Restaurant same-store sales end 2018 on a high note, despite low traffic, high labor costs

By Adam Berebitsky,  tax partner and leader of Restaurant Practice and David Rice, audit senior manager, BDO
The restaurant industry topped off 2018, with a 1.5 % increase in same-store sales. Higher menu pricing and cost-cutting measures executed throughout the year helped mitigate the effects of declining foot traffic, higher labor costs, and rife competition. As restaurants sought to differentiate from and rise above their peers, 2018 saw more investment in advertising and delivery services, as well as efforts to entice patrons with limited-time offers.

The fast casual segment ended the year with same-store sales up 2.7 %, lifted by Wingstop, which saw 6.2 % same-store sales growth through Q4 2018. The company has been investing significantly in brand awareness and innovation. Beginning this year, it is requiring franchisees and company-owned restaurants to contribute 4 % of top-line sales to a national advertising fund, up from 3 % last year.

Taco Cabana and Pollo Tropical saw same-store sales growth of 4.5 and 2.2 %, respectively. Parent company Fiesta Restaurant Group attributed the improvement in part to sales from new restaurants, which were slightly offset by permanent restaurant closures, and a favorable comparison to 3Q 2017, which saw a negative impact from hurricanes.

Casual brands saw a 1.7 % uptick for the year, with Texas Roadhouse (+5.4 % ), BJ's Restaurants (+5.3 % ) and Applebee's (+5 % ) benefiting from a sustained boost in foot traffic and average check size. The upscale casual sector saw same-store sales rise 1.2 %, with Stoney River Steakhouse & Grill (+5 % ) far outperforming its peers, followed by Capital Grille (+3.3 % ).

Relying heavily on value, with big players rolling out limited-time offers and unique menu items like Taco Bell's nacho fries, quick service restaurants' same-store sales were up 1.3 %. Taco Bell (+4 % ) led the segment, followed by Carrols Restaurant Group (+3.8 % ), a Burger King and Popeyes franchisee. Among the benchmarkers for the segment, the only company that posted negative results was Steak N Shake (-5.1 % ), which saw a 7 % decrease in customer traffic for the year.

Contrary to analyst expectations, wildfires did not have a lasting impact on most restaurant results by the end of the year.

Meanwhile, in pizza, Domino's sales were up 4.8 %, while Papa John's declined 9.0 %; Pizza Hut closed the year flat. The segment as a whole fell 1.4 % for the year.

Commodities
In commodities, the price of poultry, pork, cheese, and fresh veggies all dropped, in some cases reversing 2017 trends. Pork was down 6.1 % for the year as record pork volumes led to lower prices and prompted producers to seek international buyers. U.S. pork prices for 2019 are expected to be competitive, and exports are projected to rise by 3 %.

U.S. poultry production, by far the largest in the world, is expected to rise 2% to a record 19.7 million tons in 2019, driven by growth in domestic and foreign demand, according to the USDA. Meanwhile, the cost of eggs in 2018 more than doubled that of 2017, rising 31.6% through Q4.

Cost of sales were down marginally, ending the year 0.3% below the end of 2017. To alleviate the pressure on margins resulting from these dynamics, restaurants are raising menu prices, reevaluating operating hours, closing underperforming locations, and changing work shifts, while implementing initiatives to attract and retain talent.

Cover photo: iStock