Restaurant industry optimism tumbles as food and labor costs rise

Only 56% of US foodservice operators said they expect their industry to grow over the next three years, according to a recent study from L.E.K. Consulting. That’s a decrease of 22% from 2017, when 78% of respondents expected growth. The L.E.K. survey polled 240 commercial and non-commercial foodservice operators with up to 10,000 employees.

Thirty-five percent of operators identified rising food costs from suppliers as the top barrier to growth, with respondents expecting a 3% increase (compared to 2.7% in 2017). Meanwhile, 26% tagged higher labor costs, driven by cost-of-living increases and minimum wage laws, as the top barrier to growth. Between 2015 and 2018, wages in the US foodservices industry rose 5.3%, while the median wage in America rose 2.5%.

Changing consumer tastes are also vexing operators, as consumers increasingly demand foods that are all-natural, have no preservatives, are locally produced, or have no artificial ingredients. Plant-based alternatives are also gaining in popularity. The shifts in preferences are, however, difficult for many companies to keep up with.

“Although sentiment among foodservice operators is less optimistic than in previous years, they are proactively taking steps to counter the headwinds they face," said Manny Picciola, managing director at L.E.K. and report coauthor. "With the right strategies, operators will still be able to remain competitive and grow for the foreseeable future."

Foodservice operators are using a number of avenues to cut costs and grow sales. Reducing labor, limiting work hours, and leveraging automation is one method. Forty-three percent of respondents said they are reducing the number of full-time employees, while 35% are limiting the number of hours employees are asked to work. Twenty percent said they are using automation wherever they can.

With the rising cost of labor, companies are turning to pre-prepared foods to offset costs. Forty-one percent said the cost of labor is too high to prepare food in-house, so the prepared food category is slated to grow 17% year-over-year, up from 7% in 2017.

Companies are also looking to drum up new customers through delivery services and third-party apps such as UberEats. Three-quarters said they now offer online ordering – whether outsourced or in-house – and half expect to increase delivery offerings in the next three years.

Foodservice operators are also using social media to attract and retain customers. Instagram use has risen from 7% in 2017 to 34% today, while operators’ use of Facebook has dropped 7% to 57%. Twitter has also remained an important avenue, with brands such as Wendy’s and Popeye’s using the platform to playfully engage with Gen Z and millennials.

Finally, companies are responding to consumer preferences for healthier offerings with numerous menu changes. Since 2017, the number of foodservice operators offering meat substitutes has climbed six points to 48%, those with organic options has risen four points to 62%, and nutrient-rich options have increased four points to 68%.