Restaurant operators are benefiting from reduced inflationary pressures, some easing of labor issues, and fewer supply chain disruptions. Could 2024 be the year things get closer to the new normal?

Key takeaways

• As food prices and wage increases begin to ease, restaurants are finally getting relief from the challenges of an inflationary environment
• Despite some signals of price fatigue among consumers, overall enthusiasm for restaurant experiences remains strong
• Pent-up demand will fuel interest in M&A and IPO activity in 2024 as margins stabilize

After three years of stiff headwinds caused in part by consumers preferring to eat at home during the pandemic, restaurant operators saw business rebound in 2023, aided by slower inflation in food prices, an improving labor market, and fewer bottlenecks in their supply chains.

“The first two years of COVID were all about revenue destruction and recovery while people were homebound,” says Roger Matthews, managing director in Bank of America’s Consumer and Retail Investment Banking Group. “Then, just when the revenue had recovered to some degree, we were hit with 2022, the year of inflation, when restaurants couldn’t make price increases fast enough to keep up with rising costs. Now, we’re finally seeing margins return to some degree of normalcy.”

Wage increases have begun to flatten as well, and predictions for a damaging recession are being replaced by talk of a possible soft landing. Supply chain pressures also have eased, with delivery times improving dramatically and freight rates falling significantly.

“After so much uncertainty, the absence of a crisis du jour alone warrants celebration,” says Cristin O’Hara, managing director of Bank of America Global Commercial Banking’s Restaurant Group. “What a relief it is not to have to worry about every single line in the balance sheet. And we’ve been seeing more of a balance between the number of unemployed and those seeking jobs. That’s a ray of sunshine for a lot of restaurants.”

The power of prices

The prospect of ebbing inflation, and even price decreases in some commodity inputs, is further brightening the outlook for restaurants that struggled to adjust to dramatic jumps in prices for main ingredients, such as chicken and dairy, earlier in 2023. Those higher inputs forced many restaurants to raise prices, but those pressures seem to be retreating.

The labor shortage is also showing signs of easing, with restaurant and accommodation job openings declining from 8.2% in 2022 to 6.7% in August 2023 and the quit rate falling from 5.3% in July 2022 to 3.9% a year later.¹

Restaurant operators may be encouraged by the trend in same-store sales: Some 59% of restaurant operators reported that same-store sales rose between July 2022 and July 2023, a substantial increase from the roughly 50% that reported higher sales in May and June.²

Still, while inflation has eased for the cost of ingredients of many meals, harried consumers may exhibit price fatigue over some menu items. “Restaurant prices — in fact, prices on a lot of things — are 25% to 30% higher than they were four years ago,” says Matthews, who adds that consumer response can lag behind price hikes. “It takes time for consumers to fully notice that a sandwich is much more expensive. So how the consumer will digest these price increases is still unknown, especially as gas prices start to rise again.”

Tapping into diners’ passions

Yet consumers’ hunger for restaurants shows no signs of ebbing. Americans spent $1.34 trillion on food away from home in 2022, a 16% increase from 2021, according to the Department of Agriculture.³ In fact, food away from home constituted 56% of overall food spending in 2022, a shift from the pandemic when home cooking and baking bread were more prominent.

Throughout 2023, consumers have continued to demonstrate a preference for spending on doing things rather than buying stuff. “People prioritizing experiences over goods will be a continued tailwind for restaurants,” says Matthews, who expects to see changes in spending patterns rather than a retreat from restaurant meals. He anticipates some consumers looking to trim their restaurant spending by moving down the value chain from fine dining to casual restaurants, or from casual restaurants to quick-service restaurants (QSRs). Others may choose to manage their bill by skipping a course, foregoing a beverage with their order, or switching from dine-in to takeout meals. And of course, weaker brands will suffer more than brands that are beloved by the consumer.

Restaurant operators who embrace strategies to appeal to increasingly cost-conscious consumers are likely to benefit, notes O’Hara. “Going forward, price increases will have to be very thoughtful, and barbell strategies will be more important, particularly for the QSR and casual segments,” she says. “Franchises will need to make sure their menus continue to bring traffic through the door. That does not mean discounting but rather bringing back limited-time offers and making sure to have items that attract deal-seeking consumers while also encouraging trade-ups with ‘craveable’ offerings — items for both ends of the barbell.”

Avoiding price increases

Strategies to mitigate the impact of commodity price swings and fluctuations in the cost and availability of key ingredients will become more critical as price elasticity shifts. Restaurants able to adjust menu offerings, better manage inventory, or access alternative sources in order to avoid passing price increases on to customers will be positioned to thrive. Larger operators and those with deep pockets will also have an edge. “In tough times like these, things like scale and liquidity matter,” says O’Hara. “Chains can combat these multiple forces much more easily than independents, and having stronger cash reserves provides more buying clout with suppliers.”

That bigger-is-better stable operating environment sets the stage for an increase in M&A activity in the restaurant sector. A few large deals, including household-name chains being bought by both private equity and larger restaurant sector operators, have already been announced.

After a year-long drought, the restaurant-equity market is showing signs of a healthy rebound. Mediterranean restaurant chain Cava debuted on the New York Stock Exchange in June 2023, valued at $4.8 billion, becoming one of the top-performing IPOs for companies valued above $500 million.⁴ Meanwhile, in mid-September, Dutch Bros. raised $300 million in a primary offering that was substantially oversubscribed.⁵ Both deals capture the appetite for restaurant issuances: Consumer demand for great brands and products remains healthy, but investors hunger the most for strong balance sheets, particularly in the equity market.

“We think a lot of assets will come to market in the beginning of the new year,” says Matthews. “There’s pent-up demand on the buy side from institutional investors and on the sell side from operators interested in an exit, both of whom have been holding out for a better deal-making environment.”

Labor remains a challenge but is improving

On a positive note, many operators have made strides in adapting to new restaurant business realities, such as the need to navigate a tighter labor market by raising wages and strengthening recruitment and retention efforts. “Labor is going to be a permanent challenge for this industry going forward,” says Matthews, who believes some restaurant workers moved from the industry for gig economy opportunities and won’t be returning.

Moreover, as some states increase minimum wage requirements for fast food workers — like California, which raised the minimum hourly rate for QSR employees to $20 starting April 1, 2024 — wage pressures could be persistent and widespread.⁶ “It’s likely that other states and industries will follow suit, and that creates a lot of uncertainty for everyone, including lenders, as this is all new news,” O’Hara says. “It’s hard to predict how the consumer will react, but price elasticity is probably already nearing its breaking point.”

Strategies for success

Mining customer data is another area restaurants can’t afford not to explore, notes O’Hara, who reports that smart companies are investing in understanding who is coming through their doors, what they’re buying and how often, and are using that data to inform decisions around everything from managing inventory to creating new menu items. “Every restaurant can benefit from being able to not only collect data on every transaction, every item, but to analyze it so you can maximize your sales,” she says. “A lot of folks aren’t spending the time and money on that to stay ahead of the curve, and that’s going to be so important going forward.”

A final component in the future success of any restaurant business today is the importance of making sure your business has a clear and relevant purpose. Both in choosing where to work and where to spend money, Americans are increasingly seeking out businesses that resonate with their values, O’Hara says. “Maybe it’s that your packaging is recycled material, or the food you serve is sustainably sourced, mindfully farmed, and locally raised. Maybe it’s that you have the best service. Whatever it is, having a clear sense of your purpose, your mission, and your culture will help your business. The restaurant business is about passion all the way around. If you don’t have that, you don’t have anything.”

Looking ahead to 2024

The broad outlook for 2024 is cautiously optimistic. As the industry leaves inflationary fears and input price hikes behind, restaurants that have tightened supply chains and implemented cost controls will reap the benefits of running leaner operations. Labor shortages are likely to continue to improve, although difficulty finding and keeping employees will remain a challenge for the industry. One noteworthy recent trend is that many businesses have been able to offer new hires lower starting wages than earlier in the year.⁷ That said, wage pressure will be constant.

On the revenue front, the growth of online ordering, which boomed during the pandemic, is expected to plateau. The change reflects the resilience of consumers’ enthusiasm for in-restaurant experiences. At the same time, inflation-wary consumers are expected to continue to manage their expenses by leaning toward price-conscious menu choices and perhaps even foregoing drinks and side dishes. This ripple effect will mean operators will need to continue to regularly reimagine menus to deliver value and entice higher spends.

Technological innovation is the real game-changer that could have an impact on bottom lines in 2024. From answering phones and taking orders to upselling customers and managing inventory, the potential for advanced technologies to introduce efficiencies is growing at a rapid pace. Restaurant operators that can leverage those capabilities while continuing to adapt to the ever-shifting consumer landscape will be well-positioned for growth in the year ahead.

¹Bureau of Labor Statistics, “Job Openings and Labor Turnover Survey News Release,” Aug. 23, 2023

²National Restaurant Association, “Same-store sales and customer traffic,” August 2023

³Economic Research Service, Department of Agriculture, “2022 U.S. food-away-from-home spending 16 percent higher than 2021 levels,” July 2023

⁴CNBC, “Mediterranean restaurant chain Cava stock soars as much as 117% in market debut,” June 15, 2023

⁵Cooley.com, “Dutch Bros Announces $300 Million Underwritten Public Offering,” Sept. 6, 2023

⁶Fisher & Phillips LLP, “California Legislature Prepared to Enact $20 Fast Food Minimum Wage to Avoid Showdown,” Aug. 8, 2023

⁷Wall Street Journal, “Pay for New Hires Is Shriveling,” Aug. 23, 2023

Source: Bank of America