Casual Restaurant Sales Still Weak, McDonald's Biggest Competition and Much More

This week we report on some preliminary findings of what operators think about the proposed Sysco/US Foods merger, share Malcolm Knapp’s thoughts about casual restaurant sales for the rest of the year, look at the success of Taco Bell’s breakfast program, compare Chick-fil-A to McDonald’s and a whole lot more.

How do foodservice operators feel about the pending Sysco/US Foods merger? Dataessential and The Hale Group have teamed up to conduct a three-part research project to determine the impact the proposed merger will have on the operator community. It appears that the project will primarily be available on a proprietary basis to those who wish to purchase it. However, some findings from the first study have been made available and perhaps one of the most interesting results of the survey was that operator awareness of the merger was low, especially among smaller businesses.

More than half of the operators surveyed believe that the combined company will give them a wider product selection.

Secondly, only 35 percent of operators are concerned about price increases. The two distributors have stated that lower prices will be a major benefit of the merger. The study also found that fair pricing and customer service are the two most important factors in choosing a distributor, with more than 70 percent of the operators indicating this.

It does not appear that Sysco and/or US Foods have publically discussed what their plans are for the combined sales forces. It would seem likely that the new company would not need as many reps in the field, which would result in a reduction in force which, in turn, would mean that some operators will be losing their sales representative. Past studies have indicated the DSR is extremely important in the distributor’s relationship with its customers. It might be interesting to see what operators have to say on this subject but as near as can be determined Dataessential and The Hale group have not released any findings from their study on this topic.

Economic News This Week

  • The Producer Price Index rose 0.4 percent in June. The index for goods increased 0.5 percent and service 0.3 percent. While food prices dropped 0.2 percent energy prices increased 2.1 percent. So-called core prices — without the volatile food and energy prices — were up 0.1 percent.
  • Initial-jobless claims fell to 302,000, a decline of 3,000, for the week ending July 12. The less volatile 4-week moving average dropped to 309,000, coincidentally a decline of 3,000, too. This is the lowest the average has been since June 2, 2007.
  • More quality jobs are available according to data from The Gallup Organization. Thirty-five percent of Americans believe now is a good time to find a quality job and represents this study’s strongest showing since December 2007. Democrats, higher educated, and higher income people are the most optimistic on this topic. Gallup points out that the results are not impressive in absolute terms since almost two-thirds of those responding think it is a bad time to find a quality job.
  • The N.Y. Federal Reserve’s Empire State Manufacturing Index improved in July to 25.6, an increase of 6 points. This marks the highest level in four years, as both the new order and shipment indexes hit multi-year highs. The study also showed an increase in future employment and a slight increase in hours worked. Any number above zero indicates expansion.
  • The Philadelphia Federal Reserve’s Manufacturing Outlook Index was 23.9, a sharp — and unexpected — rise over June’s 17.8. Any number in excess of zero indicates an expansion among manufacturing activity. This is the highest the index has been since March 2011 and is the fifth consecutive month the index has been positive. New orders and shipments rose significantly while labor indicators remained positive.
  • Although U.S. industrial production rose 0.2 percent in June it still came in below estimates. The Federal Reserve also announced that Capacity utilization was unchanged from May, staying at 79.1. The reading was is a full point under the historical average (1972-2013) but is up from 77.8 in June 2013.
  • Home builders are more confident. The National Association of Home Builders/Wells Fargo Housing Market Index hit 53 in July, indicating more builders thought business was good rather than poor. This is the first time the index has been in excess of 50 since January. All three of the index components — current sales conditions, future sales expectations and prospective buyer traffic — all increased in this month.
  • New home construction did not have a stellar June. Housing starts dropped 9.3 percent over May to a seasonally adjusted annualized rate of 985,000. This was up 7.5 percent over June 2013. Housing completions were down 12 percent over May to a seasonally adjusted annualized rate of 789,000. Completions were up 3.4 percent over June 2013. Building permits issued declined 4.2 percent over May to a seasonally adjusted annualized rate of 983,000. Permits were up 2.7 percent over June 2013.
  • The Conference Board’s Index of Leading Economic Indicators rose 0.3 percent to 102.2 in June.
  • The Gallup Organization’s U.S. Economic Confidence Index dropped to minus 18, a level that it has not hit since March. However it is only slightly below the average for the year.
  • The Reuters/University of Michigan Consumer Index declined to 81.3 in the preliminary July report. The final June reading for the index was 82.5. Consumers’ feelings about the current economic situation rose to 97.1 from 96.6, however, consumers’ expectations regarding the future dropped from to 71.1 from 73.5 marking the third straight month Americans have become more pessimistic regarding the future.

Foodservice News This Week

  • Continuing weakness in June sales for casual restaurant chains has Malcolm Knapp, author of the Knapp-Track Report, very cautious about what the second half of the year holds for this operator segment. Knapp notes that labor costs are starting to pick up as state and local minimum wages are on the rise. About the only positive news he had was that comparable store sales for high-end steak houses rose 2.8 percent in the quarter ending in June. Mr. Knapp’s information is courtesy of Bank of America Merrill Lynch.
  • How successful is Taco Bell’s breakfast program? It appears to be something less than smashing. Comparable store sales rose 2 percent, which disappointed some stock analysts. YUM’s CEO said the problem wasn’t breakfast but rather the underperformance of a taco offered for a limited time. Scott Hume, publisher of Burger Business, originally said Taco Bell had set a really low bar for their breakfast program and he is not backing off from his position.
  • Is Chick-fil-A a threat to McDonald’s? At least one stock analyst thinks so. According to Scott Hume, publisher/editor of Burger Business, Mark Kalinowski of Janney Montgomery Scott sees Chick-fil-A as a “serious and growing competitive threat” to McD’s. While he doesn’t see Chick-fil-A catching McDonald’s sales in the next decade it seems that the chicken chain will grow much faster. Mr. Kalinowski’s firm also does the survey of McDonald’s franchisees who continue to show a lot of dissatisfaction with the direction the chain is going. One franchisee out the admittedly tiny sample said, “Our best years are behind us.” McDonald’s sales remained soft with U.S. comparable store sales down 3.5 percent in June.
  • Middle East restaurant opens locations in the U.S. and Canada. United Arab Emirates-based Just Falafel offers a menu that includes hummus and tzatzkiki as well as Mexican, Japanese and Indian inspired sandwiches.
  • Burger King continues to expand its Burger King Delivers program. Atlanta now has Burger King units in the delivery program and also has recently added Kansas City, Fresno, and Montgomery, Ala. to the list.
  • Tim Horton’s going more upscale? Tim Horton’s mocked up a fast-casual style restaurant for the chain’s owner convention. The prototype features fancier salads, desserts and beverages as well high-level décor. The test operation also showed beer glasses and wine carafes. Evidently this was a reach for what the chain may become but it certainly it got attention from the press and Tim Horton’s own people.
  • Corporate Stirrings: NPC International, a major franchisee of Pizza Hut and Wendy’s, announced the completion of a purchase of 56 Wendy’s units from the Carlisle Corporation. Carrols Restaurant Group, Inc., which recently purchased 4 Burger King restaurants in Pittsburgh and another 4 in Ft. Wayne, Ind., agreed to buy 21 Burger King units in upstate N.Y.
  • Growth Chains: Penn Station Subs inked a 15-unit development agreement for the Dallas/Ft. Worth area, a 10-unit agreement for the Chicago area, and a 5-unit agreement for the Atlanta area. Tropical Smoothie Café plans on opening as many as 40 cafes in the Atlanta area. Gi Gi’s Cupcakes, with 93 stores currently, plans on opening a minimum of 5 more this year. Pie Five Pizza plans on opening 18 locations in the Tampa area. Corner Bakery Café has signed a franchise agreement for opening 12 units in Oregon and Washington, which now means they have 55 in current development and a commitment for 365 more. Huddle House has signed 5 new franchise agreements that will result in 10 new restaurants that will mark the chain’s entry into the New York market.
  • Comparable Store Sales Reports: YUM! (KFC down 2.0 percent, Pizza Hut down 4.0 percent and Taco Bell up 2.0 percent)

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

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