It was interesting to note that as part of its Spring ReCount study, which is a census of the commercial restaurant locations in the United States, the NPD Group reported that the total number of restaurants grew by 0.5 percent from the same time last year. But that does not necessarily mean conditions have improved much. "Oftentimes it is easier to keep the restaurant open at a slight loss or breaking even than just closing it," Tristano says. "You can't just claim bankruptcy and move on to the next restaurant. There is a higher cost to close."

The number of restaurants may be holding steady but the units out there seem to be getting smaller. Tristano notes that the number of seats in restaurants today seems less than where the industry was 20 years ago. "We have seen the independent market struggle but it seems to be doing better," Tristano says. "With independents, we have had a major shakeout over the past five years and weaker performers are gone. Some independents who want to stay around are now trying to stay in the industry by becoming franchisees."

Operators' Foodservice Equipment and Supplies Budget for 2014 pie chartOperator Purchases by Distribution Channel pie chartTaking a closer look at specific industry segments, Technomic projects that nominal sales at limited-service restaurants will grow by 4 percent in 2013 and 4.5 percent in 2014; sales at full-service restaurants will grow by 3.5 percent in both 2013 and 2014 and bar/tavern sales will increase by 4.5 percent in 2013 and 5 percent in 2014.

In recent years, the fast-casual segment emerged as an industry bright spot and it does not appear anyone expects that to change any time soon. "We expect fast casual to grow at a rate of 10 percent because there is a lot of demand and location opportunity in the big and smaller markets," Tristano says. "So we expect growth for a period of three years and potentially five years." Helping fuel this segment's growth is a large number of franchising opportunities, he adds.

One reason for fast casual's continued growth is its unique appeal to members of the Millennial generation. "This group is already into their mid 30s and they are earning decent money and they are satisfied with dining at fast-casual concepts instead of fine dining," Tristano says. "As a result, the fine dining concepts may be the ones that struggle."

Fast casual's growth rates have made it the envy of most other operator segments and many have tried to emulate this service style. But not every restaurant concept should try to travel the fast-casual path. "If a concept offers table service I don't think customers are going to come back for the fast-casual service," Tristano says. "Many concepts are just not designed to retrofit to do fast casual."

Some concepts, like Mimi's Café, have gone to a split design where one side of the restaurant offers the chain's traditional table service and the other side features a design typical of coffee houses, with grab and go and pastry cases and seating that encourages customers to purchase a beverage and something to eat and linger while chewing up some of the chain's Wi-Fi service. "A concept like Mimi's Café might be successful because they have good baked items and coffee. But lunch and dinner might be a tougher sell," Tristano says.

Beyond the economy and the politicians, emerging concepts and chains continue to be a major disruptive force in the restaurant industry. "A big part of innovation is getting outside of the box," Tristano says. "The newer concepts have fresh thinking and need this to build a new model to be successful. They have to focus on what they can do better. Newer concepts are trying to steal share or grow share and when you are doing that you have to be on the offensive. The larger ones feel they are doing well and want to keep going. It comes down to risk and reward. When you have the share, your reward is much smaller. When you don't have the share the reward is greater."

Affect on Operations

When citing their top business concerns, restaurant operators participating in the NRA's research cite government, the economy and food costs — in that order. "For the first time in the decade-plus of running that tracking survey, government is now the operator's top challenge," Riehle says. "Part of that is the healthcare situation as well as the sequestration. There's a whole lot that comes into play when you are talking about the government but when one out of four operators report the government as their top challenge, it really does speak to the nature of the environment today.

"The challenge for the second half of the year is what a potential government shutdown could do to consumer confidence if it drags on for any period of time. When you look at consumer spending patterns, threats of a government shutdown obviously dampens consumer confidence."

Food costs remain another key issue for restaurant operators and with good reason. From June 2012 to June 2013, wholesale food prices increased 3.2 percent compared to menu prices, which are up 2.2 percent, according to Riehle. "You can see there is a substantial gap between those two inflation rates and that leads to a fairly relentless beat of the drum for the operator community. Because of the current economic environment operators can't pass through menu price increases on a one to one basis. So, not surprisingly, the operators are looking to drive greater efficiency and productivity gains."

Dealer's Top Five Operator Segments with the Greatest Sales Opportunity in 2014 chart Dealers Top Five Operator Segments Most Likely to Decline in Sales in 2014 listComparing the previous 10 years offers a clearer picture of the operating conditions for the operator community. From 2002 to 2012, wholesale food prices experienced a 4 percent compound annual growth rate (CAGR) and menu pricing experienced a CAGR of 2.9 percent, according to Riehle. In contrast, industry sales experienced a 4.3 percent CAGR. "There is not much room in terms of operating costs and the competition remains intense," Riehle says.

As a result operators need to focus, once again, on unit economics. "In today's economic situation it is easier to control your costs than your revenue," Tristano says. "Some operators have gone to 24-hour service but they are doing it in less square footage. Getting the overhead under control is important. If you travel through the rural areas you see all of the banquet halls and steak houses and supper clubs that have closed down and are not being used."

One way some operators are looking to manage their expenses is by building smaller restaurants. For example, Tristano points out that most fast-casual restaurants now measure 2,500 to 3,500 square feet, a trend not lost on players from other segments. "A lot of the traditional casual dining chains are starting to look more like fast casual," says Tristano, citing Red Lobster's new design as one example. "We are going to continue to see a blurring of segments. If KFC is successful with its new prototype (KFC eleven) they will blur the line between them and Chick-Fil-A."

The movement toward smaller locations, Tristano adds, is similar to what's taking place in the retail segment in general, where traditional big box players like WalMart are developing smaller units to control costs and gain entrance to new geographic areas. "Operators that minimize food and labor costs but don't keep up their restaurants still have customer-facing issues," Tristano says. "But if you start with a smaller restaurant their return can be optimized."