The restaurant industry was hit first and worst when COVID-19 closed the economy. According to the National Restaurant Association, businesses laid off or furloughed 8 million hospitality workers and forfeited $280 billion in sales in the first 13 months of the pandemic.
The virus cleared out a whole lot of dead wood on the forest floor, but the restaurants that survived the onslaught adapted, adjusted and endured. Then, when the vaccines rolled out and the economy reopened, restaurants were in business once again.
“The industry is well on its way to pre-pandemic numbers,” said Hospitality Works founder Isidore “Izzy” Kharasch, an industry consultant in Chicago who has worked with more than 700 restaurants in 30 years. “Though how those numbers are achieved is much different.”
That’s because the worst inflation in 40 years threw cold water on the industry’s recovery just as post-pandemic sales started heating back up. Here’s where things stand today.
Restaurants Are Bringing in Pre-COVID Money, but It’s Now Worth Less
As Kharasch said, the industry is approaching pre-pandemic numbers, but today’s dollars can’t buy as much as they could back then due to inflation.
At the start of the year, the National Restaurant Association projected that the industry would do $898 billion in sales, up from $864 billion in 2019. On paper, that’s a huge leap forward, but when adjusted for inflation, $898 billion is actually less than the industry’s pre-pandemic numbers.
The Shift to Take-Out Was a Blessing and a Curse
During the pandemic, the brick-and-mortar stores that survived were the ones that successfully transitioned to online shopping when customer demand shifted to e-commerce. Similarly, restaurants had to pivot or die — only they had to transition from sit-down dining to take-out and delivery.
“Pre-pandemic, all of the full-service restaurants that I consult with did about 3%-6% on carryout,” said Kharasch. “Today, they are doing as much as 20% of their business as carryout and/or delivery.”
Many restaurants survived by adopting takeout and delivery, but it was supposed to be a stop-gap measure — dine-in establishments simply weren’t built to sustain that business model for this long.
“This is putting more stress on these restaurants because they have not been designed for this style of service,” said Kharasch.
Inflation Has Made Running a Restaurant Much More Expensive
Rising prices have hampered the restaurant industry’s recovery in two ways. First, inflation has increased the cost of doing business. According to NPR:
- Labor costs are up 15% in 2022 compared to the year before
- Wholesale food costs are up 17%
- Rent is up 15%
- The price of cooking fuel has gone up
- The price of paper goods like bags and containers has quadrupled
- The price of gas has forced owners to pay their delivery drivers more
At the Same Time, Diners Are Spending Less
On one side of the coin, inflation is forcing restaurateurs to spend much more on labor, fuel, food and supplies, but rising prices eat into profits from the demand side, as well. Customers today simply have less money to spend on dining out.
“Inflation is definitely playing a role in the price of food when guests go out to dine,” said Kharasch. “If inflation continues at this pace, then we as an industry are on the edge of what I call shifting sales. Customers will begin to self-regulate how they spend money.”
“Shifting sales” could mean customers dine out less frequently, but another scenario is probably more likely.
“It is possible that they will go out less,” said Kharasch. “However, I am forecasting that they will continue to go out at the same pace but spend much less by ordering less food, sharing more food items and moving from a drink and wine with dinner to one or the other.”
Different Segments Are Recovering at Different Rates
It’s important to remember that “restaurant industry” is a broad generalization with many subsectors, and they’re not all recovering at the same pace.
“Specific segments of the restaurant industry have rebounded to pre-pandemic levels in comp store sales and better than expected profits,” said Robin Gagnon, founder of We Sell Restaurants, the nation’s largest restaurant brokerage firm. “The QSR or quick service restaurant sector quickly found its footing amidst a changing environment and hasn’t looked back. They thrived in the take-out and delivery model, implementing technology, and managing rising food cost with menu price offsets and better controls.”
Other restaurant segments are seeing a slower return to normal, particularly the full-service model.
“Those restaurants offering a dining experience are hampered by larger staffing requirements, clients who are still not returning in full force, and slower adoption of a take-out model where a social event is the reason for the meal,” said Gagnon. “They also typically have larger protein portions — think steakhouses for example — and inflationary pressure on beef and chicken costs have affected them more significantly.”
So, What’s a Restaurant to Do?
Restaurants have been passing rising costs onto their customers, but there’s only so much someone will pay for a pizza, a plate of spaghetti or a steak. At some point, restaurants will have to cut costs instead of handing them off to their customers.
“Inflation has made people very aware of rising costs and they’re becoming more guarded with how and what they spend their money on,” said Bob Vergidis, chief visionary officer for pointofsale.cloud. “Businesses should be extremely strategic during this time. Lower the total cost to the consumer by reducing costs as much as possible. It can involve menu re-engineering but also making the order channel cheaper for the guests. Restaurants should consider the cost of technology and third-party services as they can contribute as much as 25% to the final cost to the consumer.”
He added, “To mitigate some of the struggles inflation is posing, restaurants can look to technology that can enable them to process their own mobile ordering and pick-up services. Solutions like these are twofold as they reduce costs associated with third-party delivery services for both the customer and the restaurant and make the customer happy by giving them what they want.”
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