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In 2022, inflation trumped everything

The year’s biggest stories: Soaring costs, Starbucks’ big year, the Fast Act and restaurants’ Russian exodus marked a year full of monumental shifts and challenges.
inflation and restaurant issues
Art by Nico Heins via Shutterstock

No accounting of 2022 can be done without mentioning inflation.

Restaurant operators knew going into the year that it was going to be a difficult one, at least on the cost side. Already struggling to find labor, they knew they would be paying more for workers. And their projections for food costs were equally as grim.

And yet, in both cases, those projections would prove to be conservative. Inflation was the biggest story of the year, and by a long shot.

The consumer price index hit 9% in June, a level unseen since the early 1980s, an era before such industry sectors as fast casual and before chains like Chipotle Mexican Grill were even a dream. Gas prices over the summer hit an average of $5 a gallon, a record. The level of inflation influenced consumer behavior and challenged operators, almost none of whom had experienced an operating environment quite like it.

Restaurants raised menu prices at record levels and, even as inflation eased into November, were still raising prices at an 8.5% clip. Yet, with their own costs for food, paper and wages up in the double digits, their margins still thinned.

The good news for operators, and there is some good news, is that consumers mostly paid those prices. Traffic clearly took a hit. But for the most part, industry sales remained positive overall as diners swallowed hard and paid higher prices for burgers, pizza, chicken and tacos than they had before.

At the same time, inflation influenced restaurant company valuations and limited the market for mergers and acquisitions.

The U.S. Federal Reserve, pushing to get inflation under control, raised interest rates aggressively, which sent stock prices tumbling and industry valuations with it. Most restaurant companies lost value this year, many of them by a substantial margin. The weak stock market put a halt to an IPO market that just the year before was considered robust.

Smaller margins and higher interest rates lowered the prices buyers were willing to pay for restaurants. That soured industry dealmaking.

Heading into 2023, inflation appears to have peaked. The question remains whether inflation and higher interest rates will push the economy into a recession. Operators, who raised prices so aggressively in 2022, may be less able to do that in 2023 if consumers cut back. Still, it’s a good bet plenty of them will be glad that year is over.

Here’s a look back at some of the year’s other big news.

Starbucks’ year of massive change

We could have picked any number of headlines for this particular section. “Starbucks’ CEO search,” for instance, or “Howard Schultz makes yet another comeback.” Perhaps we could have written “Unions make ground at Starbucks.”

In the end, it’s simply too much. No chain has been as active as often as Starbucks. Schultz, the two-time CEO, made another return to the Seattle-based coffee giant in March even though his successor-then-predecessor, Kevin Johnson, appeared to have sales on the right track after a brutal pandemic. Alas, the company watched a growing number of its stores opt to form a union. Schultz, despite his liberal political leanings, was no fan of unions.

Since his arrival, Starbucks held meetings with workers across the country, upped pay and benefits for (non-union) employees, restructured the organization, overhauled management, instituted a plan to improve operations and, oh by the way, hired a new CEO in Laxman Narasimhan. Here’s a rundown of all the changes, for those of you who’ve struggled to keep track.

The Fast Act

The most notable government action last year, at least when it comes to restaurants, came in California, where the state approved a law called the Fast Act that specifically targets quick-service restaurant locations there.

The law creates a council that gives seats to fast-food workers and union representatives, in addition to restaurants themselves and government officials, that would craft regulations and wages for chain restaurants with 100 or more locations nationally. In so doing, it will give workers and union groups direct say in setting wage rules in the nation’s biggest state. Many believe fast-food wage rates would be raised to $22 an hour as a result.

The law generated an uproar in the quick-service industry, enough to convince McDonald’s to take the rare step of speaking out publicly against a government proposal. It and other chains have since banded together to get the law put to a public question in the state come 2024. Meanwhile, other cities and states around the country, driven by labor activists, are expected to take up similar measures.

Restaurants flee Russia

In late February, Russia invaded Ukraine, beginning a war that has according to Reuters killed more than 41,000 people.

The result almost completely ended the industry’s years-long push into Russia (while it worsened that aforementioned inflation problem). The country’s biggest restaurant chains fled the country, either giving up support for stores there (in the cases of franchises) or just closing up shop and pulling out.

Perhaps nothing signified the move out of Russia quite like that of McDonald’s, which closed its restaurants in Moscow more than 30 years after its opening there was hailed as a symbol of the improving relations between the U.S. and the former Soviet Union.

It also put to bed the idea of the McDonald’s peace theory: that no two countries with a McDonald’s would ever go to war with one another. Ukraine, too, has McDonald’s locations.

Ghost kitchen problems and opportunities

Ghost kitchens were the industry’s darlings during the pandemic, as investors poured money into multiconcept, delivery-only facilities in everything from storage containers to old malls. But these facilities faced major issues in 2022.

As our own Joe Guszkowski detailed, CloudKitchens faced numerous operating challenges as its facilities churned through occupants. Reef Kitchens, meanwhile, ran into operating issues and regulatory hurdles and then watched Wendy’s dramatically cut back on planned openings inside its facilities.

This hasn’t kept some big companies from continuing to test out the idea. Among them: Burger King owner Restaurant Brands International, which started a ghost kitchen in Florida featuring its concepts (including BK, Firehouse Subs and Popeyes). Inspire Brands and Chick-fil-A also are testing out the idea.

Tech company layoffs: In 2020 and 2021, investors couldn’t put enough money into technology companies that served restaurants. In 2022, the spigot dried up and many of those companies had to deal with reality. The result? Layoffs. Plenty of them.

The RRF failure: There appeared to be some real momentum behind a renewal of the Restaurant Revitalization Fund to help those operators who didn’t get grants the first go-round—until that effort failed.

Domino’s challenges: Domino’s Pizza saw its 10-year run of same-store sales increases end in 2021, and in 2022 the company changed executives and started working furiously to right its sales ship.

Notable departures:Charlie Morrison left Wingstop to surprisingly helm a 50-unit upstart called Salad & Go.Danny Meyer stepped away from day-to-day responsibilities at Union Square Hospitality Group. Kevin Johnson retired from Starbucks, and Ritch Allison stepped down at Domino’s.

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