Restaurants will experiment with dynamic menu pricing, cater to diners that are trading down and move away from ghost kitchens as inflation puts pressure on the bottom line, experts predict.
Though 2022 marked a return to financial health for many restaurants and adjacent businesses as the pandemic’s peak disruption faded, the new year holds continued challenges for operators, experts say.
As inflation drives up menu costs and shrinks consumers’ discretionary spending power, many diners will choose to trade down by visiting inexpensive categories like QSRs or by ordering value-focused meals, sources said. Low-income consumers may cut back on their restaurant frequency altogether, so restaurants will need to be strategic with menu pricing — especially since a volatile supply chain is expected to hike ingredients costs amid shortages and delays.
“Restaurants are treading water, but it’s in the form of modest declines in transaction volume being countered by increases in spend per transaction that are at or slightly above the rate of inflation,” said Andrew Custage, head of insights at Medallia Market Research.
So far, consumers are only dining out 10% less than they were in 2019, said Paul Westra, managing director of restaurant investment research at Capital One, said.
The job market also remains strong and consumers have $1.7 trillion in extra cash compared to 2019, Westra said. While that dollar amount is shrinking, it could provide a cushion for restaurants for most of 2023.
“Any slowdown and recessionary impact will probably be occurring in the third or fourth quarter [in 2023]” Westra said. “Restaurants have a window here to recoup some of their lost profitability.”
Supply constraints will disrupt restaurant development plans, as construction delays increase the cost to build and renovate restaurants. An ongoing labor shortage will push restaurants to find operational efficiencies. In 2022, restaurants already cut operating hours by an average of 6.4 hours per week compared to pre-pandemic, according to a Datassenial report. For independent operators, that hourly reduction jumps to 7.5 weekly hours.
“With these challenges, with the supply chain, and the employees and everything else, you’ve got to get money, and money’s gonna come either as debt or equity. And when you look at debt, a lot of banks won’t lend to restaurant companies,” said Jay Halpern, partner at ArentFox Schiff.
Some pandemic-era restaurant models may begin to lose relevance in 2023 as well, experts said. Ghost kitchens, for example, may struggle amid slowing delivery demand and food quality struggles, said Rishi Nigam, CEO of Franklin Junction. In 2022, some prominent platforms in the ghost kitchen space began to see restaurant deals fall through despite the ongoing success of Kitchen United, one of the first players in the game.
The new year may hold new opportunities for restaurants despite obstacles, however, experts said. Diners still crave premium experiences from their restaurants, said Zhong Xu, CEO and co-founder of restaurant ordering platform Deliverect.
Consumer demand and food spending dollars may also hold steady enough in 2023 to help improve the restaurant category’s recovery, Westra said.
“I think restaurants will succeed in clawing back the vast majority of their lost profits from the last 18 months. I think they’ll have an ability to take the necessary pricing. They’ll be able to go back to their suppliers and get the necessary disinflation to rightset their margins,” Westra said. “The consumer is strong enough … for that to occur at least for the first half to three quarters of next year before we probably see a slowdown in the macro economy and consumer.”
Learn more about five trends experts predict will shape the restaurant industry in 2022.
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