Two Reasons Why Restaurant Sales Are Soft

In this robust economy, it should be the best of times for restaurants. One problem is that while eating away from home has been on a 40 year trajectory of gains,  our companies and our organizations are more narrow in focus. They are incentivized in profits and free cash flow and are not paid for overall industry results. One reason is that there are so many “restaurants”, the National Restaurant Association defines them as venues of some sort. It counts US venues at over 1.05 million. It does not count pop up restaurants or delivery only (hidden) restaurants, the so-called shadow supply.

For some time Sysco, US Foods and PFG have reported that the sales of “independent” cases have risen via their supply chain deliveries.  Of course, they like to report that, as those are akin to mostly higher markup “street account” prices. It leads to the supposition that not only are chains cannibalizing one another (especially in the US) but also the vibrancy of new independent restaurants are cannibalizing chains as well. Newness and entertainment have always been part of the restaurant dynamic. Research over many years has shown independents are more valued for friendliness and menu authenticity, while chains are valued for convenience and standardization.

For some considerable time, basic restaurant sales components have come back as negative in “traffic/transactions” yet positive in average check. Looking at third quarter 2018 same store sales results for publicly traded  companies[1] , only one fine dining brand (Ruth’s  Chris), five casual dining brands (Outback, Applebee’s, Olive Garden, Texas Roadhouse, BJ’s and one wing pick up brand, Wingstop had positive traffic gains.  No quick service restaurant brand appeared to have positive traffic/transactions.

This divergence between casual dining (which clearly is not dead) and QSR underperformance speaks to the over saturation in the marketplace of having too many QSR restaurant units in the United States. There have been casual dining closings, but not as many as on the QSR side. For a franchising firm, massively robust franchise development is often seen as a necessary accelerant. This over saturation of restaurant units in the marketplace is easy to see, but more difficult to solve.

Is Restaurant Ad Spending Memorable?

Coming off the political season, we have all seen too many ads and messages. In many places, it has been heath product ads,  political ads and….restaurant ads. I get particularly worried when I see two restaurant ads of the same brand and message almost back to back. That is likely the network trying to hit the promised measured media metric, the entity that counts the number of messages.

Nielsen in 2016[2] noted that consumers are exposed to 30 ads per hour, every hour of every day, on television alone. This means that viewers who watch intensely actually see a lot of ads.  The number of devices/media forms is spread from VCRs, to radio, to line TV, to time shifted TV, DVD/Blue Ray, Game Consoles, Multimedia devices, PCs, smartphones and tablets.  Compared to 2010, radio, TV, and radio shifted lower, but all other media except VCRs shifted up.

The dynamite takeaway from Nielsen is that there was a .62 correlation between ad memorability and sales. A 1.00 correlation is perfect while a 0 correlation was that there is no relationship. So .62 is pretty good.  Memorable ads drive sales. A memorable ad is one that a viewer can recall the next day.

How memorable is restaurant advertising?  Ad Age and Toast POS published a list in 2018 and 2017. From that, I came up with the following US restaurant ad list, almost all of which we do remember:

Ad Content

  • 1970s-McDonalds (MCD)
  • You Deserve A Break Today
  • 2017-Domino’s (DPZ)
  • Domino’s Carryout Insurance
  • 1984-Wendy’s (WEN)
  • Where’s the Beef?
  • 2012-Chipotle (CMG)
  • Back to the Start--Industrialized Food and Farming
  • 2004: Burger King (BKC)
  • Subservient Chicken

The problem pops out right away. Even the biggest of chains have so few memorable ads. If we assume that restaurant advertising is on average roughly 4 percent of sales, brands are flushing a boatload of money down the drain on unmemorable ads that are not resonating with consumers.  

I wish the industry could change out remodel capital spending and marketing outlays at will. Unfortunately, restaurant budgets and spending plans are developed in silos. If you have X dollars from last year, then a company will spend Y dollars this year, plus or minus a little.  If an outlay is not visible on an income statement, then much visibility will be lost. That is why capital spending does not receive the scrutiny it should. For example, capital expenditure is one of the issues where McDonald’s franchisees in the United States are displeased with their franchisor right now.

[1]  Hat tip to: Duff and Phelps, Restaurant Quarterly Update, Fall 2018,

[2]  Nielsen, Maximize Your TV Advertising Effectiveness, 2016.