It’s not going to get much easier for the restaurant industry.
After facing stagnant sales and weak customer traffic in 2018, U.S. restaurants will encounter more headwinds next year, including rising food and wage costs, that 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 U.S. locations amid oversaturation 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 wasn’t all doom and gloom this year. Amid a stock market rout, restaurant stocks fared better than the broader market, bolstered by Domino’s Pizza Inc. and Chipotle Mexican Grill Inc.
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.
Here’s a look at some issues facing the restaurant industry in 2019.
Americans are demanding delivery, and it’s 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 doesn’t necessarily make sense for low-cost items.
Challenges aside, it’s hard for restaurant chains to ignore a service that more and 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 (Applebee’s and IHOP say the average check is “significantly” more). And it’s not just for the dinner crowd, breakfast chain Cracker Barrel Old Country Store Inc. is adding more vans to its fleet of delivery vehicles as it expands catering.
Delivery, especially from third parties such as Uber Eats and GrubHub Inc., 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 to get around this: Take a stake in the company, like Pizza Hut owner Yum! Brands Inc. did this year with an investment in GrubHub.
“We are very early in the days of mining the customer data that we’re getting,” Yum CEO Greg Creed said.
More data means chains can carefully curate ads to lure customers back, and the biggest companies 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.
The value wars could start to sting in 2019. After cashing in on cheap ingredients, which have helped eateries advertise steep discounts and a slew of $1 deals, 2019 may see an uptick in food inflation. Beef, chicken and cheese could be more expensive, according to Bob Derrington, an analyst at Telsey Advisory Group.
Next year, average food costs may be up about 5.4 percent, he estimated.