guestXM – by Black Box Intelligence

Chain Restaurants, It’s Time to Meet Your Competition

With the restaurant industry just experiencing its fifth consecutive quarter of negative growth, chain restaurants need to adapt to outperform competitors.

Changing Tides in the Restaurant Industry

Why Chain Restaurants Are Facing Unprecedented Competition in Today’s Market

For many years, chain restaurants enjoyed an influx of traffic and sales. After the recession, as consumer spending and confidence began recovering, chains were able to satisfy their customers and keep them coming back week after week. Today, however, this is no longer the case. The Financial Intelligence (formerly Black Box Intelligence) first-quarter results made this clear and were the primary discussion topics in the Black Box Intelligence (formerly TDn2K) Q2 State of the Industry webinar last week.

How Chain Restaurants are Adapting to Unprecedented Competition and Shifting Consumer Trends

Chains against chains

The restaurant industry just experienced its fifth consecutive quarter of negative same-store sales growth. Black Box reported -1.6 percent comp sales growth and -3.6 percent traffic growth for the first quarter of 2017. Additionally, Victor Fernandez, Executive Director of Insights, explained that comp sales growth has been trending down for all restaurant segments throughout 2016 and into 2017. Upscale casual was the only segment to report positive growth for the quarter, by a very slim margin. All other segments suffered negative growth.

Although negative, quick service and fine dining still outpaced the other segments. Fernandez noted this interesting consumer trend that has emerged. “It seems that on one hand, people that have income want an experience with dining.” For those that have the available income, they are willing to spend extra at higher-priced restaurants for the dining experience. On the other hand, consumers looking for convenience, speed, and value are turning to quick-service restaurants.

The segments in the middle are the ones in trouble. Fast casual, in particular, has a tough road ahead. It is currently the largest dining segment in the restaurant industry and continues to increase its market share far more than other segments. During 2016, fast casual restaurants reported over 8 percent net unit growth. With this much growth, consumer spending gets diluted. “It’s hard to keep up those comp sales numbers when there are so many options in the marketplace. We’re oversaturated and oversupplied,” commented Fernandez.

Upscale casual, on the other hand, reported slightly negative net unit growth in 2016. Fernandez believes this is one of the reasons why they’ve been able to perform better than their peers.

Restaurants must also adapt to shifting sales in day parts. Non-traditional dayparts, such as breakfast and mid-afternoon, are beginning to thrive while lunch and dinner are losing sales. Breakfast and mid-afternoon were the only days parts to report positive sales growth in the first quarter, while lunch, dinner, and late-night suffered over -1.0 percent negative growth.

Quick service and fast casual restaurants are best poised to capitalize on this new-day part trend. Several quick-service brands have already become more attentive to expanding and promoting their breakfast menus.

External competition

Overall, chain restaurants are also not seeing their share of market growth. They are facing a great deal of competition from other foodservice operators, including independent restaurants, grocery stores, convenience stores, and food trucks.

Since 2008, chain restaurants have experienced -14.8 percent same-store traffic growth. Furthermore, throughout 2016, total food and drinking places saw over 2 percent higher sales than chain restaurants, according to Financial Intelligence (formerly Black Box Intelligence)’s Market Share report. Essentially, chains are losing their customers to other independent restaurants and thus are suffering a decrease in traffic.

Grocery stores have also begun outpacing restaurants. While consumers are now spending more at restaurants than they are at grocery stores, this is because menu prices are consistently rising while grocery prices fall. Therefore, even though restaurants may now be capturing more sales because of higher menu prices, grocery stores are capturing a greater percentage of traffic.

A recent study from AlixPartners revealed that consumers are planning to cut back on fast food and fast casual visits throughout 2017. Diners who visit quick service or fast casual restaurants at least twice a week intend to cut back on their visits between 8 and 13 percent. Furthermore, 56 percent of surveyed consumers are planning to cut back on dining out in favor of prepared meals from convenience and grocery stores.

Adapting is the name of the game

Studies from Workforce Intelligence (formerly People Report) have found time and time again that attracting and retaining employees are key issues in improving guest loyalty and thus sales and traffic. Unfortunately, this is easier said than done. Michael Harms, Executive Director of Operations, reported that 38 states are under a 5 percent unemployment rate, and 21 states are under 4 percent. In other words, almost everyone who wants a job already has one. Additionally, labor participation rates for workers in the 16 to 19-year-old age group have dropped dramatically over the past decade, meaning that restaurant operators must find new labor pools to obtain their employees.

Speakers on this Q2 State of the Industry webinar included: Wally Doolin, Chairman and Co-Founder of Black Box Intelligence (formerly TDn2K); Victor Fernandez, Executive Director of Insights and Knowledge at Black Box Intelligence (formerly TDn2K); and Michael Harms, Executive Director of Operations at Black Box Intelligence (formerly TDn2K).

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