Harvey Hits Chain Restaurants…Worst downturn in foot traffic and same-store sales since 2009

WOLF STREET–That hurricane Harvey will leave marks on overall economic data, after the ravages it produced in one of the largest urban areas in the US, is clear. Chain restaurants had already been struggling with 17 months in a row of year-over-year declines in same-store sales and foot traffic, the longest downturn since 2009. Then Harvey made landfall.

And August became the 18th month in a row of year-over-year declines, with foot traffic at chain restaurants falling 3.9% and same-store sales 2.0%.

Sales fell in 153 markets and rose in 42 markets. The Western Region was the least bad market, with same-store sales inching up 0.1% and foot traffic falling 1.9%. Texas was the “worst region” with same-store sales falling 5.2% and foot traffic plunging 7.2%. In the area of Texas that was affected by Harvey, foot traffic and sales fell to near-zero for the last week in August.

The overall US data reflects “the difficult environment many chains are facing in today’s rapidly changing market,” said the report by TDn2K whose Restaurant Industry Snapshot tracks sales at 27,000 restaurant units from 155 brands, generating $67 billion in annual revenue. That’s about 10% of total revenues at “eating and drinking places” tracked by the Commerce Department.

The report goes on to explain that “the industry’s underlying performance was actually stronger than the topline numbers suggest.”

Or less bad.

During the first three weeks of August – before Harvey hit – same-store sales were still down, but only 1.4% year-over-year and foot traffic was down 3.0%. So this was bad, but just not quite as bad. Then came the final week in August. The report actually found two events that weighed on it: Harvey and the Mayweather-McGregor fight.

The effects of hurricane Harvey brought sales in the affected area to near zero and crushed overall sales numbers for Texas. For the first three weeks in August, same-store sales in Texas were down just over 2%. But during the final week, same-store sales in Texas plunged 15% year-over-year. Given the size of the affected area, it mattered on a national level:

Texas performance lowered the national sales results by more than 1.0 percentage point in the final week and 0.3 percentage points for the entire month. The negative effects from the storm are expected to continue for months.

And the report found a second reason – a nationwide reason – for the fall-off at the end of the month: the Mayweather-McGregor fight. It occurred on the final Saturday of August.

With an estimated 4.5 million pay-per-views at about $100 each, the spectacle had roughly a $450 million impact on that single evening. Millions of potential restaurant consumers modified their plans because of the event.

The losers:

Full-service segments with less emphasis on sports and televised events (fine dining and upscale casual) saw a severe negative impact.

But there were some winners too:

Casual dining bar and grill concepts, which often feature sports and specials in their bars, had an improvement in sales for the week.

The report also lamented the broader economic context that has been dogging the industry, in addition to the impacts of Harvey and potentially Irma:

The economy expanded moderately in the summer, though the hoped-for acceleration didn’t occur. Job growth was decent but nothing great. Indeed, for the first eight months of the year compared to the same period in 2016, job increases were about 10,000 per month lower. That has translated into modest income increases, especially when adjusted for inflation.

Consumer spending power remains limited and that is restraining retail sales, especially at restaurants. The impact of hurricane Harvey and potentially Irma are large enough to slow growth in the third quarter.

But the rebuilding should kick in during the fourth quarter and cause activity to reaccelerate. That data we see over the next few months will be distorted by the unusual weather and has to be viewed as only representing short-term and not long-term trends.

We may not get back to more normal growth until early 2018, but that is still expected to be same roughly 2.25% pace we have seen for the past six years.

The microcosm of chain restaurants is summarizing the economic scenery overall: Sluggish growth in the overall economy, consumers hampered by thin wage increases, with too much consumer spending being siphoned off by nondiscretionary spending. And while all this was hobbling along, hurricane Harvey hit — and soon Irma may hit — further diminishing demand by enough that it shows up in the national numbers. This will put downward pressure on the economy for a few months, until the rebuilding will eventually add to growth to get back to the same slow-motion range the economy has been in for years.

The brick-and-mortar retail meltdown has been active over the past two weeks: Vitamin World reportedly plans to file for bankruptcy. Perfumania Holdings just filed for bankruptcy. Bon-Ton Stores and Toys R Us hired bankruptcy advisory firms. Read…  Brick & Mortar Meltdown: Bon-Ton Department Stores Hires Bankruptcy Advisor