What Restaurant Operators Can Look Forward to in 2023
By Raphael Gross
In working with leadership teams running companies of varying sizes, models, and market caps, and within different segments of limited and full-service dining, I have long appreciated the diligent work involved in successfully operating these businesses day to day – even in the best of times. But my admiration has been even more heightened over these past few years – first in how they managed through the pandemic itself and then more recently as they have entered a “post” Covid environment that has presented its own set of challenges.
The good news is that having already weathered so much, the restaurant industry has landed on relatively solid ground – even if we were to enter a mild economic recession. Overall, restaurants are better capitalized than at any point in recent history, more operationally efficient (by necessity), and in many cases managing a stronger footprint, having already pruned the weakest units within their portfolios during the darkest days of the pandemic. With this in mind, here are some considerations heading into 2023 – which, in my view, all point to a period of “stability.”
- Menu pricing will moderate. In 2022, restaurants aggressively raised pricing between 8-12% to help alleviate numerous cost pressures. In some cases, chains stated that because their customers are more affluent than the general public, they did not experience pushback related to check management or guest counts as a consequence of their pricing actions. Others were less “bold” and instead took pricing either as a last resort or below the inflation they were experiencing themselves, determined not to upset their own price/value equation. Nearly all were quite emphatic that they have “additional pricing power” that can be tapped as needed, although this could not possibly be true across the board. Looking ahead, menu pricing is likely to be in the mid-single digit range as both the commodity and labor cost environments become less of a headwind. Restaurant chains will also be more hesitant to “spike” pricing if guest counts continue to stagnate or even decline; in most cases, they have not yet even returned to pre-pandemic levels.
- Guest count metrics will garner more scrutiny. As just referenced, most restaurant chains are still not serving as many guests as before Covid, although some are within striking distance. Given the meaningful growth in off-premises sales over the past few years, guests might still be substituting take-out/delivery for in-person dining experiences, countering the prevailing notion that these channels are “incremental.” While there was greater emphasis during 2022 on pricing to grow sales and counteract margin erosion, versus winning back guests, there will likely be more scrutiny of this metric in 2023. Guest counts are a critical barometer in measuring the health of a brand, and those that cannot increase traffic will have a harder timing explaining themselves going forward.
- Off-premises sales will hold their own. But they’re not likely to grow at a faster rate than sales overall, and are no longer the catalyst that they were a few quarters ago. Dollars are likely to hold but may decline as a percentage of total sales as more guests choose to dine-in and enjoy that experience. Additionally, the surcharge for third-party delivery (as much as 25% notwithstanding the delivery fee itself) might cause customers to think twice if they are managing their spending more carefully; this could cause the pendulum to swing further to pick-up or customers choosing to forego ordering altogether.
- Operating hours will increase. Staffing issues have not only impacted the ability of restaurant chains to properly service guests during key dayparts, but have also affected some in being able to operate their “normal” pre-pandemic hours (think late-night for fast-food or 24/7 for diners). Thankfully, with staffing pressures easing, more restaurants have now returned to “normal” hours or at the very least are getting closer to reaching them across their portfolio. For the latter, this will provide a modest sales tailwind in 2023.
- Commodities costs will be less burdensome (relatively speaking). The rate of inflation for food costs has already peaked and will continue to moderate over the next few quarters (although costs themselves will rise and inflation will remain elevated by historical standards). Many chains reported food cost inflation in the 15-20% range for 2022, but mid-single digit increases are more likely for 2023. The industry is now beginning to cycle over elevated comparisons while the cost of some individual items may actually decrease.
- Labor and staffing pressures are easing. Similar to commodities, the rate of inflation for labor has already peaked in the low- to mid-double-digit range and will continue to moderate over the next few quarters — as will employee turnover. Mandated increases in minimum wages used to be a key driver of labor inflation, although many chains have since needed to offer wage rates far above the mandated minimums to compete effectively and attract and retain adequate staffing. Most chains have indicated that the applicant pool for their posted jobs has increased, enabling them to also be more selective in who they hire. And with retention increasing, training costs should also decline.
- Virtual brands are stagnating. The creation and launch of virtual brands was very much in vogue in 2021 and into early 2022 (when many guests were not yet ready to resume in-person dining and relied more heavily on delivery than they do now), but this phenomenon may have already run its course. Many public companies that touted their virtual brands several quarters ago as beneficial to sales and kitchen operations are barely or no longer referencing them in their most recent public conference calls, which suggests that their sales contributions are stagnating.
- New development will pick up. Given the lead time in identifying and securing new locations, dealing with permitting issues, and of course the construction process itself, there has been more pruning than growth over the past several years. But this is changing. In some cases, we will see conversions of shuttered restaurants in attractive locations into new brands, but we will also see chains rolling out new prototypes that have been designed to better accommodate mobile ordering or off-premises sales.
- Supply chain will no longer be a stumbling block. This was highly topical in 2021 and the first half of 2022, when many restaurants were constrained in their ability to offer specific menu items because of their inability to secure adequate supplies of particular raw ingredients. Thankfully, this is no longer a pervasive issue. Chains are either marketing their signature items (often at higher prices) and/or demonstrating their ability to innovate across the full breadth of their menus.
The restaurant industry is the largest single private employer in the country and therefore has an outsized impact on the economy as a whole. It is also rightfully seen as a key barometer with respect to consumer confidence and behavior. Thankfully, there are good reasons to be at least mildly optimistic about how the industry could perform in 2023.
This post first appeared in Nation’s Restaurant News.