Murky Forecast for Restaurants?

Restaurant operators are “braced for potential challenges” this year, according to the latest National Restaurant Association Business Conditions survey  Currently, 50 percent of operators across the U.S. expect to be less profitable in 2023. Rising food, labor and energy/utility costs pose significant challenges heading into 2023. 

The majority of small and midsize U.S. business leaders anticipate a recession in 2023, according to JPMorgan Chase’s 2023 annual Business Leaders Outlook survey. In total, 65 percent of midsize businesses and 61 percent of small businesses expect a recession in the year ahead.

Food and labor costs are the two most significant line items for a restaurant, each accounting for approximately 33 cents of every dollar in sales, according to the National Restaurant Association survey. Other expenses — such as utilities, occupancy, supplies, general/administrative and repairs/maintenance — combine to represent about 29 percent of sales. 

• 92 percent of operators say food costs are a significant challenge
• 89 percent of operators say labor costs are a significant challenge
• 50 percent of operators expect to make less profit in 2023

“The restaurant industry is ending the year in an environment that’s the most typical since 2019,” said Hudson Riehle, senior vice president of Research for the National Restaurant Association. “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.”

Restaurants run on notoriously thin margins, so 50 percent of operators expect to be less profitable in 2023, while another 34 percent expect their profitability to remain the same as it was in 2022.

Operators continue to have to make difficult choices to manage their profitability — everything from reducing hours to postponing expansions and even eliminating third-party delivery. Actions taken include:

• 87 percent of restaurants increased menu prices
• 59 percent changed the food and beverage items offered on the menu
• 48 percent reduced hours of operation on days open
• 32 percent closed on days that normally open
• 38 percent of operators say they postponed plans for expansion
• 13 percent of operators say they eliminated third-party delivery
• 19 percent postponed plans for new hiring

According to the survey, a majority of both fullservice operators (63 percent) and limited-service operators (61 percent) say their restaurant does not have enough employees to meet customer demand. 

Operators are actively looking to boost staffing levels, with 87 percent saying they will likely hire additional employees during the next 6-12 months if there are qualified applicants available. But 79 percent of operators say their restaurant currently has job openings they are having difficulty filling.

At the same time, restaurant operators will continue to balance staffing needs with business conditions. 57 percent of operators say they would be likely to lay off employees during the next 6-12 months if business conditions deteriorate and the U.S. economy enters a recession.

Among the  Chase survey findings:

Passing Costs onto Consumers: 83 percent of midsize businesses have passed at least some increased costs onto consumers and buyers, while 68 percent of small businesses have raised prices on select or all products and services.

Rising Business Expenses: 94 percent of small businesses say inflation has impacted expenses, with 38 percent noting that expenses have increased by 11 percent or more. Leading cost drivers for both small and midsize businesses include wages and benefits costs for hiring and retaining employees, shipping and other supply chain-related expenditures, including costs of raw materials.

Bracing for Longer-Term Increases: 82 percent of midsize businesses are likely to continue to increase prices to mitigate costs, while the majority of small businesses expect that higher costs for labor, rents, shipping and materials are here to stay.

Some expert advice for  2023 planning:

Stay In-Tune with Economic Trends: While business leaders are undoubtedly familiar with today’s top economic headlines, they will want to keep a close eye on whether current trends related to the Federal Reserve, consumer spending, inflation, labor markets and more continue, abate or reverse in the year ahead. 

Recession-Proof Your Business: Regardless of when or if a recession ultimately materializes, businesses can take steps today to remain flexible, bolster their balance sheet and even find opportunities amid volatility. 

Optimize Working Capital: Working capital is a key indicator of businesses’ financial health, and maintaining it is even more crucial in times of economic volatility. To manage working capital more effectively, businesses may want to consider utilizing supply chain finance and dynamic discount solutions, implementing more efficient inventory management and reworking current debt to reduce liabilities.