The third quarter was held back by negative traffic and labor challenges.

TDn2K’s latest restaurant report doesn’t come as a surprise. Given the “underlying relentless erosion of guest counts,” the company said, and tough year-over-year comparisons, we were headed for this result since 2019 began. In the third quarter—for the first time in two years—growth turned negative with same store sales falling 0.4 percent. The gradual slowdown we’ve seen this fiscal calendar slipped into actual comparable contraction.

For perspective, in Q3 2018, comps lifted 1.2 percent to mark the best growth rate since 2015.

Yet is this really an alarming headline? Much of Q3’s result is tied to last year’s performance. If we take a 1,000-foot view of the industry and examine it long term, not much has changed. Same-store sales growth calculated over two years has remained positive the last four quarters, said Victor Fernandez, TDn2K’s vice president of insights and knowledge. “At 0.7 percent for the third quarter of 2019, it doesn’t show much of a decline from the average 0.8 percent recorded for the first three quarters of the year,” he said in a statement.

It’s a familiar equation, too. While average guest checks continue to grow at the same pace, year-over-year, as they have for three quarters now, same-store sales have declined. TDn2K credited worsening same-store traffic growth. The figure was negative 3.5 percent in Q3—the worst result in the last two years and the only time guest counts declined by more than 3 percent during the same period.

September did show some positive signs despite the challenged quarter. At 0.1 percent, it reversed a two-month trend of declining year-over-year sales, albeit barely. But this did come against a strong 2018 (growth of 1.2 percent).

However, this time last year, the industry was riding four straight months of positive comparable gains following a challenging 2017. So, the sentiment feels different even though, as Fernandez pointed out, the two-year picture really isn’t all that troubling. Results aren’t suddenly plummeting.

In September, same-store traffic tracked negative 3 percent. Although weak, it did represent a 0.8 percentage point improvement over the average results posted by the previous two months, “providing further argument for September actually being a small recovery for a beleaguered restaurant industry,” TDn2K said.

Another thing to consider is the hurricane effect felt in September. Florida absorbed a 3.1 percent same-store sales hit during the month. Sales growth declined 1.6 percent compared with August, while every other region of the country experienced an improvement.

Traffic fell 5.2 percent in Florida in September—a 1.6 percentage point slip from the previous month’s results. TDn2K points out that some regions affected by evacuations might have actually garnered a boost as displaced people and families purchased more meals away from home within the same region but at more inland locations. The Southeast was the best performing area based on same-store sales growth during September, as well as one of the top regions based on year-over-year improvement compared with August.

The Southeast saw its sales bump 1.51 percent and traffic decrease just 0.93 percent. Five of the 11 regions tracked by Black Box experienced positive sales growth in September. Fifty-four percent of local markets enjoyed positive market sales, compared to 43 percent during August.

Segment wise, fine dining turned in the best results based on same-store sales metrics, continuing a recent trend. It had the highest growth in Q3 and has been the top performer year to date, per TDn2K. If this holds, it would mark three consecutive years of positive growth for the category.

Family dining was the lone other segment to achieve positive gains in the period. It’s posted five straight quarters of growth—currently the longest streak of positive same-store sales gains by any restaurant field.

On the labor front

Turnover remained at historically high levels. Hourly, non-management turnover increased again in August. TDn2K recently released a study that suggested brands achieving consistent positive traffic growth get better guest sentiment scores based on their service. These chains are also better at retaining their employees, particularly at the management level. “Data indicates that those brands that get rewarded by incremental guest visits are perceived differently by their guests when it comes to service, and having a stable and engaged workforce is a great starting point,” the company.

That’s really a golden egg concept, though. Many restaurants remain understaffed, especially in the back of the house. And it’s not by choice.

TDn2K’s latest workforce results did provide a positive blip, however: restaurant management turnover decreased slightly during the latest month, an indication that increases might have plateaued.

“However, turnover for managers also remains at historically high levels and continues to be a concern, particularly because of the influence of management on hourly retention and engagement,” TDn2K said.

In 2018, the turnover rate in the restaurants-and-accommodations sector rose to a post-recession high of 74.9 percent. It was the fourth straight year topping 70 percent, according to data from the Bureau of Labor Statistics. From 2015–2017, the rate for just restaurants averaged 81.9 percent. For comparison, it stood at 48.9 percent last year for all private sector workers.

Yet many industry estimates peg the figures far higher. Panera Bread CFO Michael Bufano told attendees at CNBC’s @Work Human Capital + Finance conference in July it was 130 percent, meaning brands turn over more than a full staff every year. Darden referenced the casual-dining figure at 120 percent recently.

It is important to look at the full picture, which is why manager turnover numbers might be more startling. The industry boosts seasonal staffing levels throughout the year, which leads to cyclical turnover, especially at the crew member level. For instance, according to the National Restaurant Association, the industry adds more than 500,000 jobs during an average summer season. Overall, 30 percent of the eating and drinking place workforce are part-year employees, compared to 18 percent of the total U.S. workforce.

Also, restaurants typically employ a high proportion of students—employees who don’t stick around for a full-year schedule. Twenty-eight percent of restaurant/bar employees are enrolled in school versus just 10 percent of the total U.S. employed labor force, according to the U.S. Census Bureau’s 2017 American Community Survey. A third of all working U.S. teenagers are restaurant employees. That’s a 1.7 million-person pool likely just starting their careers, with plans to go on to something else.

So, the key to what TDn2K is saying might lie in finding a way to keep managers from bolting. Hourly team members are tough to retain even with the best workplace conditions and benefits. It’s simply a reality of the business and it’s not always the restaurant’s fault.

But getting management-level workers to embrace the organization can be a real differentiator.

“Companies who are able to stay on top of the staffing and traffic crisis are investing in employee training and career development, especially for managers. This allows them to deliver a superior experience to their guests and keep them coming back,” TDn2K said.

The state of things, and looking ahead

Joel Naroff, president of Naroff Economic Advisors and TDn2K economist said the outlook for the economy remains uncertain. Traffic actions could be to blame.

“The negative effects of the trade war are spreading across the economy, largely driven by business uncertainty,” he said in a statement. “Manufacturing has already moved into a downturn. Job growth has slowed, due to businesses willing to leave job openings unfilled as well as the lowest unemployment rate in nearly fifty years limiting the supply of qualified workers. The result is that household incomes are growing more slowly, making it difficult for consumption to expand strongly. It looks like growth in the third quarter, which was just completed, will be in the 2 percent range.”

“Unless there is a breakthrough in the trade negotiations so that the threatened additional tariffs do not come into play, 2 percent growth might be the best we could see for quite a while,” Naroff added. “That is a warning that discretionary consumer spending, of which restaurants are a component, is likely to continue being soft going forward.”

As for the near future, don’t expect sales to leap. Q4 2018 was the strongest last year with 1.4 percent same-store sales growth. Slightly negative, like Q3, will likely be the case again to close 2019.

TDn2K doesn’t see staffing relief coming, nor does it believe turnover at the hourly and management level will subside. As a result, a large percentage of restaurants will be understaffed and face challenges because of it.

“Data has shown that those companies investing in employee training, career development [particularly for their managers] and crafting a strong sense of purpose throughout their workforce will be those positioned to fare better in retaining and engaging their workforce. They will also provide a superior service experience to their guests, which ultimately is what wins the restaurant market share battle,” TDn2K said.

That’s simply no easy task at the moment.

Consumer Trends, Feature, Finance