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Conclusion: Knapp Track comparable restaurant sales in January indicate that the casual dining recovery has resumed.  Importantly, Knapp underlines value as a factor that will continue to be important.  As commodity pressure flows through to the P&L, concepts that lack pricing power will likely suffer as the 2011 scenario plays out.

Knapp Track preliminary results for January suggest that the casual dining recovery seen in the third quarter has recommenced in January.  January comparable restaurant sales of +0.6% signifies a sequential uptick in two-year average trends of 115 basis points.  Adjusting for bad weather, January’s number would have been +2.3%, which would imply a 150 basis point increase in two-year average trends (also adjusting December per the adjustment provided in last month’s Knapp Track report), excluding weather.  Q410 saw a sequential slowdown in comparable restaurant sales to +0.6% from +0.8% in 3Q10.  On a two-year average basis, however, quarterly comparable restaurant sales trends accelerated by more than 90 basis points sequentially.

Comparable guest counts in the casual dining space saw a sequential gain from a revised -1.8% result in December, according to the most recent Knapp Track report.  January’s preliminary decline of -1.5% shows that the “recovery” is far from secure, especially as companies look to pare back their use of discounting as a driver of traffic as commodity inflation accelerates.  On a two-year basis, January’s result implies a sequential acceleration of 100 basis points.

In this month’s report, Malcolm Knapp highlighted several interesting factors that he believes are critical to consumer behavior.  Firstly, the effects of the financial crisis persist with mortgage defaults and high levels of unemployment burdening attitudes.  Another interesting point he makes is that value (quality of the value proposition and the efficacy of the messaging) remains a key driver of traffic.  Value is relative.  The casual dining brands that can “take the pain” and absorb commodity cost increases, either by further margin gains in other areas of the P&L or by prudent hedging, will likely outperform those that have to implement price gains that make their service less affordable.

Howard Penney

Managing Director