Casual Dining Sales, Employment News, and Concerns Over Sysco Buying U.S. Foods

This week we take a look at December sales from casual dining chains, an overview of employment data and explore reports that operators may be nervous over the Sysco acquisition of U.S. Foods. We will also take a look at two chains' different franchising strategies and much more.

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December casual restaurant sales were weak based on the 50-plus chains Malcolm Knapp covers in his Knapp-Track report. Mr. Knapp reports that same-store sales declined 3.8 percent while same-store guest counts dipped 5.2 percent. Total sales among the 50-plus casual dining chains increased 1.4 percent through November and he remains cautiously optimistic that total dollar sales will grow by about 2 percent this year. Complicating the picture is the impact of the Affordable Care Act as well as increases in the minimum wage at both the state and federal levels.
Mr. Knapp reiterated his belief that the U.S. is an "Allocation Nation" with consumers carefully picking and choosing where they will spend their money. He recommends casual chains appeal to upper end consumers "through product quality, menu segmentation around interesting products, and superior product knowledge by restaurant staff."
Malcolm Knapp's data and comments are courtesy of Bank of America Merrill Lynch.

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Economic News This Week

  • First-time jobless claims for the week ending January 4 fell to 330,000, a decline of 15,000. The more reliable 4-week moving average fell to 349,000, a decline of 9,750.
  • Automatic Data Processing's December employment projections show private employers added 238,000 jobs. For the fourth quarter, private sector employment increased by an average of 224,000 jobs. Perhaps the most interesting part of the report was that goods producers added 69,000 jobs in December, which is the largest monthly increase since 2006.
  • The U.S. Bureau of Labor Statistics unfortunately did not confirm the big December increase in new jobs that ADP reported. The Bureau said there were just 87,000 new jobs created in the private sector in December, which were partially offset by a decrease of 13,000 government jobs. The results were so poor and unexpected that some observers questioned their accuracy. A few experts expect a large upward revision next month.
  • Unemployment, which is an entirely separate study by the U.S. Labor Department, fell to 6.7 percent in December from 7.0 percent in November. Most of the decline was due to people who have given up looking for work and are not counted as unemployed, according to the Labor Department. The number of people employed part time who want full time work did not change as was the case with the number of long-term unemployed.
  • Gallup's payroll to population rate (P2P) metric fell to 42.9 percent in December, the lowest reading since March of 2011. Gallup's P2P metric estimates the percentage of the U.S. adult population aged 18 and older that is employed full time by an employer for at least 30 hours per week.
  • Christmas sales were "disappointing" according to Marketwatch. The smallest growth rate since 2009 was attributed to 6 fewer shopping days vs. 2012, winter storms, and consumers using technology to search out bargains which lead to fewer store visits.
  • Consumer credit increased by $12.3 billion in November, the smallest monthly increase since April. The Federal Reserve said non-revolving credit, such as auto and school tuition loans rose 6.4 percent while revolving credit loans, most credit cards, grew by 0.6 percent.
  • Home prices rose 0.1 percent in November vs. October. CoreLogic stated that for a year on year basis home prices were up 11.5 percent, the 21st straight month prices increased.
  • 2014 gasoline prices will be a "rollercoaster" ride according to a forecast by GasBuddy.com. While overall prices will drop by an average of 10 cents a gallon this year, the prediction warns about huge swings and regional volatility. While some authorities believe that high gas prices effect foodservice spending, it is hard to find a direct correlation between the two.
  • U.S. small business owners are in a rather negative mindset coming into this year. The Wells Fargo/Gallup Small Business Index found 28 percent of the small business people surveyed were less optimistic than they were going into 2013, 23 percent were more optimistic and 49 percent felt about the same.

Foodservice News This Week

  • The Sysco – US Foods merger will leave foodservice operators with "less room to maneuver" according to a story in the Wall Street Journal. The article stated that competition between the industry's two largest distributors was one of the few weapons that operators have against the giant firms' pricing power. The Journal also discussed the controversial "sheltered income" — manufacturer rebates, which is the first time this writer has ever seen the subject covered in the business press.
  • A pair of pizza chains have announced wildly different expansion strategies. Pizza Patron will stop almost all franchising efforts and instead grow through opening more company-owned restaurants. The only exception to this policy allows some current franchisees to open more stores. Meanwhile, Papa John's is offering incentives to attract new franchisees, including waving their usual $25,000 fee, reducing royalty payments for the first 5 years (including no royalty payment for the first year), and giving a $3,000 food credit with PJ Foodsevice if the new franchise location opens at least 30 days before the scheduled date. Papa John's will also give new franchisees a set of ovens that the operator can purchase for $50 after 3 years. It will be interesting to see how these divergent policies work for the two chains.
  • McDonald's franchisees are not happy, at least according to the latest Janney Montgomery Scott survey. The major issue seems to be the Dollar Menu & More, which franchise owners claim actually hurts sales by cutting demand for larger sandwiches. The new items on the Dollar Menu, coupled with limited time offers, have hurt service and upset kitchens, according to some franchise operators. Also, some of those in the survey said the chain's new high-density kitchen won't help with one likening it to "putting lipstick on a pig." The recent spell of bad weather hasn't helped, either. It should be pointed out that only a tiny number of McD franchisees are surveyed and it is entirely possible that disgruntled franchise owners are more likely to respond to the Janney survey. And, Mark Kalinowski, the Janney Montgomery Scott restaurant analyst, admits that franchisees are "traditionally grumpy towards franchisors."
  • Foodservice employment continues to grow. The U.S. Bureau of Labor Statistics reported that the number of foodservice jobs increased by 9,400 in December. Since just 87,000 new private sector jobs were created last month, as reported above, foodservice accounted for 10 percent of the total increase.
  • Food trucks are booming in the Miami area, many of them offering Hispanic food. Some of the trucks display national flags to indicate the origin of their menus. In neighboring Broward County a five-acre area called Food Truck Collective has just opened featuring several food trucks and live music shows.
  • Almost 20,000 Darden employees have joined a federal lawsuit alleging the company underpaid them. Both former and current employees are involved in the suit, which the company calls baseless.
  • India is a hot market For American fast feeders with Burger King, Krispy Kreme, McDonald's, Pizza Hut and Taco Bell having all announced expansion plans for the region in recent months. The New York Times says that India is known to be unfriendly to foreign businesses but evidently Indians are more willing to accept restaurants since they don't see them as replacing native businesses.
  • Growth chains: Blaze Fast Fired Pizza signed a franchise agreement for 30 restaurants in Florida, Tennessee, and Kentucky. Johnny Rockets opened a restaurant in Karachi, Pakistan, with plans for nine more to follow in the region over the next 9 years. Sonic signed agreements for 8 drive-ins in Buffalo and 10 in the Los Angeles area. Denny's inked an agreement for 30 restaurants in the Middle East with the first to open next year. Chuck E. Cheese opened 4 new locations on New Year's Eve. Uncle Maddio's Pizza will open 5 units in Austin, Texas, and plans to expand to Waco and Dallas. Moe's South Western Grill plans to open 100 restaurants this year. Dunkin' Donuts opened 790 restaurants in 2013 and plans on opening 685 to 800 this year.
  • Comparable store sales reports: Fazoli's (up 5.7 percent), Frisch's (flat), Ruby Tuesday (company owned down 7.8 percent and franchised down 5.3 percent), and Wendy's (company owned up 3.1 percent and franchised us 2.8 percent.)

For details and same-store sales of other chains, please click here for the Green Sheet.

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