E What Will Happen In Restaurants In 2017?

Restaurant Reflections: What Will Happen in 2017?

Restaurants had a so so year in 2016. US Food consumer expenditures away from home continued its upward path as has been seen for decades, but restaurants counts continue to grow.That makes it harder for existing restaurants to grow organically, as a market share game is not good for operators or investors. Stock value indices fell and then rose in November and December. In 2016 as reported chain sales and traffic indicators were either soft or not what would be hoped. This space remains extremely competitive from every angle; even worldwide, restaurant counts are growing. With declining food commodity costs affecting grocery store prices, it is very challenging to take restaurant price increases. Expenses, especially labor and rent are long term problems, and more need for CAPEX to be deployed has become essential to compete. Fortunately, debt financing is still relatively easy. Yet there are some standout stars; the restaurant space remains investable, it just takes more work, and patience to find the stars. 

Was there really a restaurant recession in 2016?  No. There was a same-store sales slowdown in many chain brands but overall restaurant consumer spending continued to grow.That “restaurant recession” perception affects those who monitor and judge this industry by the same store sales metric. Looking over the years, macros forces that affect restaurant demand—population, disposable income and GDP were positive all year. For example, the Bureau of Labor Statistics food and drinking place sales grew every month year over year in 2016. But some chains didn’t keep up. There were a record number of Chapter-11s and more are coming, but these chains had been weakening for years.

The reporting and obsessive focus on same store sales has to be made more sophisticated and robust. While an important measure, it is hardly the single measure of success. Many other true brand health measures don’t get the attention they deserve. In November 2016, Howard Schultz executed the classic takedown of an analyst who insisted on asking whether mid-single digit guidance meant plus 4 or plus 5. Here is Howard’s response:

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Disclosure: The author has no positions in any stocks mentioned.

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Craig Richards 4 years ago Member's comment

I expect 2017 to be a much better year for the restaurant industry.