News

Consumer confidence grows, but costs pressure profits

Despite increased consumer confidence, increased costs -- beef is up 39 percent -- are making it tough for restaurants to earn a profit.

November 24, 2014

Despite stable, perhaps even improving, macroeconomic and consumer indicators, a tougher cost landscape is putting pressure on profit margins for restaurants, according to a new study by AlixPartners.

Debt levels are down and traffic is up, according to the study. Distress levels of publicly held restaurants have fallen to a record low, and more customers are dining out and purchasing ready to eat meals outside of the home in the past 12 months.

Cost pressures

AlixPartners' research also found that performance is decidedly mixed when it comes to earnings before interest, taxes, depreciation and amortization (EBITDA) and compound annual growth rate (CAGR). At the same time, the study showed that increased spending on investments in growth such as point-of-sale technologies and analytics has contributed to a rise in selling, general, and administrative expenses as a percentage of revenue, which now exceeds pre-recession levels.

The industry is also facing significant cost headwinds from a number of factors including volatile commodity prices and increased labor costs. Although the prices for wheat, rice and corn have dropped 14 percent, 20 percent and 27 percent, respectively, the prices for other essentials have increased (the cost of beef has increased by 39 percent, for example). Causes for concern within the industry also arise from several regulatory and policy changes, including minimum wage increases as well as legislation defining large-party tips as taxable wages, both of which are likely to increase pressure on margins.

"Despite healthier balance sheets, the industry at large is facing a serious cost problem" said Eric Dzwonczyk, managing director at AlixPartners and co-lead of the firm's Restaurant and Foodservice Practice, in a press release. "Restaurants did a good job of cutting costs during the recession, but they've crept back in recently and need to be dealt with."

Consumer confidence

Consumers reported eating out more at quick-service restaurants in the past 12 months than any other type of restaurant, though that figure is down to 5.3 times per month on average, less than the 5.8 reported last year. Consumers averaged 3.7 visits to fast casual restaurants (up from 3 in Q1 2013), 3.5 visits to casual restaurants (up from 2.8) and two visits to fine dining restaurant (up from 1.5).

Consumers also reported increases in purchasing ready-to-eat meals from convenience stores and grocery stores, with grocery stores seeing a significant jump from an average of 3.3 purchases per month in the past 12 months as reported in the Q1 2013 survey to an average of 4.1 purchases.

"Grocery and convenience stores are upping their ready-to-eat game by offering higher quality and better tasting ready-to-eat options, and we're seeing the results as value-conscious consumers are increasingly seeing ready-to-eat meals as a preferable option as they seek to reduce their dining out spend," said Dzwonczyk. "Traditional restaurants can no longer afford to ignore or underestimate the ready-to-eat, convenience and grocery store threats. We've seen a blurring of the lines between these segments and traditional restaurants, particularly (QSR), over the past several years and we expect this to continue if traditional restaurants do not take note and find ways to win back this 'share of stomach.'"

Key findings from AlixPartners' consumer survey:

• 76 percent of consumers surveyed said they plan to dine out the same or more over the course of the next year, compared to 73 percent and 71 percent who said the same in the Q1 2013 and Q1 2012 surveys, respectively.
• 77 percent of consumers surveyed said they plan to spend the same or more in the next year.
• Consumers surveyed said they plan to spend an average of $15.19 per meal in the next 12 months, a slight decline from their reported average spend of $15.30 per meal in the previous year.
• Just 48 percent of consumers said they plan to use coupons, promotions and discounts to reduce their restaurant spend, versus 56 percent who said the same in the Q1 2013 survey.
• 20 percent of value-seeking customers who are planning to reduce the amount they spend on dining out in the next 12 months will purchase read-to-eat meals, up from 14 percent who said the same in the Q1 2013 survey.
• 83 percent of consumers surveyed consider healthy menu options at least somewhat important when determining where to dine out. The top factor in choosing a health-conscious restaurant for these diners was menu variety (chosen by 61 percent of consumers surveyed), followed by whether a restaurant provides nutritional information on menus (chosen by 48 percent) and portion size (chosen by 34 percent).
• 59 percent of consumers surveyed prefer moderately sized menus with several sections, 18 percent prefer large, diverse menus with many choices, and 8 percent prefer small, limited menus with only a few choices.