Here's Why Restaurant Sales Are Still Weak
Despite positive reports from Texas Roadhouse yesterday, and from DineEquity this morning, this has been a lackluster earnings season for the restaurant industry, and many have wondered why, given increases in home prices and consumer confidence. Here’s a hint: the economy is still really, really weak.
Consider this: disposable income grew 3.3 percent last year. That was the lowest rate since income declined 2.7 percent in 2009, but throw out that year and it’s the lowest rate of growth in at least 50 years. And personal income hasn’t grown more than 3.8 percent since 2008, the longest such stretch in modern history.
In short: people just don’t have enough money to eat out at restaurants.
Disposable income is the statistic most predictive of restaurant sales. When people have more disposable income, they’re more likely to eat out at restaurants. When they have less, they eat out less. The restaurant industry’s immense growth over the past few decades has coincided with strong annual increases in disposable income. But the consumer is much weaker now than it was five years ago, or even 10 years ago.
Only 12 times since the mid-1950s has disposable income grown less than 5 percent, and eight of those years have come since 2001. And it’s not much better this year, either: in May, disposable income grew 0.5 percent.
The anemic rate of growth in disposable income is connected to weak employment growth and weak growth in personal income, which grew 3.6 percent last year, the lowest rate in modern history other than 2009.
The reduced unemployment rate, and improving consumer confidence, should be giving the industry a boost, but the rate of job growth has been weak, and many of the jobs now being created are low-wage or part-time jobs. Indeed, much of the job growth has come from the restaurant industry itself, leading to mounting pressure on QSR companies, in particular, to raise wages.
(Oddly enough, despite that demand, and despite the unemployment rate, we hear from a number of franchisees who complain that one of their biggest problems is the inability to find workers who want to make the industry a career.)
But nothing is going to change until that disposable income number starts increasing at a more rapid rate. Sales will be weak, except at the best concepts, consumers will be overtly focused on price, and plenty of weak concepts will struggle to search for the right formula to bring customers in the door.