The industry is better positioned for a downturn than it has been in the past because of increased access to consumer data.
The restaurant industry’s first quarter seemed almost too good to be true, with most public restaurant companies exceeding financial expectations, an improved labor environment and cooling inflation. Also, driven by a low unemployment-level tailwind, consumers have proven that their pent-up demand to dine out supersedes persistently high menu prices.
But cracks are starting to appear and Q2 and Q3 may prove to be a bit more unstable. Consider new Circana data showing that more consumers are seeking restaurant deals, or Revenue Management Solutions data showing that quantity-per-transaction is down nearly 4% versus last year, while traffic is also declining. Consumers are visiting restaurants less often and they’re spending less money when they do visit.
“We started to see consumers pull back on premium purchases in Q4 and Q1, both for food-at-home and away-from-home. The food industry in general has been waiting for the next shoe to drop,” Peter Cadigan, consumer products senior analyst at RSM US, said in a recent interview.
This pullback trend is likely becoming more palpable for restaurants as the inflation gap for food-away-from-home (restaurants) and food-at-home (grocery/retail) widened in May for the third month in a row. Restaurant prices are now 250 basis points higher – or 190 basis points higher than the average gap between the two categories, according to Kalinowski Equity Research.
Notably, menu inflation isn’t the only factor pushing the shoe closer to the edge. Karen Galivan, consumer products senior analyst at RSM US, said consumers in the middle and lower quartiles are running out of savings built up during the pandemic and are also “really racking up credit card debt.” Indeed, Americans are inching toward $1 trillion in credit card debt and have just recorded the highest year-over-year increase in such debt.
“The macroeconomic picture is volatile, and I don’t mean that in a purely negative sense, but rather in the sense that consumer confidence is starting to dip. There is volatility with the Fed rising interest rates, with excess debt, job creation is still there but as that starts to soften, it’s going to hit the lower quartile,” she said.
Because of this volatility, the University of Michigan’s U.S. consumer sentiment index was at a six-month low in May, while the National Federation of Independent Business Optimism Index just marked its 17th consecutive month below its historical average. The next six months are going to be challenging, Galivan noted, but the industry is better positioned to withstand any potential downturn than it has been in the past.
“That is because we have more data about our consumers and who we’re selling to. Whether it’s fine dining or QSR, we always talk about how it’s important to have that data to understand where your consumer sits and provide the experiences and value they’re looking for,” she said.
Cadigan adds that consumers’ definition of value has changed and restaurant concepts that meet these new expectations will be largely insulated from a softening consumer set.
“In earlier downturns and recessions, we saw bulk food shopping or hunkering down. But as consumers adapt to a lifestyle from at-home to mobile, convenience starts to come into play. More consumers may find value in just getting a quick meal on the table,” he said.
Value now, particularly in a post-pandemic environment, also include experiences – whether you’re paying extra to have something delivered to your home to save on time, or being out and social.
“People are looking for experiences for value and restaurants need to understand what experiences their consumers are looking for. Is it a good delivery experience? Is it sociability? If you’re meeting those expectations, the consumer will keep coming back. That’s why data about your consumer is so important,” Galivan said.
Both analysts note that such insights are much more accessible now than they were just a few years ago, especially given the proliferation of streamlined point-of-sale systems and mobile apps/loyalty programs.
“There have been enough advancements that put these types of insights closer to decision makers without the need for a data science degree,” Cadigan said.
“All of the information is there and if you know what experience your customer is looking for, what they like, what keeps them coming back, you can use that data to your advantage in a crisis,” Galivan added.
Crisis – or cracks – aside, both analysts are somewhat optimistic that the industry will be able to weather any impending or deepening downturn, and not just because operators know more about their consumers’ habits now, but also because most operators are smarter than they were pre-pandemic. Also, consumers have proven time and time again that they’re resilient.
“That’s the biggest tailwind,” Cadigan said. “That’s not to say they don’t have concerns or are not facing challenges. If businesses work to better understand their consumers and those challenges, it will help them thrive and maybe even capture market share and protect margins in this environment.”
Contact Alicia Kelso at [email protected]
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