2024 proved to be more challenging for the restaurant industry than initially anticipated. After the U.S. COVID public health emergency ended in May 2023, many expected that consumers would be eager to resume “normal” activities and dining habits. However, outside of a few notable exceptions, restaurant traffic across both the limited and full-service segments remained mid-single-digit negative throughout the year. The reason was clear: cautious consumers were exhibiting “inflation fatigue” by limiting dine-out occasions to those that truly “count” and cooking more meals at home.
While nearly all restaurants struggled with post-pandemic challenges such as higher prime costs and declining traffic counts, some also faced brand-specific issues such as excessive debt, aged assets, waning brand relevancy and operational issues. This combination led prominent brands like Red Lobster, TGI Friday’s, Buca di Beppo, Tijuana Flats, and BurgerFi to file for bankruptcy this year.
Throughout 2024, many public restaurant companies missed analysts’ expectations for comparable sales (and especially traffic), yet still generated respectable and often higher margins and profitability than in years past. In fact, some reported four-wall operations were at or above pre-pandemic levels, demonstrating their ability to optimize staffing, leverage technology, and contain other expenses despite serving fewer customers overall.
Heading into 2025, we believe the restaurant industry will strengthen, and see five reasons for this optimism:
- The trend is already our friend. According to industry data, restaurant sales have been trending upward since August with customer traffic declines less severe than in previous months. These factors pointing to a more confident, reemerging consumer along with more favorable year-ago comparisons create the opportunity for top-line momentum through 2025.
- Menu pricing is purposely tame. After higher price increases in 2022 and 2023 tempered consumer spending, restaurants were far more disciplined in taking incremental pricing in 2024. This was aided by a more benign cost environment. We think a more measured approach to pricing combined with more effective value messaging will help attract more return visits.
- Labor will still be challenging, but the worst is past. Wage inflation is expected to outpace other cost increases according to a recent survey by Restaurant Business. However, restaurants have become more adept at managing this headwind through cross-training, menu simplification and streamlined back-of-house operations. This has allowed them to hold down their labor needs and costs and reduce employee turnover, thus lowering recruiting and training costs.
Furthermore, the failure of Prop 32 in CA (which would have raised overall minimum wage to $18/hour) showcases consumers’ unwillingness to pay higher prices due to statutory wage increases in the near term, even in a state that has historically been supportive of minimum wage increases. Finally, proposed national legislation to end tip taxes could also provide additional relief. Overall, while labor costs will continue to rise in 2025, the impact will not be as strong as it was in 2024. - More favorable interest rates will spur restaurant spending. While a record-high stock market did not produce a wealth effect in 2024, more favorable interest rates on mortgages, car loans, and credit cards should have positive implications for restaurant spending in 2025. The immediate effect of higher disposable income through lower payments to servicing outstanding debt should positively impact a variety of purchases, but especially small, discretionary ones like eating out.
- Political uncertainty is behind us. The incoming administration is determined to unleash the American economy through deregulation, lower taxes, and more favorable energy policies, among other pro-business priorities. As the second largest private sector employers in the United States, restaurants stand to benefit from a growing, more prosperous economic climate which will enable it to drive growth, provide employment, and support a wide range of other related businesses.
The onset of a new year brings great hope and promise for better days ahead for the restaurant industry. For the reasons detailed above, we are optimistic that 2025 will prove the resilience of this critically important industry.
