prior year. High unemployment trends, as well as lower food prices at supermarkets versus higher prices at restaurants, are cited as key factors contributing to the continuing declines in restaurant visits and spending.
One long-lasting impact of the current recession will be the consumer’s focus on value, which represents a shift in consumer behavior that is not expected to change for the foreseeable future. This is an area that will require continued attention by restaurant operators in communicating their value proposition in a tough consumer spending environment. Fast food segment leader McDonald's (NYSE: MCD) has been successful in gaining market share during the recession with its value pricing strategy, as consumers traded down from more expensive full service restaurants to less expensive alternatives. The recent emergence of fixed price menus at casual dining restaurants including DineEquity’s (NYSE:DIN) Applebee's, Brinker International’s (NYSE: EAT) Chili’s, and other casual dining operators, reflect a greater focus on lower menu price points, as evidenced by the heavily-promoted 2 for $20 dinner offers, which have served to bring diners back into full service restaurants to some extent, but at the expense of a lower gross profit dollar contribution for the restaurant.
Keys to success for restaurant operators in the coming year will be to maintain a continued focus on value, balancing the consumer’s demand for lower menu price points while maintaining product quality, and an ongoing effort to improve operational efficiency, by eliminating costs that don’t contribute directly to product quality, value, or the guest service experience.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
