The US restaurant industry is highly fragmented. This means no single company holds a market share large enough to influence the industry’s direction. According to the NRA (National Restaurant Association), there will be about one million restaurant locations by the end of 2015 in the US. Some heavyweight players in the US restaurant industry include McDonald’s (MCD), Starbucks (SBUX), Yum! Brands (YUM), and Chipotle Mexican Grill (CMG). These four companies together make up ~9.8% of the Consumer Discretionary Select Sector SPDR Fund (XLY).
Restaurant industry sales
Sales in this industry are poised to grow to $709 billion in 2015, according to the NRA website, restaurant.org. Restaurant sales have grown over the past four quarters. In this series, we’ll look at some of the indicators that impact restaurant sales—indicators that investors should track.
Key restaurant indicators
Restaurant investors can use indicators discussed in this series to gauge the general trends and determine where the restaurant industry is headed. The decision to eat at a restaurant depends largely on the economic cycle. This is the nature of the consumer discretionary sector. It means that when the economy is doing well, people have jobs and are more willing to spend at a restaurant as opposed to cooking at home. The reverse is equally true.
We can assess the strength of the economy by looking at business conditions as suggested by the Empire State Manufacturing Survey and the Philadelphia Fed survey. We’ll also look at the labor market by tracking the initial jobless claims and the unemployment rate. Then, we’ll look at overall inflation levels along with wage and food inflation. We’ll also cover retail sales indices such as the ICSC–Goldman and the Johnson Redbook, each of which tells us something about consumer spending on discretionary items. To conclude, we’ll look at the fuel price trend and how that affects restaurant stocks, and we’ll identify the key takeaways for restaurant investors.