Flat same-store sales and declining foot traffic made for a challenging year.

BDO USA released its FY 2016 edition of The Counter, its annual benchmarking update that analyzes the operating results of publicly traded restaurants.

Aligning with other forecasts, the report found that sales continued to lag across the industry as uncertainty around the U.S. economic and regulatory environments persisted.

Same-store sales were flat and restaurants grappled with lower traffic counts thanks to market saturation, increased menu prices, and declining grocery costs.

For the first time, according to Fitch Ratings, restaurant spending exceeded grocery spending. This is a recipe for trouble since it runs parallel to sagging foot traffic.

There is also a challenge, the report says, “with evolving consumer preferences and market compositions as smaller chains, independents, and chef-driven concepts expand rapidly.”

Casual dining struggled with a reported 0.8 percent drop in same-store sales. Casual dining also had the highest prime costs at 61.3 percent and the largest labor mark at 33 percent.

Upscale casual reported same-store sales gains of 0.2 percent, with prime costs at 58.6 percent, labor at 31.1 percent, and cost of sales at 27.8 percent.

The segment with the most significant growth was pizza. Same-store sales were up 4.6 percent. For the ninth consecutive quarter, Domino’s topped the list with a 10.4 percent boost in 2016. “The company’s Tweet-to-Order rollout in 2015 and other early digital innovations bolstered the brand’s sustained success. Whether through its mobile app’s one-touch ordering option, Amazon Echo or another platform, 60 percent of Domino’s orders came through a digital channel in 2016, the company reported,” the study says.

Quick service followed at 0.9 percent. KFC led the way at 3 percent same-store sales growth. It wasn’t all rosy for limited service, however. Fast casual, which boomed 4.9 percent in 2015, showed a 1.4 percent decrease in same-store sales—the most of any segment. Fast casual also had the highest cost of sales at 30.5 percent.

BDO credited much of this to Chipotle’s 20.4 percent decline, although the brand is on the upswing, having decreased only 4.8 percent in Q4 compared to the double-digit drops reported for the prior four quarters.

Wingstop and Shake Shack were fast casual high performers, reporting increases of 5.4 percent and 4.2 percent, respectively.

“Wingstop’s CEO cites singularity and simplicity as the keys to its success, while Shack Shack’s growth may be attributed to its new mobile app and rapid physical expansion in high-traffic markets,” the report says.

Panera Bread joined the podium with a 4.2 percent sales increase.

Another topic that matched up with forecasts was commodities. With the exception of the pizza segment, cost of sales fell 0.6 percent across the board. Small upticks in cheese prices kept pizza out of the loop. “While the average price of cheese is down 1.4 percent from 2015, late summer and early fall months saw prices higher than the 2015 average,” the study says.

The cost of eggs experience the most dramatic change, plummeting more than 50 percent in 2016 following a shortage the prior year. Beef costs declined 15.5 percent.

Here’s what the report had to say about the pulse of labor costs:

“According to the National Restaurant Association, the industry is expected to remain the nation’s second-largest private sector employer with a workforce of 14.7 million in 2017. But ongoing market oversaturation, current low unemployment levels, higher-than-average job growth, the emergence of digital assistants and proposed regulations make today’s labor market tough to navigate. In fact, labor costs rose 0.8 percent across all segments in 2016, with the fast casual segment enduring the most significant hike. Although the Department of Labor’s proposed overtime rules were postponed, many restaurants prepared for the changes by preemptively increasing wages. In anticipation of rising health insurance costs and more stringent labor laws, restaurant owners are focused on reducing labor costs. However, rife competition and high turnover rates make it particularly important for employers to effectively incentivize staff. “

As for the future, BDO says the convenience economy of today’s landscape and the attractive savings offered by dining at home will continue 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 behavior,” the report says.

Expanding delivery options and embracing digital are two other options BDO suggests.

“And overall, the rise of digital is changing the game not only when it comes to delivery, but for all steps in the dining process. According to the NPD Group, digital food ordering has grown 18 percent since last year, accounting for an average of 1.9 billion restaurant transactions annually. Consumers have the capacity to satisfy all their needs with just a fingerprint—from making food decisions and ordering, to delivery and payment. For restaurants, capitalizing on this reality means investing to match the same level of sophistication, flexibility and efficiency across operations,” the reports says.

Feature, Finance