The BLS.gov inflation numbers released in February for ‘Food Away From Home’ (FAFH) were consistent with expectations. Limited service (+5.8 percent) continues to outpace full service (+4.3 percent) and grocery (+1.2 percent) inflation as wages and inherent commodity volatility remain the dominant drivers separating restaurants from grocery stores. Restaurants depend more heavily on labor, and when commodity costs decrease, these savings are more likely to be passed on to consumers in grocery stores than in restaurants. This difference contributes to the ongoing disparity in cost trends between the two sectors.

Inflation data points in isolation are useful, but also require context. At Fishbowl, we track multiple economic influences, and they are often a blend of favorable and unfavorable indicators for restaurants. Here are our expectations for several broader economic categories for the next 1-2 quarters, and the impact we think they will have on restaurateurs:

• Jobs, Wages, and Incomes (favorable)
  • Unemployment rates have wavered marginally from month to month, but remained below 4 percent since Feb of 2022. 
  • Real wage growth has returned as wage rate inflation is outpacing the consumer price index the last three months, although hours worked declined in January.
  • More people working and making more money benefits restaurants because they have more to spend, and mobility is increased, enhancing consumer likelihood to eat away from home. 

• Labor costs – (mostly unfavorable, with regional exceptions)
  • State-mandated minimum wage increases and broader wage rate growth rates in a tight labor market will stress labor costs in industries that rely heavily on hourly workers (i.e., restaurants). 

• Consumer Spending (neutral) 
  • Spending has remained steadily positive for more than two years despite inflation, and with disposable income outpacing inflation, consumers have shown few signs of slowing down (except for isolated recent weather driven anomalies in January).

• Consumer Confidence – (emerging favorable) 
  • Consumer confidence tends to lag economic news, and remains relatively low, but improving trends show a more favorable outlook about consumer’s economic well-being. 

• Commodities – (neutral with category exceptions)
  • Input cost escalations across the board are not expected to bring higher food costs in total, although limited-menu brands with heavy dependence on certain commodities may suffer more exposure than broader menu brands.

• Interest rates – (neutral, may move favorable)
  • Rising interest rates have stressed the costs of shelter, consumer credit, and expansion capital. Easing inflation rates have led the Federal Reserve to hold further increases (and the agency has signaled the possibility of interest rate reductions later this year), so upward pressure is unlikely.

• Competitive Environment (unfavorable – accelerating intrusion)
  • Unit count growth in the post-pandemic era is accelerating, buoyed in part by the recovery of the industry and improved cash positions during the high inflation period, and subsequent plans for expansion. With a typical 12-18 month lag time for development, and easing supply chain disruption in the construction industry, we believe that unit count growth rates are likely to continue rising in 2024 into 2025. This emerging increase in supply is an under-considered threat to per unit traffic going forward. 

• Check Growth (favorable but waning)
  • Brands are rolling out their value promotions in expectation of increasing competition for traffic. Additionally, we are seeing a steady slowing of price influence, party size, and delivery channel growth which will continue to limit opportunity for growing sales through check average. Moreover, job and income growth trends have been more favorable in lower-income households, and these new and returning consumers tend to participate at lower price points. The days of high single-digit or even double-digit check growth are over, but still likely to be positive up to mid-single digits, driven mostly by responses to wage inflation (through price increases) that will outpace core inflation numbers in 2024. Increased marketing focus on value will likely drive easing of check growth numbers to lower single-digit growth across the year. 

• Traffic Forecast (waning with exceptions)
  • Although consumer spending, income, employment, and confidence indicators remain steadily or upwardly favorable, the supply side growth of unit counts (likely over 5 percent by the end of 2024 versus 2022) will be the primary pressure on traffic. Even excluding soft January results, a low single digit decline in aggregate traffic is the most likely outcome on the whole. There will be brands with positive traffic performance, but they will be the exception in 2024.

• Price Sensitivity (increasing)
  • Our analysis is revealing upticks in price sensitivity in several brands, regions, and channels over the past two quarters. Consumer weariness of broader inflation as well as the compounded magnitude of multi-year price increases has been widely reported in the trade press, but it seems mostly as anecdotal “man-on-the street” reporting. Until recently, the economic math shows that consumers have been remarkably resilient, with the change coinciding with the late Q3 ’23 softening of industry traffic, and the restart of student loan repayments. We expect steadily increasing sensitivity up to moderate levels particularly where value promotions are expanding. 

Depending on your menu, segment, and geography, your brand’s comparable sales growth opportunity and transaction risk will be affected to varying degrees by changes in these indicators and how they affect consumers. 

These economic indicators reveal factors influencing the restaurant industry as a whole. Depending on your menu, segment, and geography, your brand’s comparable sales growth opportunity and transaction risk will be affected to varying degrees.

Our analysis underscores the need for a strategy that goes beyond the numbers, integrating a comprehensive understanding of market dynamics with the unique characteristics of your brand.

Ted Babcock is the SVP of Consulting Services at Fishbowl. He is a restaurant industry veteran and thought leader, and an expert on price and menu optimization. ted@fishbowl.com