Despite evolving customer expectations, continued pressure on profit margins and fierce competition, the restaurant industry fared well through the first quarter of 2019, with same-store sales up an overall 1.5%. To preserve profitability and reclaim foot traffic, many industry players are recognizing that a departure from business-as-usual is the key to continued success.
But, given the maturity of the restaurant sector, what does this departure from business as usual entail? For some, it means making enhancements to their digital presence, rolling out delivery capabilities, or introducing promotions and loyalty programs to drive same-store sales and offset increasing labor costs.
Same-Store Sales Increase across the Board
Through the first quarter of 2019, casual restaurants experienced the most pronounced growth with a 2.3% increase in same-store sales—just outpacing fast casual’s 2.1% rise. Meanwhile, quick service restaurants (QSR) and upscale casual saw modest gains, with 0.6% and 0.9% same-store-sales boosts, respectively. The pizza segment, excluding Papa John’s, experienced a healthy 1.1% gain, driven in part by an increase in average check size, as well as the introduction of value menu items, which helped boost foot traffic.
Restaurants Enlist Tech to Combat Rising Labor Costs
Labor costs continue to be most pressing issue on restaurants’ minds and margins alike. Through the first three months of 2019, labor costs rose 0.5% as statutory minimum wage increases went into effect on January 1st. In order to combat the increasing cost of labor—which made up 32% of net sales in Q1—some restaurants are rolling out order kiosks, and others are turning to traffic forecasting algorithms to ensure employees are being utilized as effectively and efficiently as possible.
Commodities & Cost of Sales
In commodities, the cost of fresh vegetables rose 19% through Q1 while beef rose 2.8%. The cost of eggs, which were up 54.2% at the end of 2018, dropped -32.2%. In addition, the cost of pork was down (-7.8%); the USDA estimates U.S. pork production will rise 5% this year.
With commodities in flux, many restaurants are looking to manage costs of sales by focusing on the variables they can control. This means managing inventory, including by challenging broadline vendors on prices, and controlling both portion size and waste. Further, some restaurants are utilizing software to analyze food and beverage costs, which allows them to make more informed decisions on improving their margins.
What’s Next for Restaurants: Q2 and Beyond
Many restaurants are taking calculated risks this year as they contend with continually tightening margins. This includes raising menu prices—a strategy that a large portion of restaurants have turned toward in 2019. However, with the specter of an economic slowdown on the horizon, restaurants shouldn’t forget their customers’ wallets—value is still a significant driver of consumer loyalty, and higher prices can turn off customers and result in lower foot traffic.
Altogether, restaurant success stories will hinge on margins: those who can absorb or offset cost increases will be better positioned to compete.
This article originally appeared in BDO USA, LLP’s Selections Blog (June 13, 2019). Copyright © 2019 BDO USA, LLP. All rights reserved. www.bdo.com
Concannon Miller is an independent member of the BDO Alliance USA, a nationwide association of independently owned local and regional accounting, consulting and service firms with similar client service goals. Learn more here.