Why retail food service sales are restaurant indicators

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Industry classification

The restaurant industry is a part of the Consumer Discretionary sector—as classified by the Global Industry Classification Standard (or GICS). The consumer discretionary industry—like the Consumer Discretionary Select Sector SPDR (XLY)—consists of non-essential goods and services. This sector does well when the economy is expanding. It doesn’t do well when the economy is contracting.

The gross domestic product (or GDP) indicates health of an economy. It’s a good place to start to understand how macro-economic trends affect the restaurant industry.

Interpretation

In the above chart, we’ve compared GDP with retail food service sales and grocery sales. Restaurants are a part of retail food service.

Real GDP increased by 1%. During the same period, retail food sales increased by 1.6%. Grocery sales grew by 0.5%.

Economic conditions aren’t the only reason why restaurants lose business. Changing trends, preferences, technology, and concepts all play a role in a restaurant’s success.

The U.S., economy went into recession between December 2007 and June 2009. This led to a dip in GDP—as we can see in the chart above. During recession, people tend to spend less on non-essential items. For example, they spending less on dining out. Instead, they prefer to cook meals at home.

As we see in the above chart, retail food and services sales were hit harder than grocery sales.

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According to the National Bureau of Economic Research, the U.S. experienced 11 recessionary business cycles between 1945 and 2009. To soften the negative impact during recessionary cycles, restaurants may enter the grocery channel. Starbucks (SBUX), Dunkin’ Donuts (DNKN), and Taco Bell are under Yum! Brands (YUM). Burger King (BKW) has already done this by selling coffee and branded products through grocery chains.

A customer’s decision to spend at a restaurant depends on various reasons. One reason is employment. We’ll discuss this in the next part of the series.

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