Restaurant Operators Haven’t Been This Pessimistic Since The Great Recession Of 2008

Food & Drink

As the restaurant industry continues to recover from two years of restrictions and consumer anxiety, weary operators may have to brace for even more impact as a new, highly contagious Covid-19 variant begins to proliferate.

Could this wave mean a return to mandates, like proof of vaccination or masking indoors? Could it deter consumers from dining out like it did in 2020 and 2021?

As if the industry hasn’t been through enough at this point.

We saw the fruit of pent-up demand last summer and, again, when restrictions started lifting (seemingly) for good earlier this year. It provided a bit of optimism for the industry–and a much-needed one given that nearly 100,000 eating and drinking establishments have closed so far throughout the pandemic.

But that pent-up demand requires sufficient labor and product supply, and neither have exactly been readily available. And so, operators recovering from the pandemic are now forced to manage historic inflationary pressures.

It’s like fighting off a bad guy only to find out there’s an entire army of bad guys waiting in the wings. Operators are beat up and they’re tired, and the failure to refill the Restaurant Revitalization Fund means they don’t have much support in return.

It’s little wonder that most operators are pessimistic about the economy at this point. New data from the National Restaurant Association finds that 43% of operators think economic conditions will worsen in the next six months, while 39% expect them to be the same as they are now (of course, “now” is not great).

Further, just 18% believe conditions will improve–the lowest number since the start of the pandemic in March 2020.

Of note, June’s 43% “economic pessimism,” as the association calls it, is the highest level of pessimism since the Great Recession of 2008 and just the second time in 20 years that over 40% of operators said they expect economic conditions to worsen in six months.

Why so gloomy? Go back to labor shortages and lingering inflation and a relentless pandemic.

Food costs are up more than 10% year-over-year, for instance. A new report from Lightspeed finds that food costs are pacing ahead of inflation and when adjusting for inflation, restaurant margins have decreased from May 2021 to May 2022.

Lower margins mean less money to pay for things necessary to run the business. In June, in fact, 38% of small restaurant owners couldn’t pay their rent, according to Alignable data.

Inflationary pressures are also causing consumers to rein in their spending on discretionary items, like restaurant food. Gen Z diners in particular aren’t visiting restaurants nearly as much as their older cohorts, according to NPD data, citing price as the most important factor. That’s a big deal given that Gen Z represents nearly $100 billion in spending power.

So where does the industry go from here? How does the pendulum swing from pessimistic to optimistic?

Plenty of proof points have surfaced illustrating labor efficiencies created by certain technologies. Automation, for example, has made its way in both the front-and-back-of-house to help operators with labor savings. But could automation be a silver bullet in an industry founded on hospitality? Not likely.

Most operators have also embraced digital ordering and delivery–Gen Z’s preferred points of access to restaurants. Still, adding more channels requires more labor and labor is hard to come by right now.

Some brands have thrust themselves into spaces like Roblox or the Metaverse to woo younger consumers who have increasing discretionary income and who happen to really like gaming. This could provide a small tailwind, but it’s going to take more than shiny, new trends to achieve longevity.

It’s also important for the industry not to get too carried away with the digital side of things in an attempt to win favor from digital natives. Gen Z diners might be able to find, order and pay for a meal on their phone in a literal instant, but they’re also willing to explore new cuisines and experiences, and they have the most diverse and sophisticated palette of all consumers. In other words, operators simply can’t lose sight of the menu.

“Restaurant operators and their manufacturer partners must quickly adapt to how Gen Z consumers think and feel,” NPD Food Industry Advisor David Portalatin said in a statement. “An understanding of which menu items to emphasize, the food attributes they seek, menu innovations that appeal to them, and their preferred advertising platforms will help you win the favor of this valuable generation.”

Another tactic is to simply be patient and wait out the current storm. It’ll pass–they always do. Exactly when is a bit harder to predict. If we were to rely on historic context, inflation could swiftly drop once supply chains are back online and pent-up demand levels off.

In 2008, the last time operators were this pessimistic, it took a little over two years for industry sales to start rebounding again.

There may be glimpses of hope now, too. For starters, the labor equation is slightly improving in the industry, while gas prices are starting to come back to earth.

Unfortunately, however, glimpses of hope are simply not enough for the nearly 40% of operators who can’t afford rent.

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