Restaurant profitability remains lower than it was before the pandemic. | Photo: Shutterstock.
Restaurant profitability remains below where it was before the pandemic, challenging the industry at a time when inflation-related traffic challenges are forcing many companies to push more discounts and value offers.
According to the National Restaurant Association’s latest data abstract, median income before taxes at full-service restaurants is just 2.8% of revenues, compared with 4% in 2019.
At limited-service restaurants, income before taxes was 4% of revenues, compared with 6% in 2019.
The weakened profitability has come despite historically high increases in menu prices, which has turned off a certain segment of the U.S. consumer. Yet those increases haven’t been enough to offset restaurant profits.
It also signals the difficulty many operators have been in over the past few years. While many operators have raised prices at above the rate of inflation, it has often not been enough to offset their own higher costs for food and labor.
“You don’t want to raise menu prices too much because you’re going to turn off the consumer,” Chad Moutray, chief economist for the National Restaurant Association, said for an upcoming episode of the Restaurant Business finance podcast A Deeper Dive. “You’re going to affect overall traffic. And so the overall bottom line has gotten squeezed.”
The data also highlights a key reality in the restaurant industry: A lot of seemingly successful, independent restaurants are only a couple of bad months away from bankruptcy.
To wit: Median income at the lowest quartile of full-service restaurants was a loss of 2.1% of their revenues. At limited-service restaurants, that bottom quartile lost 0.3%.
Restaurant industry traffic has been broadly weak in recent years, due largely to consumer frustration over prices, particularly among lower-income consumers.
Moutray suggested that there are “two Americas,” and that while upper-middle and higher-income consumers are doing well, others are not. “It’s certainly where you’re seeing some of the weakness, particularly in the fast-food segment and others,” he said. Still, the weakened profitability could make it more difficult for some restaurants to address that issue.
Driving much of the industry’s costs are labor. The cost of salaries and wages, including employee benefits, cost the median full-service restaurant operator 36.5% of their revenue.
That was far higher than the median labor cost at limited-service restaurants of 31.7%.
But limited-service restaurants’ food and beverage costs were higher than the cost at full-service restaurants, 31.3% compared with 30%.
Median occupancy costs at full-service restaurants was 5.7%. At limited-service restaurants it’s 5.2%.
The association publishes the data abstract every couple of years to give operators a sense of where their costs are relative to the broader industry. The association has been publishing them more frequently since the pandemic, because of the impact that era and its recovery has had on the restaurant business.
The overall results suggest that restaurants remain in a relatively fragile state, even though consumers spend more at restaurants as a percentage of their total food spending than they ever have.
Still, Moutray said, there are some silver linings. While many restaurants are closing, there are usually others willing to take their place.
“The recent data I’ve seen on openings and closures shows that there are more openings than closures,” he said. “Despite these really low profit margins, you still are having people who want to get into this business. That gives me a little hope.”
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