Was there really a restaurant recession in 2016?

father and daughter laughingRob Fox, Wells Fargo Food and Agribusiness Sector Manager, Dairy

Over the course of 2016, there were numerous media reports about weakening sales in the restaurant industry — particularly as it relates to publicly traded chains.1 Some analysts went as far as to call it a “restaurant recession.” This struck me as puzzling since broader economic indicators such as low gasoline prices, disposable income growth, and low unemployment rates, as depicted by the charts below, are typically correlated with an increase in dining out.

Perhaps people were not feeling optimistic about the economy? However, the Michigan Consumer Sentiment Index2 has stayed generally strong, albeit its upward trajectory has leveled off in the past year. Other pundits even hypothesized the paradoxical theory that food service profitability is being hurt by higher labor costs due to the stronger economy!3

Income Unemployment Rate Gas Prices Consumer Index Charts

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Before delving deeper into this apparent paradox, perhaps we should question whether the food industry is really in a “recession” at all? The available data is somewhat contradictory, but the longer term macro trend shows that the decades-long shift toward more eating away from home continues unabated, while there is some evidence of a near-term slowdown. One possibility is that slowing sales may be concentrated among a segment of restaurant chains that are not well aligned with changing consumer preferences.

Probably the most compelling evidence for the restaurant recession assertion is the National Restaurant Association (NRA) Restaurant Performance Index (RPI) same store sales survey4 which has showed a continued weakening trend since mid-2015 as indicated in the chart below. The RPI is based on a sample of 400 restaurant owners/managers where over 100 represents higher same-store sales.

Another reference point is the performance of the restaurant-only ETF, BITE, which was an index of all the publicly traded restaurant chain’s stock performance (unfortunately for restaurant-industry watchers, BITE was recently discontinued). The index was generally quite stable throughout most of 2016, but fell in September in line with broader indices (the FED had signaled a potential rate hike)5. Note, however, that the restaurant index rebounded strongly after the November presidential election.

Restaurant Performance Bite Restaurant

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The federal government has three data series relating to foodservice spending, none of which appears to support the restaurant recession claim.

  • USDA’s Economic Research Service (ERS) Food Expenditure Series6 estimates monthly consumer food spending at home and away from home using various data sources. In the charts below, the ERS series shows that through October, consumer spending at restaurants was up 8.5% year-on-year, compared to only 3.3% spent on meals at home. If this pace continued through the end of the year, 2016 will mark the first time in history that consumers spent more on food away from home.

Total Food Sales

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  • The Department of Commerce Bureau of Economic Analysis’ Personal Consumption Expenditures7 (PCE) data in the chart below seems to show that the growth of spending on food both at home and away has been slowing for nearly two years. This is likely, in part, due to lower food commodity prices over the same period. It does, however, confirm the USDA data that “restaurant” spending is still growing faster than “at home” food spending.

Restaurant and Grocery Sales Growth

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  • The Department of Labor’s Bureau of Labor Statistics consumer expenditure survey8 also tracks food spending at home and away. Unfortunately, it is only annual data, but it also confirms that spending away from home continues to steadily increase over time, and though trending upward for all age categories, growth is particularly strong in the millennial age groups as indicated in the chart below left. Away from home spending in the 18-34 age group jumped by 10% in 2015. This sharp increase in restaurant spending by younger people suggests that the long-term trend toward more eating away from home will likely continue in the coming years — with the usual caveat being that a significant economic downturn would crimp disposable income levels and, in turn, dining out.

Food Spending Consumer Price

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Possible explanations

In summary, it appears that there may have been some softening in the restaurant sector in 2016, but the evidence is hardly robust. Assuming there has indeed been some weakness, though hardly a “recession”, what are some possible explanations? Perhaps the fact that food inflation has been slightly higher away from home than at home, +2.5% vs -1%, has given restaurants a slight headwind9. If so, USDA is forecasting that gap to narrow considerably next year, as suggested by the chart above, and this effect should be temporary.

Many of the aforementioned media stories related to sagging stock prices amidst lower than expected same-store sales growth and earnings. This may be related to over-expansion: according to Nation’s Restaurant News10, the top 100 restaurant chains expanded by a combined net 3,285 units in 2015, a 3.8% year-on-year increase. So while per-unit sales could be weakening, overall food service sales growth could be steady.

Or perhaps sagging sales at some chains may be due to changing consumer preferences and dated restaurant concepts that no longer appeal to today’s consumer. The good news for chain restaurants is that few of them ever truly die, but instead fade away into relative obscurity. While 2016 data is unavailable, the table below shows the fastest growing and declining restaurant chains in terms of per-unit sales in 2015.

2015 Per-unit Sales Growth Restaurant Chains

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Countless articles have discussed the seemingly “fickle” nature of the millennial generation. Of millennials, certain generalizations can be fairly stated: they marry and have children later, they are more interested in health and wellness than earlier generations, and they are certainly more involved with social media. Perhaps not provable, but often repeated, is the statement that millennials are attracted to “authenticity.” This would include an aversion to “Big Food” and a preference for concepts such as locally sourced, freshly prepared, and ethnic.

Readers that interact with teenagers on a regular basis will be very aware how seriously young people view their own “brand identity” and “imaging”, continually reinforced by social media apps such as Instagram and Snapchat. Perhaps the struggling food chains have not tapped into what millennials perceive as having an “authentic” experience? Do these brands have an identifiable identity and mission, values, transparency, and culture? If not, expect these brands to struggle in the coming years.


Although there is some limited evidence that supports a weakening in foodservice sales in 2016, it was not significant nor does it appear to signal the start of a longer-term trend. The long-term trends toward more dining away from home continue, with 2016 likely to be the first year in which expenditures on food away from home surpassed spending on food at home.

While it is true that some chains may be showing declining per-unit sales, it is not due to overarching trends in consumer eating habits. One hypothesis, though difficult to prove, is that those restaurant chains that are performing significantly worse than the industry as a whole have fallen out of favor with “fickle” consumers. If this is true, with millennials already the largest population segment and with their tendency to eat out increasing, while the food service industry is poised for continued strong growth in the coming years, some restaurant chains may find themselves poorly positioned to take advantage of these trends.

Robert FoxRob Fox, Wells Fargo Dairy Sector manager, monitors the national Wells Fargo middle market portfolio of dairy processing companies, provides input into the underwriting process, evaluates collateral coverage, and assists with marketing efforts.

Rob has been in his position within the Wells Fargo Food and Agribusiness Advisors Group since 2008. Prior, Rob spent over 10 years working in various agribusinesses related positions including senior commodity analyst with MF Global, agribusiness educator with the University of Wisconsin Extension Service, and economist with USDA’s Foreign Agricultural Service. In addition, Rob owned and operated a 150-cow dairy farm in Wonewoc, Wisconsin.
Rob holds a B.A. in economics from Northwestern University in Evanston, IL, and an M.S. in agricultural economics from the University of California, Davis. Rob now lives in Oak Park, Illinois with his wife and two children. He is actively involved with and has served on various committees for the St. Giles Parish and School.

1. Two Examples: Why Cracker Barrel Might Be Restaurant Recession’s Next Victim, Wall Street Journal, Sept. 13, 2016; Restaurant Recession Could Signal Tough Times for U.S. Economy, US News & World Report, July 27, 2016
2. University of Michigan, University of Michigan: Consumer Sentiment © [UMCSENT], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UMCSENT, January 11, 2017.
3. http://www.investors.com/news/economy/fast-food-pickle-eating-in-just-got-even-cheaper/
4. http://www.restaurant.org/News-Research/Research/RPI
5. http://www.nasdaq.com/symbol/bite/historical
6. http://www.ers.usda.gov/data-products/food-expenditures.aspx
7. http://www.bea.gov/iTable/index_nipa.cfm
8. http://stats.bls.gov/cex/
9. https://www.ers.usda.gov/data-products/food-price-outlook/
10. Nation’s Restaurant News Top 200 Datafiles