Restaurant operators expect a continued bumpy road in 2023

A new survey from the National Restaurant Association finds that operators have a mixed outlook for 2023, which is not all that surprising given the relentlessly bumpy macroeconomic environment throughout much of 2022.

Much of what is keeping operators up at night are food and labor costs; 92% say food costs are a significant challenge, while 89% say the same about labor costs. The Producer Price Index for all foods increased 18 out of the last 23 months, while some commodity prices jumped by double digits. Coffee and egg costs, for instance, contributed to a 30% jump in breakfast inflation during 2022, according to David Maloni, principal at Datum FS.

On the labor side, wages and salaries are up by over 4% year-over-year, while the cost of benefits is up by 5%. Combined, these are the most significant line items for restaurants, each accounting for about 33 cents of every dollar in sales. To manage these costs, 87% of restaurants have increased their menu prices, which are 8.5% higher on average year-over-year.

If there is a positive takeaway (or a couple), it is that restaurant prices have increased at a lower clip than grocery store prices, which are up 12% year-over-year. In the competitive battle over share-of-stomach, that can be an advantage as consumers tighten up their budgets.

Additionally, consumers have shown they’re still willing to spend money at restaurants despite those higher menu prices. The association reported that consumer spending at restaurants in November (the last month reported) increased by at least 0.9%, versus a decline in other sectors. Retail spending, for instance, was down by 0.8%, while department stores were down nearly 3%.

Further, some relief is expected on the food cost side this year, and products like chicken and dairy have already shown signs of deflation. As Maloni recently noted, “the expectation is to see some softening for the industry.”

That said, even if food costs come down, supply chain disruptions are expected to continue. In the past six months, a staggering 96% of operators experienced supply delays or shortage on key food or beverage items, and 76% made changes to their menu to manage these issues. Nearly 80% of operators also experienced delays or shortages of equipment or service items. Several factors, including Russia’s invasion of Ukraine and widespread droughts in California, could exacerbate food supply shortages in 2023, the USDA has warned, while the Association of Equipment Manufacturers reports that 58% of manufacturing companies are experiencing worsening supply chain conditions.

Of additional concern, the higher-wages genie won’t likely return to the bottle, particularly as restaurants continue to struggle to fill positions. The industry remains nearly 500,000 employees short of pre-pandemic levels, and 79% of operators say their restaurant has job openings that have been difficult to fill.

Balancing job openings and higher labor costs will continue to be a challenge in the new year and, accordingly, the overall employment outlook is all over the map. For instance, most restaurant operators – 87% – say they are actively looking to boost staffing levels in the next six to 12 months. However, 57% say they will be likely to lay off employees during the same timeframe if business conditions deteriorate and the economy enters a recession. Predictions of a recession have grown in recent weeks from several economists, while Moody’s has forecasted a difficult 2023 but a narrow miss on a full recession.

Operators have been and will continue to deploy solutions to manage higher costs. Nearly 50% have recently reduced hours of operation, for instance, while 32% have closed on slower days. Thirty-five percent of restaurant operators say they have stopped operating at full capacity.

They’re also seeking an assist from technology, as 21% of operators say they have incorporated more tech into their restaurants. Papa John’s has saved on labor by automating some of its call center duties, for instance, while Checkers/Rally’s has saved on labor by implementing a voice assistant solution at the drive-thru, and Potbelly has saved “about an hour a day” with its digital kitchen.

Despite these efforts, however, 50% of operators expect to make less profit in 2023, while 35% expect profits to remain the same as they were in 2022. Of course, only time will tell what will really manifest this year, but for now we know inflation-fatigued operators have to keep balancing on a thin tightrope in search of both a full recovery and some optimism.  

“In this kind of economic environment, typical operators don’t have much margin for error. With major input costs escalating, they can make changes to align with local consumer demand while realigning operations for longer term growth,” Hudson Riehle, SVP of Research for the National Restaurant Association, said in a statement. “Moderate but positive employment growth across the economy and elevated consumer spending in restaurants will allow the restaurant industry to kick off 2023 on a more optimistic note than the last few years, but operators remain braced for potential challenges in the new year.”

Contact Alicia Kelso at [email protected]