A new year has begun, and with it comes increasing minimum wages, lowering food costs, and a healthy rebound in the restaurant equity market. The problems that plagued the industry: staff shortages, supply chain issues, and rising food costs, have somewhat stabilized. The restaurant industry may be continuing its upward trajectory, though many face the future with slightly suppressed optimism.
Here, we’ll explore some of the key changes taking place and how restaurants are adapting.
Rising Minimum Wage and the Workforce
The passing of California’s Fast Act Bill in 2022 (AB 257) left many in the restaurant industry concerned about the long-term effects and copycat legislation. On April 1, 2024, the minimum wage for fast-food workers in California will be $20 per hour, and the impact has expanded beyond California’s borders. This wage increase applies to chains with 60 or more locations.
Restaurant Business recently mapped out the minimum wage increases that 2024 brings. Twenty-two states and 70 local jurisdictions will see rising wages. All the cities with the highest minimum wages are found in California and Washington, with Tukwila and Seattle coming in the highest, followed closely by Los Angeles. Minimum wages will top $16 an hour in 48 local jurisdictions, 40 of which are in California.
While 19 states remain in alignment with the federal minimum wage of $7.25 an hour, the labor market has challenged this status quo. To retain high-quality staff and strengthen recruiting efforts, operators have adapted by raising wages and offering benefits. These higher wages and fewer vacancies have translated to falling turnover rates.
Restaurants struggled to maintain their margins due to rising inflation that hit a 40-year high in 2022. The Fed’s rate hikes managed to dampen the runaway increase, though it is still elevated. The good news: economists foresee further declines in 2024. What does that mean for restaurants?
Food Service Equipment Reports shared the importance of “excellence in execution” as consumers shift to looking for good value. Victor Fernandez, vice president of insights for Black Box Intelligence, shared this concerning increasing interest rates and the inflationary market, “What’s surprising this year is how resilient consumers have been in terms of their spending.” He added, “People are aware of everything being so much more expensive. They’re OK with that. The mindset shifts to, ‘Is this worth it?’ We’ve seen in our data, time and again, that if the guest sentiment for food is high, if the service sentiment is high if the restaurant is clean…if the order is accurate, if the portion looks right to them, …then the value sentiment ends up being high.”
Hudson Riehle from the National Restaurant Association agrees, “The consumer continues to hold restaurant spend in a preferred and in many cases, essential category.”
Mergers & Acquisitions and the Restaurant Equity Market
After a year-long dry spell, the restaurant equity market shows signs of bouncing back. Some of the top contenders include Cava, the Mediterranean restaurant chain, and Dutch Bros. Cava, valued at $4.8 billion, hit the New York Stock Exchange in June 2023 and became a top-performing IPO. In a primary offering, Dutch Bros. raised over $300 million.
Roger Matthews, managing director of Bank of America’s Consumer and Retail Investment Banking Group, believes a lot more assets will be entering the market in the new year. “There’s pent-up demand on the buy side from institutional investors and on the sell side from operators interested in an exit, both of whom have been holding out for a better deal-making environment.” As margins stabilize, investors will look at restaurants more favorably.
At the recent Restaurant Finance & Development Conference in Las Vegas, the talk centered around the discrepancy between price evaluations from buyers and sellers. While sellers want valuations that align with the hot market of 2021, the higher interest rates and thinner margins are restricting buyers.
One of the winners? Far West Services, a group that operates over 100 Wingstop locations, was at the center of a bidding war. Restaurant Business reports it was sold for a record valuation above 10 times the earnings before interest, taxes, depreciation, and amortization.
The Suburb Migration Continues
The hybrid workforce is continuing to change the restaurant landscape. Overall, spending is moving to the suburbs and declining in the cities. This change is also affecting peak hours.
At EMERGING Concepts, we’ve been carefully monitoring this migration for some time and recommending restaurants incorporate data analysis to keep a watchful eye on sales by region and time of day. Our team of data scientists and industry and real estate experts are here to help, evaluate real estate opportunities across the country. To learn more about our strategic process or to schedule a consultation, contact EMERGING.