2018 hard to stomach for US eateries, and 2019 looks worse

CHICAGO • It is not going to get much easier for the United States' restaurant industry.

After facing stagnant sales and weak customer traffic this year, US restaurants will encounter more headwinds next year, including rising food and wage costs, which may stall profit and hinder efforts to jump-start growth.

Even the industry stalwarts are dealing with such issues in a fiercely competitive and increasingly crowded field.

Starbucks Corp is shuttering some US locations amid over-saturation worries.

McDonald's Corp, the world's largest restaurant company, has been tweaking its value offering to stay relevant in the price wars and expanding delivery with Uber Eats to spur sales.

It was not all doom and gloom this year. Amid a stock market rout, restaurant stocks fared better than the broader market, bolstered by a couple of standouts like Domino's Pizza and Chipotle Mexican Grill.

Chipotle, while far from reclaiming its position as a Wall Street darling, is beginning to recover following a string of food safety issues that damaged the brand.

  • 5.4%

    Estimated increase in average food costs next year.

Here is a look at issues - both obstacles and opportunities - facing the restaurant industry next year.

1. DELIVERY AND PACKAGING

Americans are demanding delivery, and it is forcing big chains to get into the game. That can mean costly technology investments.

Revenue from orders through third parties is often shared, making it more difficult to turn a profit on digital customers. It also means delivery does not necessarily make sense for low-cost items.

Challenges aside, it is hard for restaurant chains to ignore a service that more customers are demanding. Starbucks tried delivery this year in Florida with Uber Eats, and is now expanding it to almost a quarter of its domestic company stores.

Delivery is attractive to companies because to-go orders usually mean customers spend more.

As more orders shift online, restaurants are working to improve takeout and delivery containers so fries do not arrive soggy. IHOP has revamped its pancake containers to have side ventilation that traps in heat (but not moisture). It stays fresh for 45 minutes, said parent company Dine Brands Global.

Shake Shack is also trying out some new to-go packaging. "Burgers and fries and shakes were not intended to be eaten half an hour after they were cooked," said chief financial officer Tara Comonte.

2. CUSTOMER DATA

Delivery, especially from third parties such as Uber Eats and GrubHub, is creating a massive log of diner data. That valuable information has become a source of tension between restaurants and the delivery companies over who owns the information.

One solution is to take a stake in the company, like Pizza Hut owner Yum Brands did earlier this year with an investment in GrubHub.

"We are very early in the days of mining the customer data that we're getting," said Yum chief executive officer Greg Creed.

More data means chains can carefully curate advertisements to lure customers back, and the biggest companies, like McDonald's, are likely to have the most bargaining power in getting access to it.

The information may also lead to better menus as restaurants tailor their food according to "real-time shifts in eating patterns", said RBC Capital Markets analyst David Palmer.

3. FOOD INFLATION

The value wars could start to sting next year. After cashing in on cheap ingredients, which have helped eateries advertise steep discounts and a slew of US$1 (S$1.40) deals, 2019 may see an uptick in food inflation.

Beef, chicken and cheese could be more expensive, according to Telsey Advisory Group analyst Bob Derrington. Next year, average food costs may be up about 5.4 per cent, he estimated.

Olive Garden owner Darden Restaurants Inc recently noted that food costs would "tick up" in 2019. The company is a big buyer and seller of beef and other proteins with its LongHorn Steakhouse and Capital Grille chains.

4. LABOUR INFLATION

With unemployment low, higher wages will weigh on profit margins, according to Robert W. Baird & Co analyst David Tarantino, who cited minimum-pay hikes and investments in other employee benefits as contributors to the added pressure.

Those with a big concentration of company-owned locations will be the hardest hit: Darden, Chipotle and Starbucks.

While some companies are shelling out big bonuses to attract workers, Taco Bell is throwing parties with free tacos and swag to lure potential hires.

Companies including Dunkin' Brands Group and Applebee's have said they will keep labour costs in check by making things easier for kitchen staff.

Labour is the "number one challenge" for franchisees, Dunkin' Brands chief executive David Hoffmann said in October.

5. TAX CUTS OFFER HOPE

Fast-food customers tend to be price sensitive, going to chains in search of filling meals on the cheap.

Economic forces like higher gas prices or cheaper groceries can drive traffic away from the industry.

And when Americans have more cash in their pockets, they eat out more. That is a good thing for McDonald's, Taco Bell, Starbucks and the rest of the industry.

While companies have benefited from the tax cut championed by US President Donald Trump, the advantages are expected to start reaching consumers, and particularly lower-income shoppers, next year, according to Wells Fargo & Co.

This could boost chains like Jack in the Box, as households making less than US$75,000 (S$103,000) a year see higher tax returns.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on December 29, 2018, with the headline '2018 hard to stomach for US eateries, and 2019 looks worse'. Print Edition | Subscribe