Analyst: Innovation And Pricing Key In 2012

The recovery from the recession may have stalled in 2011, but there will be ways for innovative restaurant operators to gain market share during the coming year, said Warren Solochek, vice president of client development for The NPD Group.

Solochek discussed the state of the restaurant industry during the recent webinar, "A Look Back at 2011 and a Look Ahead to 2012." John Glass, restaurant industry analyst for Morgan Stanley & Co., hosted the event.

Innovation crucial in 2012

Looking ahead into 2012, NPD projects consumers will remain price-conscious, meaning restaurant chains will have to be cautious in the price increases they consider in an environment with high commodity inflation.

"The restaurant industry has done a very good job of sensitizing American consumers to price, and we have done that via a lot of advertising and a lot of promotion that's been specific to price points," Solochek said. "That is going to suppress the opportunity that operators are going to have to take across-the-board pricing."

However, until employment improves, there's little expectation for industry growth, he said, making business a game of stealing market share in the near term. Along with pricing strategies, menu innovation will remain critical to encouraging new visits, he added.

"Innovation is what will get guests to notice a chain and go there to try something new," he said. "Otherwise, the consideration set is just the same mish-mash."

Fast casual will continue to post stronger sales, given its strength in lunch, Solochek said.

"What fast-casual chains are offering truly resonates with consumers," he said. "It's not all about price; it's really about the price-value relationship."

Restaurants positioning themselves as an affordable option for eating at home can improve their price-value perceptions, Solochek said. He pointed out that quick-service restaurants' division of traffic shifted toward more off-premise occasions like drive-thru, carryout and delivery in the third quarter of 2011, and the incidence in which those meals were eaten at home increased 3 percent.

"People still don't want to cook at home and would prefer not to prep," Solochek said. "You still have to have food that's portable and that will stay hot. If it's delivery, it's got to be delivered within a certain amount of time."

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Check averages, not traffic, rising in 2011

Total industry sales have grown over the past six quarters, starting with the period beginning in March 2010, Solochek pointed out. But lately it has been only because of modest growth in the average check as operators cautiously increase menu prices. For the third quarter of 2011, ended Aug. 31, total sales increased 1.3 percent.

"I don't think there is any reason to believe that the industry's dollar growth rate is going to get much above 1.5 percent in the next year," Solochek said. "As long as the economy is not very strong, people are going to continue to trade down to less expensive options."

However, full-service restaurants still are facing significant traffic declines, Solochek said, and high unemployment continues to put pressure on lunch sales. Total visits are only back up to 2005 levels, he said.

For the third quarter of 2011, total industry traffic slid 0.6 percent, the second consecutive quarterly decline.

In the most recent quarter, traffic in the fast-casual segment was one of few bright spots, increasing 5 percent. That segment's outperformance had a lot to do with unit growth, Solochek said, as "this is one of the few places in the industry where we're seeing a decent number of units being built."

The majority of restaurant categories that grew traffic were in the quick-service segment, led by coffee-doughnut-or-bagel concepts, which increased guest counts by 4 percent. Hamburger chains grew traffic only by 1 percent.

Similarly, casual-dining bar-and-grill chains' guest counts only increased 1 percent. Traffic increased for parties with children and for visits that included a deal or coupon, Solochek noted.

August was a particularly bad month for traffic, as guest counts decreased 2 percent overall, reflecting declines of 1 percent in quick service, 6 percent at midscale restaurants, and 2 percent in casual dining.

"If you think back to August, the biggest impact on this number was what was happening in Washington," Solochek said. "Essentially, there was gridlock and a threat that the government was going to shut down. People were worried about whether they could or should spend money ... and you saw those cutbacks."

On the bright side for casual diners, traffic for parties with children has risen in the low single digits each of the past four quarters, increasing 2 percent in the third quarter.

"This is an important trend for casual dining," Solochek said. "During the recession in 2008 and 2009, we saw a dramatic cutback in visits with adults coming in with their kids. We're slowly but steadily seeing these people come back."

Contact Mark Brandau at mark.brandau@penton.com.
Follow him on Twitter: @Mark_from_NRN