Business at U.S. restaurants is rising along with consumer confidence, which hit a seven-year high earlier this month.
Sales at casual-dining establishments grew 0.3 percent in November from a year ago, following a 1.6 percent increase in October, according to the Knapp-Track Index. This marked four consecutive gains in the monthly index of restaurant sales after an eight-month negative streak.
This end-of-year boost caps off a progressive improvement throughout 2014, said Malcolm Knapp, a New York-based consultant who created the index in 1991. As a result, total sales at casual-dining eateries are poised to outpace last year’s 0.9 percent gain, he said.
Restaurateurs are “cautiously optimistic” heading into 2015, even as wage gains for hourly employees remain lackluster and consumers are “shopping very carefully and not making a lot of impulse purchases,” Knapp said. The U.S. is an “allocation nation,” with Americans having to choose each month which discretionary purchases to make, including eating out or buying clothes.
The improvement in sales has been driven primarily by diners who are spending more when eating at restaurants, said Larry Miller, founder of MillerPulse.com in Atlanta, which provides an industry performance benchmarking service. “People are feeling better about the economy, and the purse strings are a little looser.”
Sentiment among U.S. consumers climbed to the highest since December 2007 for the week ended Dec. 7, as measured by the Bloomberg Consumer Comfort Index. Gauges of the economy and buying climate also were the strongest in seven years, driven by job gains and falling gas prices.
Improved hiring in particular has helped buoy restaurant sales because that growth is highly correlated with eating out, Miller said. Employers added an average of 240,900 workers to their payrolls in January-November, the most for the period since 1999, figures from the Labor Department show.
Trends have been improving throughout the year after severe winter weather rocked the industry in the first quarter, Miller said. Comparable sales at casual-dining and limited-service establishments rose 2.2 percent on average in April-November, up from 0.9 percent in the first quarter, according to data Miller collects.
Fiesta Restaurant Group Inc. reported a 2.6 percent gain in the average check at its Taco Cabana chain for the three months ended Sept. 28, Chief Executive Officer Timothy Taft said on a Nov. 4 conference call. This was “positively impacted” by a new menu that pushed guests to more profitable plates from combo items and the Addison, Texas-based company’s 1.1 percent price increase, he said.
Some consumers have prioritized spending on experiences rather than material items, which benefits certain types of restaurants, said Jack Ablin, chief investment officer at BMO Private Bank in Chicago. With gasoline prices falling about 30 percent since April, many diners may have more cash to spend each week, which also could buoy sales, he said.
The increase in disposable income benefits Cracker Barrel Old Country Store Inc. and should continue to do so as long as gas prices remain low, Chief Executive Officer Sandra Cochran said on a Nov. 25 conference call. The Lebanon, Tennessee-based chain saw average checks rise 2.5 percent, partly reflecting a 2.1 percent price increase, for the quarter ended Oct. 31, Lawrence Hyatt, chief financial officer, said on the same call.
The question remains whether recent improvements in sales will translate into more widespread menu changes, Ablin said. Price increases have averaged 1.6 percent to 2.1 percent this year, though operators must weigh the potential of deterring customers with any additional amount, Miller said, citing data he collects.
Many companies, including restaurants, also will be grappling with higher labor costs as minimum wages go up in several states and municipalities beginning Jan. 1, Knapp said. In addition, food prices — particularly beef and chicken — are rising, which adds additional pressure. As a result, while “some companies have pricing power, most don’t.”
The buzzword for this industry is “caution” — both from the prospective of companies trying to pass along price increases and diners looking for deals — though recent sales trends are promising, Knapp said. It also “doesn’t hurt” that the Standard & Poor’s 500 Index hit an all-time high earlier this month, Miller added.
Another positive indicator: Comparable sales from the first quarter of 2014 were weak, which paves the way for “the easiest stretch we’re going to have for some time,” he said. With sentiment among restaurant operators “the most buoyant” it’s been all year, the industry could be turning a corner.
“The business is getting better,” Miller said. “I don’t see any reason why that shouldn’t continue through the end of the year and into early 2015.”
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