2016–2017 Restaurant Industry Performance and the JHFM Index

Abstract

Restaurant industry sales continued their moderate growth between 2016 and 2017. According to National Restaurant Association (NRA; 2017) reports, restaurant industry revenues are projected to be approximately $798.7 billion in 2017—a 4.3% nominal growth, or 1.7% real growth, relative to its estimated $766 billion in sales in 2016. Regardless of such optimism, experts are cautious about the industry’s revenue growth in 2017 amid mixed economic signals, rising labor costs, and a complex regulatory environment at both the federal and state levels. Table 1 summarizes trends in stock returns for key restaurant firms up to the first quarter of 2017. At the end of the first quarter of 2017, the one-year average return for the S&P 500 index (14.23%) clearly surpassed the one-year average return of restaurant stocks represented by the JHFM Restaurant Industry Index (6.74%) by 7.49%. During the past year, the family, casual, and full-service restaurants (JHFM Index returns of 14.64%) seem to have performed better than the market (14.23%), with casual-dining restaurants showing the maximum returns (16.59%) and Darden Restaurants (31.13% annual return) contributing the most toward this buoyancy. Such a trend suggests a significantly stronger consumer preference for fine dining during the 2016–2017 period relative to 2015–2016. Alternatively, the Quick Service and Quick Service Specialty Restaurants (JHFM Index returns 6.11%) yielded significantly less annual returns relative to the market (14.23%), with firms such as Panera Bread, Jack in the Box, Wendy’s, and Domino’s Pizza (annual returns 49.14%, 44.74%, 25.46%, and 28.55%, respectively) being clear winners in this group. Trends in the first quarter of 2017 suggest caution in the market’s expectation from restaurant industry stocks (5.91%). Current trends in the NRA’s Restaurant Performance Index (RPI) continue to support the cautious tone in the expectations of NRA experts. The RPI is a combination of the current situation index (derived from recent period restaurant industry indicators such as same-store sales traffic, and labor and capital expenditures) and the expectations index (derived from a forward-looking or six-month outlook for restaurant industry indicators) and is based on the NRA’s monthly survey of U.S. restaurateurs. RPI values greater than 100 indicate expansion, while values less than 100 suggest a period of contraction for key restaurant industry indicators. Table 2 summarizes recent trends in the NRA’s statistical barometer, the RPI, from January 2009 to January 2017. Figure 1 presents a graph of RPI trends from January 2009 to January 2017. The RPI values in Figure 1 are suggestive of a continued regressive trend for restaurant industry indicators during the period from July 2016 to December 2016. In December 2016, the current situation index dropped 0.1% to 99.5, suggesting contraction. However, the expectations index stood unchanged at 101.6 relative to November, indicating optimism in sales growth expectations of restaurant operators within a cautiously hopeful economic outlook. On the positive side, the downward trend in RPI values seems to have plateaued since its major dip in August 2016. The cautious outlook for the restaurant industry in the coming months seems logical given the recent mixed signals in the U.S. economy. According to data from the U.S. Department of Commerce (2016), real Gross Domestic Product (GDP) increased only 1.6% in 2016, relative to a 2.6% THE JOURNAL OF HOSPITALITY FINANCIAL MANAGEMENT 2017, VOL. 25, NO. 1, 1–3 https://doi.org/10.1080/10913211.2017.1330519