— By George Lessmeister —
3 areas of margin pressure on restaurants.
Operating a restaurant can feel like a roller coaster ride. Revenue and volume plummeted during the pandemic and then climbed back to pre-COVID levels in 2022. Rising costs, however, are now squeezing profit margins. These ups and downs can make it difficult to plan. What’s the outlook for 2023?
Supply Chain Challenges
George Lessmeister, LGC Hospitality
While supply chain bottlenecks are easing somewhat, they are expected to continue as a problem for the restaurant industry well into 2023. Some operators are updating menus more often, even at the expense of more frequent printing, so they can pivot to new offerings when certain ingredients are unavailable or become too costly. Expansions or new builds will likely face delays or cost overruns as supply chain issues impede delivery of critical equipment or building supplies. These increased costs will contribute to the squeeze on profit margins.
Inflation’s Effects
January’s CPI reports showed that inflation continued to fall, but at a slower rate than in previous months. It appears while inflation is easing somewhat, it is not dropping at a rate that will see the United States back to the Fed’s target annual inflation rate of 2% anytime soon. Restaurant owners seeking to mitigate the effects of stubbornly high food prices are implementing creative ways to reduce costs, including offering menu items with less-expensive ingredients, reducing hours and doing away with costly third-party delivery services.
In addition to cutting costs, roughly 90% of restaurant owners increased menu prices in 2022, but the cost of food away from home (dining out) is still rising slower than the cost of food at home. Dining out visits are down 10% over 2019 levels, but this lower rate of traffic is being offset by price increases and greater per-spend transactions. This trend could slow or reverse if the economy enters a recession in the latter half of 2023.
Increasingly, consumers being squeezed by higher prices everywhere on everything are seeking dining choices that offer good value, a memorable experience or both. According to the National Restaurant Association, “84% of consumers say going out to a restaurant with family and friends is a better use of their leisure time than cooking and cleaning up.” That said, many diners are choosing less-expensive dining options when they do go out, such as opting for a quick-serve restaurant rather than a fast-casual restaurant or selecting value-priced menu items.
Labor Availability and Costs
The shortage of labor continues across industries, and restaurants are still significantly understaffed. A recent study found that 63% of full-service operators and 61% of limited-service operators do not have enough employees to meet customer demand. Continued efforts by the Fed to cool the economy could improve the labor market, but at the risk of triggering a recession.
To attract workers in this tight job market, restaurants have had to increase wages. The Bureau of Labor Statistics reported the average hourly rate for foodservice employees was $17.56 in December 2022, up from $16.33 in the same month in 2021 and $14.17 in February 2020, just prior to the pandemic. HourWork predicts that, in 2023, average hourly wages in QSRs will range from $14.36 for crew through $16.07 for cooks. Baristas are expected to earn an average of $20.41 per hour, while managers will average $26.57 per hour.
Operators are in a tricky spot, trying to provide adequate staffing to meet customer needs, but limiting their financial exposure ahead of a possible recession. While some are increasing automation, industry experts note that full automation is unlikely for the restaurant industry in the near future, but tech options that allow fewer staff to serve more customers, such as tableside ordering and paying, may become more popular. Most agree that the “human face” of foodservice is part of the dining experience and is here to stay.
Partnering with a staffing agency to supply workers for peak periods is a growing trend. It allows owners to have adequate numbers of work-ready staff to provide the dining experiences customers desire, without having to take on the obligation of permanent employees in an uncertain period. This arrangement also provides a pipeline for potential permanent staff when business conditions stabilize.
Overall Outlook
Only 16% of the nation’s restaurants expect profits to increase in 2023. Half expect to make less money than they did last year because of rising expenses. Controlling costs and providing positive dining experiences that justify higher menu prices will help restaurant owners flatten out the ups and downs of this turbulent period.
— George Lessmeister is CEO and founder of LGC Hospitality, a national staffing firm headquartered in Indianapolis. LGC has offices in over 40 U.S. cities. Team members work with hotel and restaurant leadership to place executives and temporary workers.