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NEW YORK -- Higher payroll taxes may be having an impact on American consumers' eating habits, as restaurants have suffered their worst three months since 2010, reported Bloomberg. The Knapp-Track Index of monthly restaurant sales shows that sales at casual-dining establishments fell 5.4 percent in February, after declining 0.6 percent in January and 1.6 percent in December.
The first three months of consecutive declines in nearly three years come as consumers are caught in a "very emotional moment," said Malcolm Knapp, creator of the index and a consultant who has monitored the industry since 1970. Knapp added that February will likely turn out to be the worst month of 2013 after January dealt an "initial blow" in the form of rising payroll taxes, health care premiums and gasoline prices, along with other factors.
"It's important to keep in mind that companies also are facing unusually tough comparable sales because of favorable weather in 2012," Knapp stated, resulting in an industry that is "a lot softer so far this year."
A late-January, 17-cent increase in average gasoline prices was especially notable. "That one-week spike was a killer. It destroyed sales in the first week of February," said Knapp.
All these factors put considerable pressure on full-service restaurant operators such as Darden Restaurants Inc. and Brinker International Inc., as well as limited-service chains like McDonald's Corp. and Yum! Brands Inc., according to the report. Due to weakened discretionary purchasing power among its customers, Darden CEO Clarence Otis in a Feb. 22 statement pre-announced weaker same-store restaurant sales for the Olive Garden, Red Lobster and LongHorn Steakhouse chains during the three months that ended Feb. 24, compared to the same period one year earlier.
Members of the 21-company Bloomberg U.S. Full-Service Restaurant Index, including Bloomin' Brands Inc., DineEquity Inc., Bob Evans Farms Inc. and BJ's Restaurants Inc. have experienced similar difficulties. Meanwhile, surveys conducted this month by RBC Capital Markets show consumers and industry contacts reported that higher payroll taxes have been the biggest impediment to sales this year, hurting business for 63 percent of companies in March, compared to 36 percent in February. Fifty-four percent of Americans state that they have or will cut back on dining out, which is the No. 1 most-reduced expense.
"People are acting fearfully, or you could almost say rationally in a way," regarding changes in dining habits, said RBC analyst Larry Miller. Even a shift of just five guests per day could move a restaurant's traffic counts by 1 percent due to the industry being "very sensitive to marginal changes."
Casual dining in particular is vulnerable because "it's not food on-the-go, and it's not high-end food for people trying to treat themselves," stated Henderson Global Investors Holdings Ltd.'s Matthew Beesley. As a result, many investors are wary. "It seems to me Darden is caught between those two buckets of expenditures," stated Beesley, noting that sit-down meals away from home are "extremely discretionary" while being in excess of supply.
"Casual dining is not necessarily the bright shiny star that it used to be," stated Brinker CEO Wyman Roberts during a Feb. 27 analyst meeting.
In additional to casual-dining restaurants, fast food sales fell 0.1 percent in February, the worst rate in two years, and revenue growth at fast-casual restaurants increased only 0.6 percent, the lowest amount in three years, according to RBC. At a March 13 conference, Yum! Brands CEO David Novak stated the company is bracing for a difficult year.
However, Knapp noted that "March started on a decent tone," and February saw "really solid" job gains. Another sign of optimism is that restaurant sales are not dropping equally. Sales at restaurants such as steakhouses have shown more strength, reported Bloomberg.
Ultimately, to appeal to consumers, it is important for restaurants to provide value, according to DineEquity CEO Julia Stewart. "I still think the economic environment is lumpy and bumpy," Stewart stated at a March 8 conference.