Trends Shaping the Restaurant Industry in 2023 by Aaron Harker
Posted 1 year ago
As the year 2022 marked a return to financial stability for many restaurants and related businesses, the new year will still pose a challenge for operators. With inflation affecting menu prices and diminishing consumers' discretionary spending power, people will likely look for cheaper options such as QSRs or value-focused meals. Low-income consumers may even forgo eating out altogether. Restaurants, then, will have to be strategic with their pricing, especially since ingredients costs are expected to rise due to a volatile supply chain, leading to shortages and delays.
Though consumers are dining out 10% less than before the pandemic, the job market is still stable, and people have $1.7 trillion more in cash than they did in 2019. This could help restaurants regain some of their lost profitability before the third or fourth quarter of 2023, when a slowdown is expected.
The labor shortage and construction delays will add to the difficulty of running a restaurant. On top of that, ghost kitchens may not be as successful in 2023 due to the decline in delivery orders and food quality issues.
Nevertheless, restaurants have a chance to make up for their losses in the new year. People still desire premium experiences, and there is enough consumer demand and food spending to help the recovery. As long as restaurants take the necessary pricing, disinflation of margins, and other steps, they should fare well in the first half to three quarters of 2023.
Price is becoming an increasingly influential factor in consumer decisions, according to Custage. In an August 2022 survey, Medallia found that 49% of respondents cited price as a driving force for their household decisions, which is 20% higher than the year prior. This number has remained steady for the past few months.
It appears that affluent customers are making up a larger portion of restaurant transactions, as low-income customers look to cut back on such expenditures. Custage believes that some of these people are trading down, opting for fast-casual or quick-service restaurants rather than sit-down restaurants.
In order to make up for inflation and wage pressure, many companies have been raising their menu prices. However, Custage suggests that these businesses should also implement cost adjustments, such as service reductions or smaller portion sizes. This blended approach has been more accepted, with over half of people preferring it to higher prices.
Despite the increasing prices, customers appear to still be willing to pay for quality experiences. For instance, in New York, people were waiting up to 45 minutes in line just to get a table. It seems that people want something extra and are willing to pay a premium for that.
In Titan Hospitality Group's fine dining restaurants, customers are also dining at the bar more often, with food sales on the rise. This trend has been beneficial for the restaurants, as it increases sales and keeps guests around for longer.
Finally, Medallia's survey showed that a five-point increase in inflation would prompt a change in consumer spending habits for 96% of people, indicating that people are reaching a breaking point.
As the US Federal Reserve continues to raise interest rates, labor markets may cool. However, current Bureau of Labor Statistics data shows that foodservice wages are still on the rise, reaching $17.24 an hour in October. Sectoral employment has also witnessed an increase, topping 11,898,000 in preliminary numbers. Moreover, the quit rate in foodservice has remained steady and is hovering between 5.6% to 6.2%.
In response to the labor shortage, restaurants are focusing on increasing efficiency in their operations. This has seen pre-preparation and pre-cooking being done in advance of shifts, as well as the implementation of pay-at-table or tableside ordering. Moreover, some restaurants may have to operate on a reduced staffing level.
To counter the issue of high turnover, employers are focusing on improving aspects such as workplace culture. For example, Titan Hospitality is placing emphasis on hiring young workers who fit the company's culture, and then training them intensively for several weeks.
In addition, restaurants may be more flexible with their ordering channels, choosing to switch off particular services so as to minimize impact on the guest experience. Automation is unlikely to be implemented on a large scale in the near future, as the pandemic has shown that it takes more than a labor crisis to fully transform or automate certain jobs.
Overall, while labor shortages may lead to higher wages and job security for workers, it is ultimately macro-economic changes that will determine the future of labor markets.
In order to keep the bottom line steady amidst fluctuating ingredient costs and operational pressures, restaurants need to take a close look at their menu strategy and spendings on sourcing. They must create a more streamlined menu that is precise in its offering due to high costs of ingredients, while also considering items that are popular with customers but complex in terms of total ingredient mix and preparation for removal. Menu prices will likely be raised by 5% this year, but operators should look to increase pricing by 200 basis points more than food, labor, and energy cost increases to protect margins without further damage to sales. Additionally, technology can be used to enable dynamic menu pricing during peak hours or events in order to maximize profit; however, customers may resist this solution.
At the beginning of 2021, ghost kitchen companies were booming. Expansion deals and investments flooded the market with optimism that these virtual brands would take off in a big way. However, as we move further into 2022, it seems like things are not going quite as planned.
Despite their popularity, there have been problems—including softening demand for delivery services, higher capital costs and lack of consumer trust. Many people don't want to order from Uber or DoorDash only to find out later that the food was coming from two buildings with no quality control. As such, customers will often look for brands they know and recognize instead of trusting in a virtual brand.
Another challenge for ghost kitchens is that many tech start-ups don't have enough experience running restaurants and producing food consistently. This puts them at a disadvantage compared to those who already come from a restaurant background when it comes to producing quality products. So far, some companies have been able to adapt to the changing environment while others such as Butler Hospitality have collapsed completely due to the inability to compete effectively.
On the other hand, Kitchen United has managed to secure $100 million in Series C funding last July with the help of Kroger, Restaurant Business International and Circle K. Saladworks has also opened two units in Kitchen United Food Halls within two Ohio Kroger stores in December 2021, showing signs of growth amidst an otherwise shrinking ghost kitchen sector.
However, Travis Kalanick's Cloud Kitchen concept has suffered greatly due its failure to attract restaurant operators despite its success in other markets like Europe and Asia where population density makes delivery more feasible than it is in America's suburban areas. Even Reef's major ghost kitchen partnerships such as Wendy's have seen shakeups with Wendy's canceling most of its projected units leading many people like Nigam concluding that "ghost kitchens are dead".
Overall, it seems that ghost kitchen companies may be struggling due various factors including softening demand for delivery services, higher capital costs and lack of consumer trust among others which could ultimately lead to their downfall unless they can find ways to adapt and create lasting partnerships with traditional businesses like Kitchen United did with Kroger and Saladworks.
Restaurants across the nation are facing a crisis of supply chain and construction delays in 2023 due to severe labor shortages, according to Jay Nigam, CEO of Titan Hospitality. This is leading to longer-term menu development and other changes that can affect customer experience, as well as higher costs for restaurants looking to build or expand.
The cost of food products is skyrocketing due to supply chain issues, with some items becoming too expensive to include on menus. For example, king crab meat increased from $25 per pound last year to a whopping $65 per pound currently. Supply chain challenges are causing companies like Titan Hospitality to shift their menu development frequency from twice a year to quarterly in order to keep up with market demand and rising prices while still delivering quality products at reasonable prices.
Construction costs and timelines have also been extended by the same labor shortages that are driving up food product prices. It’s now taking up to 16 weeks for materials to arrive and 30 weeks for walk-in freezer boxes - all of which contribute heavily towards budgeting problems for restaurants looking to build or expand their operations. On top of this, there simply aren’t enough electricians and plumbers available for hire so many projects are running months behind schedule - resulting in additional costs that weren’t initially accounted for.
For businesses who don’t have the luxury of money saved up or access to capital needed for these unexpected increases in expenses associated with construction delays, it is an even harder hit financially. Financially speaking, it’s almost impossible for them not only pay the cost of rent but also the additional expenses incurred during building delays before they get their restaurant open and starting generating revenue.
The long-term effects of these supply chain issues could be significant if they continue into 2024 and beyond as expected by experts such as Halpern - who believe it isn’t just a two-month problem anymore due the ongoing conflict in Ukraine coupled with other economic factors. Restaurants will need new strategies when it comes to menu development and customer engagement if they hope to survive these difficult times ahead without compromising their standards of quality or pricing structure too much.
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