Restaurant industry ticks upward
MRLA Q4-2018 report shows 3 percent growth last year compared to 2.3 percent in 2017.
Fed by an uptick in same-store sales in 2018, Michigan restaurant operators are optimistic about growth in 2019.
The Michigan Restaurant & Lodging Association (MRLA) released its Q4-2018 Michigan Restaurant Industry Trends Report last month, which is based on a survey of 1,500 food venues comprising $750 million in annual revenue.
The report tracks economic and demographic trends within the restaurant industry on a statewide basis.
The MRLA was formed by a merger announced last year, expected to close April 1, of the Michigan Restaurant Association and Check In Michigan, previously known as the Michigan Lodging & Tourism Association. However, the MRLA’s Industry Trends Report still focuses solely on the restaurant industry.
Justin Winslow, president and CEO of the MRLA, said 2018 represented a “return to stability” following a lackluster 2017.
Same-store restaurant sales in Michigan increased by 3 percent in 2018.
Restaurant traffic, or in-store attendance, increased by 3.1 percent in 2018.
“It was a good growth year but not a phenomenal one. But when I put that into perspective in the context of what the year before was like, 2018 was a good year,” Winslow said.
“To see 3 percent growth out of the year is not gangbusters. But we had a little more anemic growth in 2017 to the point where I was almost concerned that we were going to see an economy-wide recession in 2018. … If you see the restaurant industry struggling, it usually seems to foretell a recession coming.”
The previous report showed full-year 2017 same-store sales finished up at 2.3 percent, while traffic was up 1.9 percent.
Restaurateurs are optimistic about 2019, estimating sales growth will reach 3.7 percent.
Operators are bullish on traffic growth, anticipating 3.8 percent in-store attendance growth in 2019.
Survey respondents expect menu prices to increase by 2 percent in 2019, which would surpass the year-over-year increase of 1.6 percent reported in 2018.
Food and labor costs increased from the third to fourth quarter last year — with food costs at 31.5 percent of total sales during Q4, up from 30 percent of total sales in Q3, and labor costs at 30 percent of total sales in Q4, up from 29.8 percent of total sales in Q3.
However, respondents said they believe food and labor costs will stabilize or even decrease slightly in 2019.
Winslow said he has noticed Michigan restaurateurs, on average, are “overly optimistic” when projecting same-store sales growth for the coming year.
“But the fact that they see 3.7 percent as their likely growth in 2019, and that’s what they’re preparing for, is a good sign that they … think better growth days are ahead of them than behind them.”
Winslow said he expects statewide same-store sales growth will rise more in the 3 percent to 3.5 percent range.
Winslow noted region-specific breakdowns of the data indicate West Michigan operators are better at predicting their sales growth accurately.
“They answered questions like, ‘Were your sales in line, above or below plan from where you were expecting them to be in 2018?’ and there was a statistically significant degree that they were better at being in line or above plan than the statewide average,” Winslow said.
“(The data) suggest that they’re better planners on the west side, that they seek to understand what trend lines are out there, and they are ... probably less surprised, frankly, at the end of the year. That’s good. Because in the hyper-competitive restaurant market, that kind of planning is what keeps you in business.”
Same-store sales growth rates for West Michigan operators were “negligibly better” than the statewide average, at about 3.1 percent compared to 3 percent, Winslow said.
Grand Rapids rates among Detroit, Ann Arbor and Traverse City as the strongest market for restaurants in Michigan, Winslow said, although smaller cities like Battle Creek are making strides by adding independent restaurants and, most recently, announcing New Holland Brewing picked the city for its next location.
“There’s enough (economic) growth overall that you’re seeing it everywhere. It’s not always disproportionate, certainly to those areas that already have great restaurant communities,” he said.
Third-party delivery apps
MRLA members over the past two years have indicated in surveys their dine-in rates have been negatively affected by baby boomers cutting their budgets in retirement — as well as the rise of third-party delivery companies such as Uber Eats and Grubhub, Winslow noted.
Partnering with food delivery platforms is a double-edged sword, he said.
“It opens you up to sales that you otherwise were not likely to get. … It makes it easy. But the rates at sometimes 30, 35 percent of sales really dramatically increase costs, and that eats into your bottom line. So, it’s a difficult decision for a restaurateur to make. Do you forgo those potential sales, or do you say yes to that, knowing you’re not going to make a whole lot of profit on delivery because of how much these third-party delivery companies charge?”
He said some restaurants treat delivery as a loss leader to maintain brand recognition in the market, while some opt out altogether.
Tip credit legislation
In addition to questions about sales and traffic, MRLA survey respondents were asked how legislation signed in December to restore a lower minimum wage for tipped employees, commonly referred to as the tip credit, would impact their business decisions in 2019.
The legislation was in response to a potential ballot proposal seeking to make Michigan the eighth state to eliminate the tip credit. Detractors objected that paying employees at the full minimum wage rate would necessitate raising menu prices to offset the overhead costs, which might in turn prompt diners to tip their servers less.
The tip credit allows employers to pay 38 percent of the minimum wage, which currently is $9.25 per hour.
Winslow said the industry operates on thin profit margins of 3-5 percent and thus could not afford such significant inflation when wages already grew by 6.7 percent in 2018.
Nineteen percent of survey respondents said keeping the tip credit would save their business, while 76 percent said it would allow them to maintain current staffing levels or hire more employees.
“I’m not speaking in hyperbole when I say the tip credit is an existential issue for the restaurant industry, especially the full-service side of the industry,” Winslow said.
“The tip credit is ... the restaurant economics that frankly allows them to function as they do. This survey unequivocally illustrates that keeping Michigan one of the 43 states that operate with a tip credit will make for a far better 2019 than if it had been lost.”