F&B InsightsRestaurant Industry Insights

The Economy’s Changing Impact on Restaurants

According to Alignable’s recent report, about 55% of small businesses face rent increases, and 36% of independent restaurant operators couldn’t cover their July rent. This number is an improvement, however, compared to the 45% of operators who reported delinquencies in June. 

The bottom line? Higher rents, higher interest rates, and slowing traffic are affecting the restaurant industry.

Dine Brands Global Inc. Reports Increasing Interest in LTOs

Another reminder of our current uncertain times is evident in Dine Brands’ second-quarter earnings results. John Peyton, CEO, said, “In late Q1, we began to see some hints that our guests were growing a bit more cautious in their spending. This continued into the second quarter as a percentage of guests selecting from limited-time offerings and the value offerings on our Applebee’s menu grew from approximately 15% to 19% quarter over quarter.”

Additionally, they noticed their competitors upping their promotions as well as a slight decline in traffic. Their check average, however, remained constant year-to-date. According to Peyton, this translates to diners cutting back on visits rather than trading down as they face the impact of continued inflation. He also noted that customers were turning from delivery to pickup to avoid the additional fees associated with delivery.

The brand’s net income fell to $18.2 million, dropping from $24 million in Q2 of 2022. Dine Brands Global is the parent company of Applebee’s, Fuzzy’s Taco Shop, and IHop. They currently have over 3,500 restaurants across the globe.

Restaurant Sales Hold Firm

Despite the challenges, the U.S. Census Bureau reported that restaurant sales volume in June held firm, relatively unchanged from May. Restaurants saw consumer spending increase by 8.4% from June 2022 to June 2023. This increase, however, stems from higher menu prices. 

More Restaurants Report Slowdowns

While the national numbers suggest consistent sales, restaurants around the country are stating otherwise. The Washington Post recently reported on several restaurants experiencing slowdowns. The Corner Bar & Diner in New Underwood, S.D., said more customers are ordering $3 well whiskeys instead of $5 Crown Royal pours. Steaks and ahi tuna have come off the menu, and the diner closes at 8 p.m. instead of 2 a.m.

This kind of pullback is, of course, what the Fed has been in search of. A sign their rapid interest rate hikes are taming the runaway inflation. Signs that suggest a turning point include Airbnb’s expectations of a slowdown in bookings and lower rates. And McDonald’s noting an increasing number of customers foregoing fries. 

Sales at Chipotle Mexican Grill also fell short of expectations. According to the brand, profit gains in Q2 were affected by higher food costs. While their shares sank over 8% following the news, the brand still boasts hitting an all-time high the week before. And while many restaurants are reporting an increase in sales, they also report that the increase is due to higher prices, not more customers. 

The Restaurant Industry and the Expected Recession

Is a recession still expected in 2023? That would depend on the clarity of your crystal ball. Some experts suggested we would hit the recession threshold before mid-year in 2023. Others believe we’ve dodged the bullet. 

According to the Deloitte forecast, the economy should see a substantial slowing in the second half of 2023. However, they hesitate to call it a recession, except for the housing market. They expect inflation to settle down to the 2% range by the end of the year. Or not. Another scenario is that inflation returns, settling in at 6% due to continued strength in the labor force. Or, the next recession hits, though smaller in size than the 2008 catastrophe.

Diane Swonk, the chief economist at KPMG US, told the New York Times, “The chances of a soft landing are higher—there’s no question about that. I’m more optimistic than I was six months ago: That’s the good news.”

So how does this uncertainty affect the restaurant industry?

According to Broadleaf, the industries most at risk of layoffs should a recession raise its ugly head include information services, transportation and warehousing, and construction. No real surprises there. 

Industries with less risk of layoffs include healthcare and social services, retail, and accommodation and food services. And while the record-low unemployment rate suggests a reason for optimism, declining profits and consumer cutbacks point in the opposite direction. 

Decreasing discretionary spending could predominantly affect higher-end luxury food establishments. Economic downturns can also create supply chain disruptions. And competition intensifies with increased promotional activities affecting profit margins.

Restaurants’ Reactions

As noted, we’ve already started seeing an increase in promotional activities. So, in response, it’s a good time to emphasize value and differentiate your brand from your competitors. Make sure you have a solid financial management plan in place and keep a steady eye on changing market conditions. Strengthen customer loyalty, optimize operations, and explore new revenue streams from online ordering, catering, delivery, and merchandise sales. 

One additional revenue stream rarely taken advantage of is your data and its intrinsic worth to suppliers. Many will actually pay you for POS reports that demonstrate how their brand is doing in your establishment, trends in customer purchases and target markets. Data, today, is the holy grail, and you’re sitting on tons of it. To learn how to take advantage of this additional stream of income, contact F&B Insights today.

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