How Inflation, Economic Pressures Will Impact 2023
For restaurants. There’s a lot at stake next year, and with it, comes new and familiar risks. The same issues that have kept a damper on the hospitality industry since the COVID-19 pandemic will keep the pressure on during 2023, particularly squeezing profits for the beleaguered restaurant sector. Inflation pushed up costs across the board—food, beverages, and labor—in 2022, and that is likely to remain the pattern in 2023. Combined with continuing economic uncertainty and the need for new—or better—strategies to deal with the sector’s ongoing labor shortages, it will take tight management and smart investments for continuing viability in 2023. Here’s what decision-makers need to know about the outlook, the opportunities, and the risks. Everything got more expensive in 2022, and with 95 percent of sales covering those costs, it’s no surprise that everyone’s scrambling to narrow the profit gap. It’s reflected in menu changes, as 90 percent of restaurants have raised prices, and offerings have changed due to rising costs and ingredient shortages. And, of course, reduced hours are common, especially given continuing difficulties finding workers for the front and back of the house. Job growth has been uneven in 2022 but the trendline has been up. Still, inflation-driven minimum wage hikes are further shrinking profit margins—another pressure point for management.
Restaurant Hiring Accelerated in November
New statistics show that 62,100 jobs were added. Restaurants and bars stepped up their hiring during November, adding 62,000 jobs, according to figures released Friday by the U.S. Bureau of Labor Statistics. That’s higher than the 36,300 jobs the industry added in October, which itself was an upward revision from previous estimates. The statistics for November show a total of 11.9 million people were employed by eating and drinking places. That’s 400,000 jobs short of where the industry was in February 2020, before the pandemic led to widespread job cuts. Overall, the U.S. economy created 263,000 nonfarm jobs last month, a slight dip from the average number of jobs added in each of the prior three months. The national unemployment rate stayed at 3.7%. Eating and drinking places accounted for roughly one of every four of those new positions. The new data shows that hiring by restaurants and bars was higher during the start of the fourth quarter than originally reported. Restaurants employed 40,800 more people in October than BLS initially said last month, according to the revised figures published Friday by the agency.
Why Restaurants are Opening Beverage-Focused Spin-Offs
Operators look to tap into a new dining occasion. In expanding their on-premises business, restaurants typically go one of two routes: They open more locations of the same concept, eventually becoming a micro-chain, or they pack their portfolio with new concepts. And then some brands take a varied approach on the latter path. Instead of creating new restaurants, they build bar-forward establishments and differentiate themselves from the pack by serving a niche—and sometimes untapped—dining occasion. “Food revenue drives a lot of the sales, but the margins are not as strong. So, when you build a bar concept on top of that, you’re building something with much larger margins,” says Justin Weathers, co-owner of Stove & Co. Restaurant Group. “The 50/50 blend of food and beverage sales, in any operation, is the sweet spot for making a successful business. It is more to manage, but it does amount to a healthier business.” Based in the greater Philadelphia area, Stove & Co. comprises four brands: two-unit Stove & Tap, Al Pastor, Revival Pizza Pub, and its latest concept, Good Bad & Ugly. When the space beneath the West Chester, Pennsylvania, location of Stove & Tap opened, Weathers and his partners were eager to grab it. They wanted to distinguish it from the New American restaurant upstairs, but they also didn’t want it to stray too far from the group’s F&B core. Opening a bar was the natural choice. “It expands your time that you can, as a business, create revenue and different experiences. And because it’s attached to the restaurant, my business partner Joe [Monnich] and I like to say it’s kind of like dinner and a movie,” Weathers says. “People want to not just go out; they want to be entertained.”.
In the Digital Era, Gift Cards are More Critical Than Ever
For restaurants. Nearly half of all gift card sales occur in the last two months of the year and most of those redemptions happen in Q1, a historically slow time for restaurants. MrBeast Burger announced today it is adding a gift card program to its quickly growing restaurant business. The 2-year-old brand is offering physical and digital gift cards available for $25, $50 or $100. MrBeast Burger is a mostly virtual brand, perhaps illustrating just how important it is for restaurants of all kinds to have a gift card program in place now. That is especially true during the holidays, when the industry sells a majority of its gift cards for the year. According to Credit Suisse, the average casual restaurant generates more than half of its annual gift card sales in Q4, and nearly 40% of redemptions happen in Q1. This isn’t necessarily a new trend. What is new, however, is that the promotional push has become a bit more aggressive in the past three years as restaurants diversify their revenue streams amid crises. Further, that promotional push has largely come via ecommerce channels as consumers have become more digitally dependent. Consider Paytronix data, for instance, which found that gift card sales on Cyber Monday jumped nearly 14% and 18% in overall dollar sales. Digital cards experienced a 31% increase over 2021.
Fast Act Opponents Collect Enough Signatures To Put The Law On Hold
Voters decide in 2024 whether to keep the controversial fast-food wage law. Restaurant representatives say they have collected more than enough signatures from California residents to put a recall of the state’s Fast Act on the 2024 ballot, a step that would suspend the adoption of the controversial wage law until voters decide whether to keep it. The 1-million-plus signatures will now be vetted by county and state officials to verify their authenticity. The main proponent of the Fast Act, the Service Employees International Union (SEIU), has already leveled accusations that hired signature gatherers misled some voters when asking them to sign the petition for a recall vote. The union has aired videos that show the gatherers, known as circulators, telling would-be signers that the petition calls for raising fast-food workers’ pay, and not to hold a referendum on the new wage law. Still, enough signatures were collected for the petition drive to succeed even if a significant number were disallowed. Getting a recall of the act on the 2024 state ballot would shift the industry’s challenge to convincing voters that the Fast Act would be a detriment to consumers. The International Franchise Association has warned that the Fast Act would drive up food prices by 20% by pushing up labor costs beyond fast-food restaurants, the targets of the legislation. The act calls for the creation of a Fast-Food Council to set the wages and working conditions of workers within California fast-food restaurants that are part of a chain of at least 100 units nationwide.
Want to be Recession Proof?
Take care of your guests and employees first. There is a debate as to whether we’re currently in a recession, but less so as to whether or not we’ll be in one at some point in 2023. Most signs are pointing in that direction, though it won’t likely be as deep as the 2008-09 downturn. Still, recessions present obvious challenges for business owners who have to contend with more discerning customers. The restaurant industry is already starting to see this with traffic declines across the board. For Andrew K. Smith, managing director of Savory Restaurant Fund, less foot traffic is the biggest indicator that a recession is upon us, “if not looming.” “Also, the cost versus value versus margin equation is all coming in a line. Usually there is less cost, better value and higher price points, so there are better margins. When that starts to get compressed, it’s either going to pop, which is a recession, or we’re going to start letting air out of it one way or another,” Smith said during the Emerging Restaurateur Live Learning Series webcast this week titled “Recession-Proofing Your Business.”
How Restaurants Should Prepare for the On-Demand Digital Economy’s Peak
A 7-point improvement over October. The future of restaurants is here: a future where your digital footprint is more crucial than your physical entryway, where customers expect online hospitality to be just as (if not more) easy to use and as convenient as in-person dining, and where every operator knows more than just your name. Essentially, restaurants must be “everything everywhere all at once” to customers who have become used to an on-demand economy, thanks to tech giants like Amazon, Google and even Netflix. It might sound harsh, but the days of mom-and-pop restaurant operators being able to rely on word of mouth for marketing and resisting digital investment because they “are food experts, not tech/social media experts” are over. While at first experts predicted that the end of the COVID-19 pandemic would bring about the end of the traditional restaurant experience as we know it, with dining-in becoming the new dining-out, this proved not to be the case. Instead, customers keep wanting more from restaurants. They want operators to offer everything: classic dine-in, easy and flexible online ordering and delivery, and personalized experiences like customizable rewards based on their purchasing habits and subscription programs. They want the omnichannel experience, which has been the hospitality buzzword of 2022.
Did You Know?
Turn your restaurant’s tax situation into savings opportunities. With operators prepping to pay taxes for 2022, the National Restaurant Association recently held a webinar with Frost Law that offered advice on how to get the most out of this year’s returns and plan properly for 2023. The webinar, “Don’t Leave Money on the Table: Commonly Missed Tax Planning Opportunities for 2022 and 2023,” shared tips on: year-end planning for restaurants, including bonus depreciation, business expenses, ERTC maximization and tax planning, and planning for 2023 including the work opportunity tax credit, research and development credit, and planning for long-term sustainability Rebecca Sheppard and Peter Haukebo, both directors and tax attorneys at Frost Law, headed up the panel, which was moderated by Association VP of Public Policy, Aaron Frazier. “Our goal is to make sure these tax credits are part of your overall operational and strategic framework going into 2023,” Frazier said.
Employee Tip
The tipping fatigue struggle is real. The rising cost of goods and services has given some consumers pause over how much gratuity they are willing to leave at restaurants. With inflation continuing to reach near 40-year highs, tipping for takeout and delivery dropped to 14.5 percent in the second quarter of 2022. With the holidays coming up, restaurants don’t want to be caught short-staffed and underprepared for the increase in customer volume, as this can contribute to patron dissatisfaction and lower tips. They still have time to set themselves up for success and higher tipping potential.
Bielat Santore & Company – Restaurant Industry Alert
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