There is a lot to like about the restaurant business at the moment. Sales have recovered to levels beyond where they were in February of last year, despite the fact that many restaurants never reopened after last spring’s shutdown.
Both consumers and the government, meanwhile, pretty much insisted that they want restaurants to survive. Consumers ate out whenever they got the opportunity. The government spent billions to keep the industry afloat.
The current recovery, however, has given way to a new problem: Inflation. The rapid reopening of the economy is causing problems with labor, food supplies and real estate. In short, the industry could face profitability challenges over the next year-plus as it navigates these challenges.
“It’s the perfect storm,” said Juan Martinez, principal with the consulting firm Profitality. “You’ve got labor. You’ve got food costs. And real estate is going to be more expensive if you can find it.”
Construction costs are going up, too. “Those four things are going to put a ginormous amount of pressure on the restaurants over the next 12 to 18 months,” he said.
To be sure, many operators got better at finding efficiencies over the past 16 months as they looked to survive the pandemic. Casual dining chains in particular demonstrated their ability to find those efficiencies—Olive Garden and LongHorn Steakhouse, for instance, generated record profits last quarter.
But rising costs are pushing prices higher, a lot higher most likely. “It’s going to be another 12 to 18 months for this thing to get to whatever this is going to be,” Martinez said. “It’s going to be very different from where we started.”
Labor shortages remain common throughout the industry and in all kinds of markets. While some operators have received a moderate reprieve in the form of summer break and teenagers taking jobs, many remain challenged filling positions.
A Subway location near my house is currently paying $500 to $1,000 sign-on bonuses. That’s costly for a brand that generates $400,000 per location in revenue.
“I think the restaurant industry is going to continue to struggle to attract workers,” Darden Restaurants CEO Gene Lee said last week.
Martinez said operators need to “be cautious” when treading the labor issue. “You have to have the right labor system,” he said. “You have to have the right scheduling. Use it to your advantage.”
Still, labor alone is going to drive up prices. The labor line represents about a third of a restaurant’s revenues and if that goes up, prices typically follow. “The labor issue is so grave, pricing is going to have to go up,” Martinez said.
Food costs are going up at the same time. Protein prices have been increasing in recent months, brought about by labor shortages and transport issues, not to mention the recent hack that hit big meat producer JBS. High feed and production costs could keep these prices elevated for some time.
Demand is also playing a major role. Higher wing and chicken prices have risen due to demand-related inflation. People are simply ordering a lot more chicken wings and ordering more chicken sandwiches. They’re also ordering a lot more steak—sales at steak chains like LongHorn Steakhouse have soared—which have driven up the prices of the meat.
Temporary shortages brought on by production problems have exacerbated the situation.
Martinez said companies should keep their menus smaller, or shrink them, getting rid of unnecessarily expensive items.
On top of all this are real estate prices. While many operators had hoped that closures would yield improved costs for real estate, that hasn’t necessarily happened in part because so many companies are targeting the same type of real estate—basically anything with a drive-thru. Even companies that never considered drive-thrus, like Pizza Hut or Auntie Anne’s, are now targeting such locations.
And construction costs have gone up, too. Though prices for items like lumber have come down from their highs, they still remain elevated.
Martinez, for his part, said companies should build smaller, better facilities with efficient operations inside. “Design a facility that can make money at a lower volume,” Martinez said. “The engine doesn’t have to be big. It just has to be fast, lean and mean horses in it. Otherwise it gets expensive.”