2016 closed on a sour note as December became the weakest month in over three years for same-store sales growth. The 4.3 percent sales decline for the month shrank the industry’s fourth quarter same-store sales result to -2.4 percent, the worst quarter experienced by restaurants in over five years. This insight comes from data reported by TDn2K through The Restaurant Industry Snapshot, based on weekly sales from nearly 26,000 restaurant units and 130-plus brands, representing $65 billion dollars in annual revenue.

“To put the second-half sales downturn into perspective, the only two quarters with comp sales worse than -1 percent during the last five years were the -1.1 percent in the third quarter and the very soft -2.4 percent results in the fourth quarter of 2016,” says Victor Fernandez, executive director of Insights and Knowledge for TDn2K. “Furthermore, restaurants have now posted four consecutive quarters of declining year-over-year sales. The last time the industry experienced a year with all negative quarters was 2009, when the economy was suffering the effects of the great recession. This was also the last year in which we experienced a quarter with a sales decline worse than -2 percent as we did for the fourth quarter of 2016.”

From an annual perspective, same-store sales growth for 2016 was -1.1 percent. This is a 3.1 percentage point drop from the growth rate in 2015, and the poorest industry performance since the recession.

“The resurgence in economic growth that began in the summer continued into the fall and early winter,” says Joel Naroff, president of Naroff Economic Advisors and TDn2K economist. “Consumer spending was solid, but the trend toward big-ticket purchases rather than soft goods accelerated. Household borrowing is soaring and paying off that debt is limiting spending on a wide variety of goods and services. Overall, total sales were solid for the restaurant sector as defined by the government’s food service and drinking places and takes into account the change in number of locations, but the slide that started early this year is continuing. The sea-change in shopping trends is upending the traditional retail sales model and has led to closings of stores and even companies. Malls are being forced to adapt, as retail spending is increasingly done online. The further tightening in the labor markets is driving up wages adding to disposable income. Tax cuts are likely, but the impacts of any changes are not likely to be felt until the latter part of 2017 or early 2018.”

Restaurants continued to struggle with guest visits, as declining traffic growth again proved to be the biggest hurdle in the fourth quarter. December same-store traffic was down -6.4 percent, the worst monthly result in over five years.

At -4.6 percent, the traffic decline in the fourth quarter was also troubling. The last time the industry faced a similar result was during the third quarter of 2009.

Average guest checks grew by 2.1 percent year-over-year during the fourth quarter. This represents a drop of 0.4 percentage points from the average for average guest check during the second and third quarters. The combination of declining traffic and slower check growth made for a very tough sales environment during the fourth quarter.

On a two-year basis, 2016 sales grew by 0.9 percent compared with 2015. Although positive, the change is a direct result of significant increases in guest checks driven primarily by price increases.

“Same-store traffic dropped by -4.1 percent over the last two years,” says Fernandez, “but average guest checks grew by a robust 5 percent over the same period, lifting sales growth. Black Box Intelligence research revealed prices have increased on average between 4.0 and 5.0 percent over the last 2 years. Without those price increases, many companies would have a very tough time maintaining sales growth and margins. However, the question remains: can brands continue to raise prices at the same pace in an environment of declining traffic and increased competition from alternatives such as inexpensive groceries, a new breed of independents and home delivery?”

In December, the best performing industry segment based on same-store sales was fine dining. This was also the only segment with positive sales in the month.

The weakest segments in December were family dining and casual dining. The year proved to be very challenging for casual dining; it was the bottom performer in ten of the months in 2016. Results were markedly worse for the “bar and grill” sub-segment of casual dining.

“During 2016, consumers favored those segments on the extremes of average check and it was the segments in the middle that were challenged,” says Fernandez. “The best performing segments based on both sales and traffic were quick service, fine dining and upscale casual. In the case of same-store sales, these were the only segments with positive growth during the year. Yet, none of the industry segments reported an increase in their guest counts during the year.”

After posting an average year-over-year growth in number of restaurant jobs over 3.5 percent the first half of the year, job creation slowed down to a crawl in recent months. Based on TDn2K’s People Report, chain restaurant job growth was flat for October and November of 2016.

Turnover for both hourly employees and all levels of management continued the upward trend in November that started at the end of the recession. Management turnover is particularly concerning. It has surpassed pre-recession levels and continues to rise. At the brand level, TDn2K analysis consistently links higher restaurant management turnover with lower sales and traffic growth.

Rising labor costs are also top of mind for restaurant operators. In addition to the increasing costs directly and indirectly associated with employee turnover, nineteen states are scheduled to increase their minimum wage during 2017. Another factor that could have a considerable effect on costs during the year is the approved legislation regarding new overtime regulations. However, the new administration may provide a reprieve to the impending reclassification of employees and some potential mandated salary increases.

“As we gladly close out 2016 and focus on 2017, it is obvious we do not have positive momentum to begin the year. However, in spite of the macro environment, the story we will be able to unfold from our research, in our upcoming TDn2K Global Best Practices Conference later this month, is not all doom and gloom,” says TDn2K’s Chairman Wallace Doolin “It is one of winners and losers that are not necessarily determined by the segment, nor the age or size of the brand. We believe that in 2017 and beyond there will be a widening gap in brand performance as the industry settles into the new reality of overcapacity in a share of stomach battle. The moneyball question will be: how do brands achieve coveted and profitable top quartile performance?”