Guy Fieri, the restaurateur and celebrity chef, encapsulated the restaurant industry’s biggest challenge in a nutshell Sunday during the Restaurant Directions conference in Los Angeles.
“Labor is a killer,” he said. “We’re in the toughest time in the restaurant business right now.”
For much of the past four years, the industry has struggled with an onset of high labor costs, brought about by low unemployment and overexpansion, even as its own traffic has fallen. It’s resulted in a particularly challenging operating environment despite a thriving economy that should be a major tailwind.
“The industry is not fully benefiting from the booming economy,” said Joe Pawlak, managing principal for Restaurant Business sister company Technomic.
But things are looking up, at least when it comes to sales. Same-store sales at publicly traded restaurant chains have improved this year, Pawlak noted. And they are even better at smaller chains and independents. The gap between companies that said their sales improved and those that said their sales fell is 38% this year, and has increased each of the past two years.
“It’s a better story this year than we’ve had in previous years,” Pawlak said.
Or, as Fieri said, “We have the best consumer in the world right now.” Fieri established himself as a champion for out-of-the-way local concepts with his Food Network show “Diners, Drive-Ins and Dives.”
Still, among publicly traded restaurant chains, traffic remains a major challenge even as sales go up.
Chains such as The Habit Burger Grill, which saw traffic fall 4.2% despite a 3.2% increase in same-store sales in the first quarter, as well as Starbucks and McDonald’s, have seen declines in traffic this year.
Chains have relied on higher prices in part to generate sales growth. Menu prices rose 2.9% in April, according to federal data, Pawlak said, and have been trending higher. “Prices have been getting too high for restaurant meals,” he said.
Labor is a major factor.
Job openings in the restaurant business are up 40% over the past two years. Median wages are up more than 10% over that same period, Pawlak said. “We’re raising wages faster than the average industry,” Pawlak said.
Several factors can help explain the industry’s traffic slide in recent years: the brutal retail environment, for instance, as well as those higher prices and a proliferation of restaurant concepts that has led to an oversupply in the number of locations.
Pawlak said that Americans spend the most money at restaurants when they are between the ages of 35 and 54.
In 2007, 40% of Americans were in that age group. Now that’s down to 34%. “Fewer consumers are in the sweet spot,” Pawlak said.
For all of those concerns, however, the industry’s growth is expected to be relatively strong this year, driven by consumers paying more for their food and shifting more spending to those small chains and independents.
Technomic expects sales at limited-service chains to rise 4.6% this year, thanks largely to robust growth at fast-casual restaurants, where sales are expected to increase 7.8%. Sales at full-service chains are expected to rise 4.1%.
But that’s this year. Next year, Technomic expects sales to slow again. It is projecting 4.4% sales growth at limited-service restaurants and 3.4% at full-service concepts.
Most economists, Pawlak said, expect the economy to slow, and Technomic is adding that consideration into its projection.
Restaurants face all of these concerns—and a potentially slower economy on the horizon.