Restaurant Sales Sag
The restaurant sales growth has been rough in 2016 and 2017. Previously, restaurant sales were thought to be an indicator of future economic growth. This is why you need to always question every indicator. There’s no full proof method that will give you results when it comes to trading, investing, or predicting the economy. You need to use critical thinking skills and do deep research dives to get an idea of what the truth is. From reading a few economic reports, you could see that the economy hasn’t been faltering. It’s difficult to go against a previously reliable indicator, but it must be done. Frankly, even if the restaurant sales growth wasn’t a good indicator, it would still cause economic forecasters to question their bullish thesis on the consumer. As you know, the consumer drives GDP growth. If spending was shrinking across the board, America would be in a recession.
The chart below is interesting because it breaks down the types of restaurants: full service, fast casual, and quick service restaurants. As you can see, the big change in the past couple of years is fast-casual restaurants have taken a hit, while QSRs have taken back lost share. My theory on this trend is twofold. First, the fast-casual space got too crowded. Everyone saw how great Chipotle was doing. This inspired firms to emulate Chipotle’s success. Investors gave capital to firms who claimed they were the next Chipotle even though they were just normal restaurants with subpar themes (think Noodles). Now we’re seeing that Chipotle isn’t even doing well because of a few health scares. The biggest success story in the fast casual space in the past couple years, in my opinion, is Shake Shack. It experienced fad-level craze which has died down in 2017.
The second aspect of this switch in market share is McDonald’s improvement; it emulated restaurants like Shake Shack. McDonald’s is a large, slow-moving company, but a few years of underperformance caused a management change. The new leadership learned from the firm’s mistakes and the successes of Chipotle and Shake Shack. The key is to provide customization and better-sourced meat and poultry. With McDonald’s back in the competitive fold, fast casual restaurants have suffered. The full-service restaurants have done fine, relatively speaking, since they don’t compete with McDonald’s.
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