This Important Restaurant Metric May Signal Even Worse Times Ahead for the Economy

Uh-oh. The realization that poor restaurant performance has not been due to weather may at last be sinking in, and analysts may finally have to admit that a lousy economy is serving to drag the industry down.

The latest numbers from the Black Box Intelligence and People Report show that same-store sales at restaurants open at least a year turned negative in June, while traffic at those stores continued its downward drop. The industry hasn't posted a single quarter of same-store traffic growth since the recession. Further, with second-quarter 2014 comps barely inching 0.3% higher, it calls into question whether the recovery Wall Street was expecting in the back half of the year will actually materialize.

Source: Black Box Intelligence and People Report, and Nation's Restaurant News.

From restaurants to clothing stores, the harsh winter weather allowed retailers to lay blame on the supposedly strange "snow in winter" phenomenon as the cause for all their malaise. McDonald's (NYSE: MCD  ) said "severe winter weather" was partially to blame for a sharp drop in comps in January, Wal-Mart pointed the finger at "eight named winter storms (that) resulted in store closures" as the cause of its poor performance earlier this year, and carmakers Ford and General Motors said they saw sharp declines in monthly sales because of "extreme weather" patterns.

Even Janet Yellen at the Federal Reserve sought to misdirect attention from the shabby state of the economy by blaming disastrous first-quarter results on Old Man Winter, numbers that were most recently revised sharply downward again, this time to a near 3% contraction, as opposed to the slight expansion that was originally reported.

But with the second-quarter restaurant numbers now also showing persistent weakness -- weakness that was evident last year but was ignored for a variety of excuses companies used en masse to hang their hats on -- it's clear the industry has run out of excuses, and that doesn't bode well for the rest of the year.

The Black Box report goes on to note that over a two-year period, customer ticket values have grown at more than 2% in the second quarter, suggesting that whatever gains restaurants are making is the result of rising prices, not more people who are going out to eat. Even so, they're not fully benefiting from the increases, because falling traffic is offsetting the gain.

Now restaurants are caught in a dilemma of higher input costs. Beef and pork prices are at record levels, and now poultry, which has enjoyed higher demand as a result, is seeing its prices go up, too. Restaurants such as Chipotle Mexican Grill (NYSE: CMG  ) are being forced to raise their prices to compensate for the greater costs for meat and commodities, a yellow flag that it may cause consumers to pull back even more from eating out.

According to restaurant supply chain co-op SpenDifference, just about everything is more expensive:

  • Cheese, butter, and whey cost 15% or more than they did last year.
  • Beef prices are 15% higher.
  • Pork sausage is up 21%, though pork bellies, which are used for bacon, are only 2% higher, but that's after a year that also recorded record high prices.
  • Liquid egg whites have surged 57% over 2013.

The only bright spot is corn, where prices are falling. Although that would normally help poultry producers increase their supplies, the world's biggest chicken breeder, Aviagen Group, reports that it messed around with its roosters' genetics and caused them to overfeed, resulting in lower fertility. Sanderson Farms (NASDAQ: SAFM  ) , which is the third largest poultry producer in the U.S. and one of Avigen's biggest customers, said 17% of its eggs failed to hatch (15% is the normal failure rate) and the USDA cut its egg production rate for 2014 by 75% from the long-term average because there's a short supply of breeder birds.

Yet unlike McDonald's, which is suffering from both lower comps and traffic but may need to raise prices as much as 3% this year to compensate, further affecting sales and profits, Chipotle continues to gain. Analysts conducting channel checks recently found that the chain's price increases are higher than the average 5% to 6% increase but aren't affecting traffic at its restaurants. 

That's probably because it's the leading chain in the resilient fast-casual dining segment, the only industry niche that's consistently been able to record any growth for the past few years. But the new numbers coming out may call that resilience into question, as there may be only so far consumers are willing to go in paying more at the register.

But even if a Chipotle can weather the storm, other restaurants in the fast-food, casual, or family dining segments may not fare so well. And as more retailers in and out of the industry own up to the fact that there are no more excuses to use, the economic harm will be all too apparent. Investors, therefore, may want to tread carefully before putting any of their money into this ailing sector, no matter how cheap stock prices may look.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 15, 2014, at 1:21 PM, Domeyrock wrote:

    "Restaurants such as Chipotle Mexican Grill (NYSE: CMG ) are being forced to raise their prices to compensate for the greater costs for meat and commodities, a yellow flag that it may cause consumers to pull back even more from eating out."

    wow, are you way off base. No one's forcing Chipotle to buy top QUALITY ORGANIC food for their restaurants, they know it's what the consumers want. This is something McDonalds and Taco Bell still hasn't figured out. And consumers are more than willing to pay up for quality food if need be. How many more quarters does Chipotle need to show of upside suprises in the face of supposed economic turmoil?

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3029611, ~/Articles/ArticleHandler.aspx, 9/3/2015 11:17:30 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


Today's Market

updated Moments ago Sponsored by:
DOW 16,524.55 173.17 1.06%
S&P 500 1,973.07 24.21 1.24%
NASD 4,791.37 41.39 0.87%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 11:00 AM
CMG $726.00 Up +2.13 +0.29%
Chipotle Mexican G… CAPS Rating: ***
F $14.03 Up +0.16 +1.15%
Ford CAPS Rating: ****
GM $29.64 Up +0.43 +1.46%
General Motors CAPS Rating: ***
MCD $96.85 Up +0.81 +0.84%
McDonald's CAPS Rating: ***
SAFM $68.54 Up +1.94 +2.91%
Sanderson Farms CAPS Rating: *****
WMT $64.85 Up +0.41 +0.63%
Wal-Mart Stores CAPS Rating: ***