Meal Deals Reveal Real Appeal

Restaurant industry's modest gain driven by discount offers; but outlook sours

Published in CSP Daily News

WASHINGTON -- As the outlook for the restaurant industry worsened, discounted price, dollar menus and other promotions are driving customer traffic and keeping the restaurant industry in the black, according to market research company The NPD Group. NPD reports total restaurant industry traffic is up 1% for the quarter ending August 2008, and the modest gain is driven entirely by deals.

The outlook for the restaurant industry worsened in September, according to the National Restaurant Association (NRA). Its comprehensive index of restaurant activity fell to a new record low. [image-nocss] The Restaurant Performance Index (RPI), a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry, stood at 96.7 in September, down 1.7% from August and its 11th consecutive month below 100.

NPD said that as consumers look for ways to moderate their overall food budget without cooking more, restaurant operators have been offering more deals-including value menus, coupons, discounted prices and buy-one-get-one-free promotions-to increase traffic, according to new data from NPD's CREST service, which tracks restaurant usage.

"More so than we've seen in many years, consumers are looking for savings and ways to stretch their dollar," said Bonnie Riggs, restaurant industry analyst at NPD. "Restaurant operators are responding to economic concerns with enticing value offers and deals."

In the quarter ending August 2008, 23% of all visits to restaurants were prompted by consumer-perceived deals, which represented an increase of 9% compared to the same quarter a year ago. Non-deal restaurant traffic was down by 1%.

The quick-service segment accounts for 78% of all restaurant visits and is largely driving deal activity. Quick-service deal traffic is up by 10% and is being driven by hamburger and other sandwich restaurants, according to NPD; 30% of all visits to these outlets were prompted by deals, an increase of 20% over a year ago. Value menus and discounted price offers found the most favor with consumers.

Overall, while deal traffic is up at breakfast and dinner, consumers use deals most often at lunch. The latest NPD CREST data finds that 38% of all deal visits to quick service restaurants occurred at lunch. Dollar or value menus tend to drive lunch traffic, coupons are used most at dinner and discounted prices are used at both lunch and dinner.

"Deal offers are complex and risky for restaurant operators, and this is at the same time they are faced with rising food costs," said Riggs, who recently authored a report on restaurant promotions, entitled Working Magic...The Art of The Deal. "But operators understand that in order to get the customers in the door, they need to make them an offer they simply can't refuse."

Meanwhile, Hudson Riehle, NRA senior vice president of research and information services, said "Nearly two out of three restaurant operators reported negative same-store sales and traffic levels in September, while 50% expect their sales in six months to be lower than the same period in the previous year."

He added, "The rapid deterioration in economic conditions is reflected in operator sentiment, with a record 42% of restaurant operators saying the economy is currently the No. 1 challenge facing their business. Operators aren't optimistic about the economy looking forward either, with 50% expecting economic conditions to worsen in six months."

The RPI is based on the responses to the NRA's Restaurant Industry Tracking Survey, which is fielded monthly among restaurant operators nationwide on a variety of indicators including sales, traffic, labor and capital expenditures. The RPI consists of two components, the Current Situation Index and the Expectations Index. ( Click here to view the report.)

The RPI is constructed so that the health of the restaurant industry is measured in relation to a steady-state level of 100. Index values above 100 indicate that key industry indicators are in a period of expansion, while index values under 100 represent a period of contraction for key industry indicators.

The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 96.4 in September, down 1.5% from August and its lowest level on record. In addition, September marked the 13th consecutive month below 100, which signifies contraction in the current situation component.

Restaurant operators continued to report negative same-store sales, with September representing the worst result in more than five years; 26% of restaurant operators reported a same-store sales gain between September 2007 and September 2008, down from 38% who reported a sales gain in August. And 60% of operators reported a same-store sales decline in September, up from 48% who reported similarly in August.

In addition to negative sales, September traffic levels represented the weakest performance in the six-year history of the RPI. Only 15% of restaurant operators reported an increase in customer traffic between September 2007 and September 2008, down from 25% who reported similarly in August; 66% of operators reported a traffic decline in September, up from 55% who reported negative traffic in August.

Along with weak sales and traffic levels, capital spending activity remains extremely soft. Some 40% of operators said they made a capital expenditure for equipment, expansion or remodeling during the last three months, which equals the lowest level on record.

The Expectations Index, which measures restaurant operators' six-month outlook for four industry indicators (same-store sales, employees, capital expenditures and business conditions), stood at 97.0 in September, down 1.9% from August and the lowest level on record. In addition, September represented the 11th consecutive month in which the Expectations Index stood below 100.

Restaurant operators grew more pessimistic about sales growth in coming months. Only 15% of restaurant operators expect to have higher sales in six months (compared to the same period in the previous year), down from 30% who reported similarly last month. Meanwhile, 50% of restaurant operators expect their sales volume in six months to be lower than it was during the same period in the previous year, up from 33% who reported similarly last month and the highest level on record.

Restaurant operators also remain decidedly pessimistic about the direction of the economy; 14% of operators expect economic conditions to improve in six months, down from 24% who reported similarly last month. And 50% of operators said they expect economic conditions to worsen in six months, up sharply from 33% who reported similarly last month.

Restaurant operators' remain reticent to plan for capital expenditures in the months ahead. Just 41% of restaurant operators plan to make a capital expenditure for equipment, expansion or remodeling in the next six months, down from 43% last month and the lowest level on record.