Financing

Why 2023 will be a year of weaker sales and higher margins

Fitch Ratings expects modest restaurant growth this year. But recent price increases and an improving inflationary environment should help with profits.
2023 restaurant forecast
Low-price restaurants like Taco Bell can be expected to outperform full-service chains and those with higher prices. / Photograph: Shutterstock.

In 2022, restaurants watched their profits shrink even as their sales growth remained strong or even accelerated.

This year should be the opposite, as last year’s price increases coupled with an improving inflationary environment lead to improved profits even as sales growth weakens.

That, at least, is according to Fitch Ratings, which on Monday suggested that restaurants will see weaker volumes but stronger profits. “Restaurant sector margins should rebound modestly in 2023 as recent price increases take effect and inflationary pressures moderate,” the credit rating firm said.

But it also noted that profitability “will likely remain below pre-pandemic levels” despite the improvement.

Restaurant sales rose 11% year over year in December, according to federal data released earlier this month. Most of that was driven by higher prices—menu prices at restaurants, bars and schools were up 8.5% over that same period. Wage rates for leisure and hospitality workers rose 6.3% over that same period while wholesale food costs rose more than 14%.

But inflation is showing signs of slowing. Numerous operators have suggested that it’s easier to find workers these days and wage rate growth for low-level workers has slowed from its peak over the summer. Meanwhile, wholesale food costs declined 1.2% from November to December, according to the U.S. Bureau of Labor Statistics.

Operators now go into 2023 with higher prices and improving inflation, which should help recover some of the margins lost last year. But Fitch does not expect the industry to recover from the margin compression of 2022.

And restaurants can be expected to lose traffic again in 2023. Fitch expects quick-service restaurants will perform better than full-service concepts as consumers pull back on discretionary spending. “Value-oriented restaurants should outperform those with higher average tickets,” Fitch wrote. That is “consistent with their track record of more stable operating results in periods of economic turbulence.”

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