Restaurant Industry Performance Edges Up and Menu Prices May Follow

While the National Restaurant Association's Restaurant Performance Index did not show robust growth, it did indicate the industry is experiencing positive growth. Could that mean menu prices will follow in the coming months? One study seems to think so.

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The National Restaurant Association's Restaurant Performance Index rose to a 10-month high of 101.0. Any score in excess of 100 indicates the industry is in an expansion mode. Both the Current Situation Index and the Expectations Index were up in April, 0.3 percent and 0.5 percent respectively. While the RPI does not show robust expansion, it does indicate the foodservice market is experiencing positive growth.

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The Current Situation component broke the 100 barrier for the first time in 8 months primarily due to the strength of same-store sales. Forty-nine percent of the operators in the survey said their April same-store sales were higher vs. 33 percent who said they were lower.

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Forty-seven percent of the operators said they made a capital expenditure for expansion, remodeling or equipment in the past 3 months compared to 51 percent who reported they did in the NRA's March study.

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The Expectations component in April found 41 percent of the operators expect higher sales in 6 months while just 10 percent expect lower sales. As for capital expenditures in the next 6 months, 59 percent of those surveyed plan on making the investment, which is up from 55 percent who reported similarly in March.

Economic News This Week:

  • The U.S. Department of Commerce revised its second estimate for gross domestic product to +2.4 percent from +2.5 percent. The Department of Commerce did increase consumer spending to +3.4 percent from +3.2 percent for the first quarter. Other estimates, such as the level of business investment, were revised down. While 2.4 percent is not a strong showing, it is a definite improvement over the +0.4 percent GDP in the last quarter of 2012. Looking ahead, a number of economists expect the current quarter's GDP to come in around +2.0 percent or less but then believe the economy will improve significantly in the final 6 months of the year.
  • Small business employment shows a decline, according to the Wells Fargo/Gallup Small Business Index. The study of 600 small businesses in April shows more of them were laying off than hiring. Another survey by CNNMoney and Manta found that just 14 percent of the small business owners surveyed were planning on hiring this year.
  • Initial jobless claims increased by 10,000 in the week ending May 25 over the previous week. Claims totaled 354,000 with the 4-week average standing at 347,250. It would appear that the big declines in claims for 2 consecutive weeks about a month ago were anomalies.
  • Personal income was flat in April after the Bureau of Labor Statistics revised March personal income up to 0.3 percent. Personal spending in April was also disappointing, falling by 0.2 percent.
  • The Chicago Purchasing Managers Index took an unexpected leap up, rising to 58.7 in May from 49 in April. A score of less than 50 for this index indicates contraction. Most of the sub indices were up substantially including new orders, production and order backlogs. But, this week was indeed a tale of 2 cities with the Milwaukee PMI falling 48.4 in April to just 40.7 in May. Previously, surveys of manufacturing activity in New York and Philadelphia have also showed contraction.
  • U.S. car and light truck sales rose 8 percent in May with pickup trucks leading the way. Sales results varied significantly by manufacturer. Both Chrysler and Ford up double digits and while GM was up 3.7 percent. Ford light truck sales were up more than 30 percent while Chrysler and GM light truck sales were up more than 20 percent. Purchases by construction contractors were responsible for a lot of sales as the home building market improved.
  • Consumer confidence reports provided a ray of hope this week. The Conference Board's Consumer Confidence Index rose to 76.2 in May from 68.1 in April. This is the highest the Index has been in five years. The Expectations component rose to 82.4 from 74.3 in April while the Present Situation component increased to 66.7 from 61 in April. A spokesperson for the Conference Board said the impact of the payroll tax hike and the Federal funds sequester seem to have vanished and consumers are focused on falling gas prices, rising home prices and an improved stock market. However, the pre-recession index was 105 so there is a long way to go. The Reuters/University of Michigan Index also jumped with the final May report coming in at 84.5 vs. 75.4 in April. This is the highest this Index has been since July 2007. Finally, Gallup's U.S. Economic Confidence Index for this week was minus 6, virtually tied with last week's minus 5 which was the highest reading since 2008.

Foodservice News This Week:

  • Menu prices at restaurant chains will increase later this year if a survey by supply chain cooperative SpenDifference proves correct. The study done in early May found that 64 percent of chains held price increases to 0.5 percent or less in the first quarter but 90 percent of the chains expect to raise prices this year by 1.6 percent. It appears that chains feel they cannot reduce prices anymore, they must cover food cost increases, and consumers will accept higher menu prices as the economy improves.
  • Restaurant traffic was flat, according to The NPD Group in the first quarter of the year while restaurant spending increased 2 percent. NPD forecasts that the number of restaurant visits will remain flat for the year while sales will be up 2.7 percent by year's end.
  • McDonald's salads are not proving popular and account for just 2 percent to 3 percent of sales even as the chain tries to project a healthier image. For comparison McD's Dollar Menu accounts for 13 percent to 14 percent of sales. McDonald's keeps trying to offer healthy options such as their recently introduced egg white breakfast sandwiches.
  • Boston Marathon restaurant patrons who fled when the bombs exploded have made an effort to pay their tab according to restaurant owners. One restaurant manager said they have received checks from all across Massachusetts as well as from far away as Florida. A restaurant that was left with unpaid tabs of $3.000 has received $1,200 and calls keep coming. Customers are including tip money as well.
  • Growth Chains: Sbarro has an agreement that will open 20 restaurants in Ontario, Canada. Sbarro is opening two fast-casual restaurants in Columbus, Ohio, named Pizza Cucinova, which means "new kitchen." Yumz Frozen Yogurt has 6 stores under construction in the greater Chicago area and has signed agreements for 45 projected franchise stores. Forever Yogurt plans on opening 21 stores in the Chicago area, Ohio, Wisconsin, New York and Maryland. KFC plans on opening 15 units in Mongolia in the next 5 years. Jet's Pizza is opening 3 new restaurants in the Memphis area with a total o 10 planned. Burger 21 is opening a minimum of 5 restaurants in the Raleigh-Durham, N.C. market.
  • Comparable Store Sales Reports: COSI (down 4.5 percent), Krispy Kreme (up 11.4 percent) and Popeye's (domestic up 4.5 percent, company-owned up 3.1 percent, and franchised 4.6 percent)

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

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