July sales spiked 9.7%, but large brands are still seeing traffic problems, thanks perhaps to “chain fatigue.”
This has been a good summer for the restaurant industry. According to federal retail sales data, U.S. restaurant sales jumped 9.7% year over year on a seasonally adjusted basis.
That continued a recent surge. Sales rose just 3.8% in April and have accelerated every month since then—potentially signaling that consumers are opening their pocketbooks as their taxes decrease and their finances improve.
But there’s one problem: Restaurant chain sales, at least for now, don’t appear to be keeping pace.
Same-store sales in July, according to the monthly Black Box Intelligence Index, rose just 0.5%. And same-store traffic has been down all year long, including a 1.8% decline in July. And the monthly Technomic Chain Restaurant Index was also weak in May and June even as total industry sales seemed to jump.
Blame what John Gordon, a restaurant consultant out of San Diego, calls “chain fatigue.” “Guests have always had the desire to try something new, to enjoy a quality experience, and to be entertained,” Gordon said. “We have chain restaurant unit overload that leads to chain restaurant fatigue.”
“The overall experience doesn’t seem to be good enough right now,” he added. “But it can be fixed.”
Chain fatigue?
The annual growth in restaurant sales has spiked the past three months.
Restaurant Sales Monthly Annual Change
Source: U.S. Census Retail Sales, Food Services & Drinking Places, Seasonally Adjusted
Some do question the data itself. Technomic, a sister company of Restaurant Business, does not pay much attention to the federal data over concerns about the limited number of sources for its calculation.
And a 9.7%, annual increase in sales should be reflected more in chain performance.
Yet, for the most part, same-store sales in the second quarter were modest and chains such as McDonald’s, Starbucks, Chipotle, Shake Shack, Dunkin’ Donuts and others reported lower traffic.
Quick service and fast casual chains’ same-store sales averaged under 1.5% in the second quarter. That wasn’t enough to match the 2.8% annual increase in menu prices so far this year—meaning that these chains’ traffic fell.
If consumers were rushing out to their local restaurants the past three months, more of those publicly traded companies would have reported stronger same-store sales.
Still, the discrepancy backs a growing contention among many industry observers that consumers are shifting more of their spending toward small chains and independents that are not typically captured by major indexes.
And there are more chains now than there was even five years ago. Consider that chains such as Shake Shack, Mod Pizza and Blaze Pizza, among others, were barely registered if they existed at all five years ago.
“When you think of how many new players are out there, especially in segments like fast-casual that we didn’t even have a few years ago, there are so many players in there, and some of them are becoming the favorite restaurant of a lot of people,” said Victor Fernandez, vice president of insights and knowledge at Black Box parent company TDn2K.
“If you have six favorite chains and now you have seven, now you lose that much traffic.”
Fernandez noted, for instance, that more chains are doing better this year. He said that half of restaurant chains his company surveys have better same-store sales than a year ago. The year before, that number was just 36%.
And consumers do have a lot of choices in their restaurants. The number of locations in the U.S. has jumped 16% over the past decade, according to federal statistics.
With so many choices, in addition to convenience stores and grocery store prepared food, consumers might be spreading their dollars.
“The number of options are so big that the overall sector is growing at a rapid pace, but chains are not capturing that same spike,” Fernandez said. “The dollar is getting diluted among more locations.”