Still-cautious clientele keep casual-dining sector in slump

Nation's Restaurant News,  Nov 12, 2007  by Malcolm M. Knapp

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Hampered by still-slumping guest traffic, casual-dining restaurants sustained another decline in same-store sales in September, which we estimate was an average dip of 1.1 percent--the fifth-worst monthly slippage of 2007.

The dismal results for the month provided yet another indication that economic pressures continue to suppress consumers' discretionary appetites for sitdown eateries.

By comparison, the casual sector's same-store sales rose 0.8 percent in September 2006, last year's third-highest monthly result. Thus, the year-to-year slippage in same-store performance was an overall 1.9 percentage points.

Knapp-Track's estimate for same-restaurant guest counts for September 2007 was that they fell 3.5 percent, on top of a 1.8-percent decline in the prior September.

It should be noted that the latest estimates are based on weekly data. The final accounting for September will depend in large part on shifts in results for individual casual-dining brands based on the specific weeks included in their accounting month.

All five weeks of September had negative same-restaurant sales results and guest counts. The spread between the best week of the five and the worst week was 1.5 percentage points, with the best week being the first and the third and fifth weeks tied for the worst result.

The reduction in same-store sales results for September, versus the 1.7-percent gain for August, can be attributed in part to very hot weather in that month, which boosted air conditioning-related energy bills that showed up in September. In addition to that effect on consumer behavior, the casual sector spent much less on advertising in September than it had in the same month last year.

Conditions were especially troubling in California, which is home to a large concentration of underperforming subprime mortgages--17 percent of all such mortgages and 19 percent of all foreclosure starts in the second quarter were in that state.

High-rate mortgages represented 29 percent of all new home loans in 2006. From 2004 through 2006, 10.3 million high-rate loans were made, or 23.6 percent of some 43.6 million mortgages. High-rate or subprime mortgages are not just the province of low-income households. Higher income households took out high-rate mortgages to buy more expensive homes than their financial position would allow with conventional financing.

Fort Meyers, Fla., is a prime example of an area in subprime trouble. In 2006, 40 percent of all mortgages in that market were subprime loans. Since December 2005, the area's median selling price has fallen 22 percent. This year through July, the Fort Meyers area has had the second highest mortgage default and foreclosure rate in the nation. It is no accident that the Fort Meyers-Naples TV market has posted the worst results in Knapp-Track comparisons.

The casual-dining sector's September same-store slump was below the weighted-average same-store retail industry increase of 1.2 percent for the month, as measured by Bear Stearns' retail analysts. The pattern of the period from April 2003 through August 2007 was that Bear Stearns' retail same-store results outperformed the casual-dining sector in all but seven months: November 2004, January 2005, April 2005, May 2005, January 2006, March 2006 and April 2007.

Hotter weather than usual in September was a major factor in lowered sales of fall clothing. That negative factor showed up clearly in the so-called softlines category, which was up 2.8 percent in August and down 3.4 percent in September. It was even more dramatic in the apparel category, whose sales fell 0.9 percent in August and another 8.6 percent in September.

For September, drug stores led retail's same-store sales with a gain of 3.3 percent, followed by discounters, up 2 percent; department stores, down 2.4 percent, the softlines category's 3.4-percent decline; and home furnishings, off a steep 16.2 percent from September 2006. Off-price apparel led in the softlines merchandise category with comparable sales gains of 1.5 percent, followed by junior apparel, down 1.1 percent, and apparel stores, the worst niche, with a decline of 8.6 percent.

"Higher-demographic" department stores, discounters and drug stores were the best retail performers in August 2007.

Value propositions for most restaurants will continue to be very important as pressure on households earning less than $50,000 continues to come from inflation in general, and increased energy, education, medical and drug costs.

The most recent 2005 Consumer Expenditures Survey from the Bureau of Labor Statistics showed that households with pretax incomes of at least $70,000 account for 28.5 percent of all households but account for 50.1 percent of all personal dollars spent on meals away from home, an index number of 176.0. The casual-dining concepts that do not increase the proportion of their overall patronage coming from $70,000-plus-income households will not fare well in the next turn of the "retail wheel."