June 19, 2023



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Unbelievably Strong Performance: Restaurants Riding the Greatest Tailwind in America

The performance of the restaurant industry in the first quarter of the year seems unbelievably impressive, with most publicly listed restaurant companies exceeding expectations in their financial status. The labor environment has improved, and inflation has cooled down. Furthermore, driven by low unemployment rates, consumers have demonstrated that continuously rising menu prices cannot deter their long-suppressed demand for dining out.

However, the restaurant industry's Q2 and Q3 might become more unstable. New data indicates that more restaurant owners are exploring opportunities for restaurant sales and transfers. Data from Revenue Management Solutions shows that the transaction amount per dining-out experience has dropped nearly 4% compared to last year, and foot traffic is also declining.

Consumers are dining out less frequently, and they are spending less money when they do visit restaurants.

As the inflation gap between dining out (restaurants) and dining at home (groceries/retail) continued to widen for the third consecutive month in May, this downward trend might become even more pronounced for restaurants. According to data from Kalinowski Equity Research, restaurant prices are now 250 basis points higher than anticipated, exceeding the average gap between these two categories by 190 basis points.

Karen Galivan, Senior Analyst at RSM US Consumer Products, stated that a quarter of consumers are gradually depleting the savings they accumulated during the pandemic, and "increasing credit card debt."

"The macroeconomic situation is uncertain, and that's not purely negative; consumer confidence is slowly declining," she said.

Due to this volatility, the University of Michigan's Consumer Confidence Index hit a six-month low in May, and the National Federation of Independent Business Optimism Index has remained below historical average levels for the 17th consecutive month.

Galivan pointed out that the next six months will be challenging, but the industry is better equipped to withstand any potential recession compared to the past.

"That's because we have more data about our consumers and our target market," she said.

Another analyst, Cadigan, added that the consumer's definition of value has changed, and if restaurants want to weather an economic downturn, they need to proactively cater to these new values.

Today's notion of value, especially in the post-pandemic environment, encompasses the "experience." Whether it's paying extra for the convenience of home delivery or going out for social interaction, experiences hold significant importance.

"People are seeking valuable experiences, and restaurants need to understand what kind of experience consumers are looking for," Galivan said.

Both analysts emphasized that obtaining consumer information is now easier compared to a few years ago.

"All the information is there; if you know what experience your customers are seeking, what they like, and what brings them back, you can leverage that data to your advantage in times of crisis," Galivan added.

Both analysts are also optimistic that the industry will withstand any deepening recession, not only because restaurant owners now have a better understanding of consumer habits, but also because most restaurants are smarter than before.

Furthermore, consumers have repeatedly shown their resilience.

"This is the greatest tailwind," Cadigan said. "It's not to say they don't have concerns. If businesses work harder to understand their consumers, it will help them thrive."