Total Full Service Restaurant Reset

The December CPI report showed an encouraging trend in the overall inflation as headline CPI ticked down from 7.0% to 6.5%.

Less favorable than headline CPI, Food inflation remained high, particularly Full-Service Restaurant (FSR) CPI, still hovering near the historical high at 8.2%. 

Limited-Service Restaurant (LSR) CPI has been moderating since peaking earlier this year. After 2 years of running hotter than FSR, Limited Service CPI peaked early in 2022 and began to ease on a mix of price increases and return to discounting while Full Service restaurants continued higher before settling in at historical highs in the 8–9% range.

Going Against Consensus

As we get deeper into 2023 there is a developing consensus that as the economy deteriorates, we’ll see significant consumer trade down from Full-Service dining to Limited-Service like we did during prior recessions. Historically the biggest beneficiary of this dynamic was the Fast Casual segment as consumers traded similar quality at a lower price. However, I don’t expect that we will see the same kind of trade-down from full-service dining to limited-service as we did in past economic slowdowns for 3 reasons.

FSR Off-Premise Programs: The full-service restaurants that thrived during the past 3 years did so by executing on & off premise sales programs. FSR investments in technology and resources to execute off-premise programs got more full-service quality food to people who want it without dining in. Expect the more price-sensitive customers to find ways around the 3rd party fees (pickup instead of delivery) before they trade down to limited service.

Drop in Full-Service Restaurants: The estimated number restaurants closed in the pandemic is 10–12% of all restaurants, possibly more as restaurants continued to close even well after covid restrictions were lifted. The closure, however, didn’t hit all restaurant types equally. It was boom-times for many restaurants with a drive-thru and those that could adapt to curbside pickup, restaurants in rural and residential communities were often overrun — while Full-Service Restaurants, particularly those in traditional retail and work trade areas took the brunt of the closures. What netted out was a major shift in the mix of restaurants versus pre-covid. According to Safegraph “Places” point of interest database approximately 60% of restaurant units were described as Full Service, by the end of 2022 that had dropped 5 points to 55%. Likewise, sales figures by segment show a similar shift with Limited-Service Restaurants rising more than 3points in Revenue share. The numbers may not seem that large on the surface — but in an $800B industry the economics are huge — and the implications are significant. The disproportionate mix indicates that approximately 20% of all Full-Service Restaurants closed in the past 3 years. That is a fundamental shift in the supply/demand of the segment.    

Market for Food Service Employees: Payroll cost increases and scarcity of employees for QSR has received a lot of press largely because QSR is a leading employer of minimum wage positions. With less publicity, and perhaps more challenges Full-Service Restaurants require more service workers per store on average and they are typically higher skilled than the average limited-service worker. Scarcity of both front & back of house workers constricts capacity for full-service restaurants by both changing open hours, and limiting dining room capacity.

The game board has been reset – how closely are you paying attention?

The current disruption is not all bad news. It’s a harder environment, precision matters more and it’s time to re-evaluate where you stand in each market. For the past 25 years the US Restaurant Industry has been operating in a state of restaurant saturation with fairly predictable consumer patterns within markets. When the game board got flipped over in 2020, the pieces did not emerge in the same spots. Those that take the opportunity to reassess their local positioning with different assumptions will see a landscape of opportunities emerge. Just like the industry we serve, we had to rethink everything, examining every data source and analytical approach to adapt to analyzing wild changes in demand patterns that rendered old methods useless. What we emerged with was a new approach that we wouldn’t have invented if the urgency hadn’t existed. I believe the Restaurant Industry is in the early stages of a similar transformation and we are excited to be a central part of it.

About the author: Michael Lukianoff is CEO of #Extropy360, a Decision Intelligence company specializing in hyper-local demand analytics for the restaurant industry. Lukianoff is a pioneer in analytics with more than 2 decades of innovation in price, promotion & geo-segmentation analytics for brick & mortar retailers.

Note: The original article ran in Data Driven Investor, a Medium Publication accessible here https://medium.datadriveninvestor.com/beyond-restaurant-inflation-34b5f2aa8acb

*Special thanks for #Safegraph for exclusive access to “Places” comprehensive Point of Interest database as a key part in the analysis.