US Restaurant Industry Sees Easing Inflation Bringing Hope in 2025, But Uncertainty Lingers
The US restaurant industry is navigating a volatile environment as we head into the third quarter of 2024, with many companies struggling to meet expectations regarding same-store sales and earnings per share. Despite these challenges, most have shared optimistic outlooks on recent sales trends.
According to Jeffrey A. Bernstein, a Barclays analyst, the key focus remains the consumer outlook, which has been unpredictable. On a positive note, unemployment rates remain near record lows, and wages continue to rise, contributing to a healthy increase in real disposable income. Inflation has also eased, allowing the Federal Reserve to slow down its rate changes.
However, the analyst warned that the cost of living, including high rent and basic expenses, continues to pressure consumers. Consumer confidence has remained lower than pre-pandemic levels, and many restaurants are working to improve traffic by offering greater value in response to inflation concerns.
One area where optimism is evident is in commodity prices, excluding coffee, which have shown signs of normalization. In December 2024, commodity prices saw a year-on-year increase of around 16%, mainly driven by coffee prices. This has led restaurants to expect mid-single-digit inflation in 2025, assuming current prices hold and the industry is hoping for a more stable cost environment that can support margins amidst uncertain sales projections.
Labor costs remain a concern, with wage inflation having slowed from the peaks seen during 2021 and 2022. In December 2024, year-on-year wage increases were reported at 10.3%. To mitigate these costs, restaurants are easing aggressive price hikes seen in recent years and moving towards smaller price increases as commodity and labor inflation stabilizes.
The analyst has upgraded both Shake Shack Inc (NYSE: SHAK) and Dutch Bros Inc (NYSE: BROS) to Overweight from Equal Weight. Conversely, Bloomin' Brands Inc (NASDAQ: BLMN) and Dine Brands Global Inc (NYSE: DIN) have been downgraded to Equal Weight from Overweight.
The analyst's upgrade of Shake Shack and Dutch Bros reflects their strong sales trends and ability to maintain price increases despite easing commodity inflation. The downgrade of Bloomin' Brands and Dine Brands, on the other hand, is attributed to their weaker same-store sales growth and inability to pass on higher costs to consumers effectively.
Restaurant Industry Trends in 2025
As we look ahead to 2025, several trends are expected to shape the US restaurant industry. One key trend is the continued focus on value offerings by restaurants in response to inflation concerns. Many chains are introducing promotions and loyalty programs to drive traffic and increase customer retention.
Another area of growth is in digital ordering and delivery. Restaurants are investing heavily in online platforms and mobile apps to improve the customer experience and increase sales. The COVID-19 pandemic has accelerated this trend, with many consumers now preferring the convenience of ordering food online or through mobile apps.
Restaurant Industry Challenges in 2025
Despite the optimistic outlook, several challenges persist for the US restaurant industry. One major concern is labor costs, which continue to rise due to higher wages and benefits. Restaurants are struggling to maintain profit margins amidst these increased costs, making it essential for them to optimize their menu pricing and reduce waste.
Another challenge is consumer confidence, which remains lower than pre-pandemic levels. This has led restaurants to focus on offering value and convenience to drive sales and customer loyalty.
Restaurant Industry Outlook in 2025
The US restaurant industry is expected to experience mid-single-digit inflation in 2025, assuming current prices hold and the industry is hoping for a more stable cost environment that can support margins amidst uncertain sales projections. This is driven by easing commodity prices and slower wage inflation.
Restaurants are adapting to these trends by introducing value offerings, investing in digital ordering and delivery platforms, and optimizing menu pricing to maintain profit margins. Despite challenges, the industry remains optimistic about its prospects in 2025, with many chains expected to report strong sales growth and improved profitability.
Conclusion
The US restaurant industry is navigating a complex environment as we head into 2025. While easing inflation brings hope, uncertainty lingers amidst rising labor costs and lower consumer confidence. Restaurants are responding by offering value and convenience, investing in digital platforms, and optimizing menu pricing to maintain profit margins.
As the industry continues to evolve, it will be essential for restaurants to remain agile and adaptable to changing trends and consumer preferences. With a focus on value, convenience, and innovation, the US restaurant industry is poised for growth and success in 2025.