Challenges Ahead for the Restaurant Industry

Since the onset of the COVID-19 pandemic, the restaurant industry has faced a dramatic shift in its operational landscape. Initially hit hard by closures and restrictions, the sector has since grappled with evolving consumer behavior, inflationary pressures, and workforce challenges. As the world transitions into a post-pandemic era, the tides continue to change.

Consumers, now more mindful of their spending habits, are cutting back on dining out, a trend further compounded by rising costs of living. Even tourist destinations, once reliable hubs of robust restaurant activity, are seeing a noticeable decline in customer spending as travelers tighten their budgets. These emerging patterns have forced the restaurant industry to reassess its approach to maintaining profitability amidst a perfect storm of economic uncertainties, evolving work habits, and a more frugal customer base.

Where We Currently Stand

The National Restaurant Association's (NRA) Restaurant Performance Index (RPI) has recently highlighted a concerning trend within the restaurant industry. A combination of inflation, declining disposable income, and rising labor costs have created significant obstacles for restaurant operators trying to maintain profitability. These issues have only intensified, leaving the industry in a state of uncertainty.

The RPI, a monthly composite index, is designed to track the overall health of the U.S. restaurant industry. It functions as a barometer, with values above 100 indicating expansion and values below 100 signifying contraction. In May 2024, the RPI stood at 99.1, slightly up from April's 98.8, but still below the 100.9 level recorded in April 2023. This decline underscores a larger issue of contraction within the sector, with restaurant operators struggling to navigate ongoing economic pressures.

Key components of the RPI include the Current Situation Index and the Expectations Index. The Current Situation Index, which measures trends such as same-store sales, traffic, labor, and capital expenditures, showed a value of 98.7 in May, marking the eighth consecutive month in contraction territory. This signals weakened consumer demand and reduced customer traffic, a troubling trend for many operators. Meanwhile, the Expectations Index, which forecasts the outlook for the next six months, rose to 99.6 in May, though the NRA noted that operators remain cautious about the future, reflecting uncertainty in both sales and broader economic conditions.

"This year, 58 percent of operators in the survey said rising inventory costs was their No. 1 source of financial strain, up from 54 percent in 2022."

When surveyed, restaurant operators expressed mixed expectations. While 30% anticipated higher sales in the next six months, a notable 25% expected a decline. These responses indicate a polarized outlook on the near-term prospects of the industry, with some operators bracing for further economic downturns. Additionally, 43% of respondents predicted worsening economic conditions in the coming months, highlighting a growing concern about the broader market environment.

Although lower-income consumers have borne the brunt of the current economic challenges, industry leaders such as Ricardo Cardenas, CEO of Darden Restaurants, noted that consumer behavior shifts have impacted even larger brands like Olive Garden and Yard House. McDonald's, too, has responded to changing consumer spending by reintroducing a national value menu, aimed at enticing price-sensitive customers back into their stores.

However, attributing restaurant sector struggles solely to lower-income consumer behavior would be shortsighted. Operators are also grappling with increased labor costs, a decline in foot traffic due to remote work trends, and the rise of alternative work models, such as the four-day workweek. These factors, combined with the industry's traditionally slim profit margins, have made it difficult for restaurants to maintain financial stability.

The challenges faced by restaurants today are not entirely new but are compounded by the long-lasting effects of the COVID-19 pandemic. The industry has demonstrated resilience over the past few years, but many operators are just beginning to grasp the full extent of the structural changes brought about since 2020. While some recovery is underway, the current sales patterns suggest that the restaurant industry faces an extended period of adaptation as it contends with shifting consumer habits, rising costs, and evolving economic realities.

Closures, Reshuffling and Change

Since the start of 2024, several well-known restaurant chains have announced significant closures and undertaken more aggressive restructuring efforts, driven by the mounting economic pressures that continue to plague the industry. TGI Fridays, facing profitability challenges, has closed numerous locations across the U.S. and sold off eight corporate-owned stores to strengthen its franchise model and shutter underperforming outlets. Denny’s, grappling with inflation and rising costs, shut down 57 restaurants in 2023 and announced further closures in 2024. Boston Market, once a popular chain, drastically reduced its number of restaurants from around 300 to just 27 by March 2024, driven by landlord evictions, unpaid bills, and state-imposed shutdowns due to delinquent sales taxes. Mod Pizza, facing rising labor costs, abruptly closed 27 locations, including five in California, just before the state's new minimum wage law took effect. Coco’s Bakery and Carrows chains similarly shuttered 75 locations, resulting in a federal lawsuit over the sudden layoffs.

This wave of closures reflects the harsh reality that even major chains, which once seemed immune to economic downturns, are now feeling the strain. PDQ, a regional chain, closed eight restaurants in North and South Carolina, citing market conditions. Bloomin' Brands, the parent company of Outback Steakhouse, Carrabba’s Italian Grill, and Bonefish Grill, announced the closure of 41 locations in a major financial restructuring effort. Subway has also been undergoing a massive drawdown, closing over 400 underperforming locations since last year, while Applebee’s continues to close low-revenue stores in an attempt to optimize its portfolio.

"Americans are pulling back on dining out as prices have been sharply rising and recently hit new all-time highs. Since 2020, food prices away from home have increased by 27.0%, and fast food prices have jumped by 31.0%."

The trend extends across the industry, with Buffalo Wild Wings planning to close 60 locations, IHOP winding down 100, and other chains like Pizza Hut, Red Lobster, Hooters, and Chili’s scaling back operations. Some brands may not survive at all. The closures are a direct result of the ongoing financial pressure that many restaurant operators have been under since the COVID-19 pandemic. The lockdowns decimated customer traffic, which severely weakened revenue streams, forcing many operators to take on debt just to stay afloat.

By 2024, the aftershocks of COVID continue to reverberate. Debt has become a significant burden for many restaurants. Full Service Restaurant (FSR) Magazine reported that as far back as 2020, only 66% of independent bars and restaurants expected to survive without direct aid, and nearly 75% had taken on debt of at least $50,000 to stay in business. For some, that figure soared past $500,000. This growing debt, paired with declining operating performance, has made it nearly impossible for many restaurants to service their loans, leading to heightened investor and debt-holder scrutiny.

Debt isn’t the only issue. Food costs have become an even bigger concern for restaurant operators, with 58% of respondents in a recent FSR survey citing rising inventory costs as their primary financial challenge. This marks an increase from 54% in 2022, highlighting the intensifying pressure of rising prices. The cost of key ingredients for restaurant menus has risen significantly over the last few years, with the rate of increase far surpassing what was seen in the previous decade.

The restaurant industry, long a cornerstone of American culture, is facing an era of unprecedented change. The aftermath of COVID-19 laid bare the industry’s vulnerabilities, exposing just how fragile the traditional restaurant model can be when faced with disruption. Rising costs, mounting debt, and shifting consumer spending habits have made it increasingly difficult for operators to maintain profitability. Many restaurants continue to struggle with tighter margins and a customer base that is more discerning about where and how they spend their money. Without strategic adaptation, sustaining operations in the years ahead will be a challenge for many.

However, the industry is not without solutions. Strong leadership, innovative marketing, and well-trained staff can change the trajectory for restaurants willing to evolve. Leaders who embrace data-driven decision-making, dynamic pricing strategies, and creative guest engagement tactics can help revitalize struggling operations. Investing in staff education ensures employees are not only knowledgeable but also empowered to enhance the guest experience, leading to higher check averages and stronger customer retention. Additionally, modern marketing strategies, including social media engagement, loyalty programs, and curated dining experiences, can help reconnect restaurants with consumers. While the challenges are real, restaurants that adapt to the evolving landscape with strong leadership, a strategic vision, and a commitment to excellence will be the ones that thrive in the future.

The following were consulted in the writing of this article:

American Institute for Economic Research. "The End of the Restaurant as We Know It." American Institute for Economic Research, 27 Feb. 2023, https://www.aier.org/article/the-end-of-the-restaurant-as-we-know-it/.

National Restaurant Association. "Restaurant Performance Index." National Restaurant Association, https://restaurant.org/research-and-media/research/economists-notebook/restaurant-performance-index/. Accessed 15 Sept. 2024.

National Restaurant Association. "Restaurant Economic Insights Blog." National Restaurant Association, https://restaurant.org/research-and-media/research/economists-notebook/analysis-commentary/restaurant-economic-insights-blog/. Accessed 15 Sept. 2024.

Stones, Erica. "Restaurant Industry Outlook Remains Uncertain as Challenges Mount." Food Business News, Sosland Publishing, 30 Aug. 2023, https://www.foodbusinessnews.net/articles/26450-restaurant-industry-outlook-remains-uncertain-as-challenges-mount.

Williams, Michael J. "What to Know from the Latest Restaurant Performance Index." Fermag, 12 Sept. 2023, https://www.fermag.com/articles/what-to-know-from-the-latest-restaurant-performance-index/.