Across the restaurant industry, same-store sales growth—although modest—remains consistent. This past quarter same-store sales for publicly traded brands increased 1.5 percent, according to BDO’s benchmarking report The Counter. It’s a dynamic that has played out for some time: In a highly competitive and mature market, if not an overly saturated one, restaurants invest in fresh pathways to offset slower dine-in traffic.
Restaurants are enhancing their digital presence while also rolling out delivery, promotions, and loyalty programs to cover the gap. These initiatives have the added benefit of mitigating higher labor costs, as well. Adam Berebitsky, tax partner and leader of BDO’s Restaurant Practice, says the challenge will likely persist.
“Saturation of restaurants in most markets and low unemployment continue to result in labor inflation, maybe even more so than state minimum wage increases,” he says. “Higher-performing restaurants are maximizing their margins through menu engineering and incremental sales through online ordering and catering, which require either less labor or, in the case of catering, fixed labor.”
While labor costs rise and exert downward pressure on margins, BDO advises restaurants to focus on variables they can control—namely, the cost of sales and inventory management. For example, restaurants can challenge broadline vendors on prices and product portion control.
Despite across-the-board commodity price increases, the single most pressing issue on restaurant margins is likely labor, which rose half a percent in the first three months of 2019. Since statutory minimum wage increases typically go into effect January 1, some of this pressure is to be expected. Nevertheless wage expansion and climbing turnover rates guarantee that labor pressures continue beyond the new year.
One suggestion from BDO is to invest in traffic forecasting algorithms to better predict how many employees may be needed throughout the day. While understaffed restaurants often garner the buzz, overstaffing locations is a significant issue, too. Texas Roadhouse spoke about this after its Q1 review.
“We talk about staffing for your next $10,000 a week in sales, but we don’t necessarily need to be staffed for our next $20,000 a week in sales,” said former president Scott Colosi during an investor call. “We just want to make sure we’ve got a good balance and we’re disciplined, and we believed in the vast majority of our restaurants that’s the case.”
Another recurring theme is the move away from limited-time offers and deals designed to drive four-wall traffic. Berebitsky highlighted Olive Garden, which boosted check sizes 4.2 percent despite reducing promotions.
But is this a one-size-fits-all notion?
“As we mention in the report, though, it’s important to note that this won’t be the case for everyone; many are still reliant on LTOs to get customers through their doors,” Berebitsky says.
Olive Garden and Texas Roadhouse increased menu prices by 1.8 and 1.5 percent, respectively, in the quarter. Some chains can do that in this climate. For others, it’s a traffic deterrent they simply can’t afford to tack on.
Menu engineering and strategic pricing can balance these competing priorities. Driving more profitable items over labor-intensive, low-margin items and adjusting serving sizes can produce a material impact on a restaurant’s bottom line.
Still, restaurants shouldn’t forget their customers’ wallets. Many analysts have hinted at the possibility of an economic slowdown. After nearly a year of strong growth, the economy seems to have entered a period of uncertainty, created by the escalation in tariffs. Capital investment is being restrained, which could lead to inconsistent consumer-spending growth. Furthermore, wage gains will likely moderate along with job increases at some point.
Some operators may be forced to raise prices, but value will remain a significant driver of customer loyalty. Restaurant success will hinge on margins. The brands able to absorb or offset rising costs will be in a better position to compete.
Despite somewhat grim prognostications, BDO’s data provided good news for casual chains. The segment’s same-store sales saw the highest increase in the first quarter, rising 2.3 percent and outpacing fast casual’s 2.1 percent mark. It’s worth noting this covers publicly traded brands. Fast casual has very deep roots in the privately held sector.
Quick service and upscale casual reported slower gains, with 0.6 percent and 0.9 percent upticks in same-store sales, respectively. The pizza segment, excluding a struggling Papa John’s, saw same-store sales lift 2.1 percent, even with accelerated pressure from third-party aggregators in the delivery space.
Berebitsky says the casual performance could be related to a more willing customer. “The casual segment outperformed the fast-casual segment in terms of same-store sales,” he says. “This could be because consumers are feeling a little better about the economy and are comfortable spending time and a little more money at pricier concepts.”
Only time will tell if these sentiments persist. But if and when they do shift, brands investing in guest experience, employee retention, loyalty, and accessibility will have a leg up to weather the storm.