California’s Restaurant Industry Performance in 2023 and the Outlook for 2024
The California restaurant industry as always is continuing to be challenging.
There are many restaurants facing challenges and have not been able to fully rebound since Covid. Additionally, many restaurants whose life line was PPP money have used up their funds and are finding that they are unprofitable as their increased operating costs including labor, food and beverage costs, utilities, insurance, etc. are exceeding their ability to increase menu prices. In other words, if they increase their menu prices too aggressively, they will price their customers out of the market as the customer is demanding price value. In 2023, all food prices have increased at least 5.9+ percent.
The California state legislature is pushing for $20 per hour minimum wage for fast food workers who do not earn tips to tentatively occur in April 2024. Although this increase is aimed at fast food operations with 60 or more units this increase will spill over to the entire California restaurant industry and will put pressure on all California restaurants to increase their minimum wage structure significantly. The exceptionally low unemployment rates continue to make it difficult for restaurant owners to staff their restaurants adequately to meet customers’ expectations for good service.
The National Restaurant Association says that the industry is fragmented with take out, delivery, drive thru and curbside sales performing at above pre-covid levels and conversely on-site restaurant traffic remains down. Overall, IFMA or the International Foodservice Manufacturing Association is expecting real foodservice growth to have a steep drop off in 2023 and 2024. IFMA predicts that the post-pandemic growth phase is over, and the industry is back to growing at a relatively low rate. Additionally, the economy is plagued with high interest rates that have increased of over 5 points in the past 12 months. This makes it tough for restaurant buyers to obtain reasonable interest rate loans for purchases as well as for operators who want to borrow funds to do the necessary remodeling of their plants when required.
Regionally in California there are some extraordinary challenges.
The homelessness, crime and drugs on the street in San Francisco have tarnished its reputation. This has resulted in turning off the tourist and convention markets which were vital for the success of this region. Anchor Brewing Company which had been in business for 127 years closed as well as La Cocina Municipal Marketplace and the original Philz Coffee location in the Mission district. The downtown shopping district, the financial district, the South of Market district, and other parts of the city including the Mission district have been negatively impacted by the challenging factors mentioned above.
Other major downtown areas in the state including Los Angeles, San Diego, San Jose, Oakland and Sacramento have also been negatively impacted by the decline of the office worker population. This is due largely due to many office workers working from home. Also, the homeless problem in downtown areas contributes to people not wanting to travel and utilize restaurants and entertainment in those areas. In Los Angeles County the Writers and Actors Guild strike had a big negative impact in this region and throughout various parts of Southern California.
The National Restaurant Association took a recent survey of restaurant owners throughout the country and here are the results.
Only 16% of the nation’s restaurants expect profits to increase in 2023, with 50% bracing to make less money than they did last year because of soaring expenses. The survey also designated a third inflationary culprit to add to the Big 2 of labor and food costs: energy expenses. The research revealed that operators are adjusting to the tougher cost environment in dramatic fashion. More than a third, for instance, have delayed expansion, and 13% have stopped using third-party delivery services, a notoriously high expense.
The major takeaway of the survey, according to the association, is that operators are mildly optimistic about 2023 sales but are braced for significant pressure on margins. Roughly 9 out of 10 operator-respondents described soaring food and labor costs as significant challenges for the next 12 months. Almost two-thirds (63%) designated energy and utility costs as a deep concern. Costs will pose a significant challenge, the National Restaurant Association says. Considering the total cost picture, about a third (34%) of restaurants expect profits to flatten this year, and half anticipate a drop in income. The association noted that the industry has adjusted significantly during the ongoing pandemic to new market realities such as sky-high inflation. It found that … 87% of U.S. restaurants have raised menu prices; 32% are now closing on days they were formerly open; 48% have trimmed hours on days when they are open; 38% have postponed planned development because of high interest rates.
In general, the findings underscore assertions that inflation has supplanted a shortage of potential hires as the industry’s big problem. Yet the association found that 63% of full-service restaurants and 61% of limited-service places are operating with fewer employees than are needed to accommodate guests. Nevertheless, 19% of the 3,000 respondents indicated that they are holding off on recruitment, and 57% said they are poised to lay off staff during the second half of 2023 if a recession materializes or business conditions otherwise deteriorate. Nearly a third (32%) reported they’d already eliminated positions, and 21% revealed plans to invest in more technology.
Positive direction that is occurring in the California restaurant sales market that will help to expand the buyer pool for food and beverage sellers continuing into 2024
- The baby boomer population is continuing to exit the business because of the physical and financial demands of the food and beverage business. This provides opportunities for potential buyers.
- There is a large segment of the tech world and other industries that have been laid off in the past year and some are joining the food service buyer pool.
- There is a continual diversified buyer pool which consists of the following:
- The existing operator market that wants to expand,
- The restaurant wan a bee coming from other industries that think that the restaurant industry is for them and frequently they pair up with a partner that has food and beverage industry experience,
- Immigrants pouring into the state that only know the restaurant business and want to become entrepreneurs,
- The general population that looks at the restaurant business as a glamorous business and sees dollar signs (ka ching) when they view the restaurant as a customer (little do they know!),
- Former restaurant employees that want to be their own boss and control their future destiny and not have their future dictated by someone else and
- A family member who succeeds an aging relative.
A summary of what the restaurant industry in California will potentially face in 2024.
Operators will face the following challenges as indicated below.
- A continued shortage of employees because of a continued low unemployment rate. There will be many job openings for each employee so applicants will have many jobs to choose from.
- Continuing high operating costs for labor, food & beverage, utilities, insurance, and other operating expenses. There will be a spillover effect of the increased proposed $20 hour minimum wage for fast food operations of 60 or more units putting pressure on all food and beverage facilities to increase their minimum wage. Food-away-from-home prices are predicted to increase 7.1 percent, with a prediction interval of 7.0 to 7.2 percent. Food prices are expected to continue to decelerate but not decline in 2024. In 2024, all food prices are predicted to increase 2.9 percent, with a prediction interval of -0.9 to 6.8 percent.
- Continued pressure by the consumer for price value which will limit the operator’s ability to offset increased costs dollar for dollar with increased menu prices thereby further eroding profit margins.
- Continued high interest rates and construction costs which will limit the operator’s ability to remodel their existing units or expand to new locations.
Irrespective of the above the buyer demand for food and beverage businesses will continue to be strong for the reasons indicated above.
Although the restaurant industry continues to be challenging the demand for eating out is still strong as people continue to have a desire to experience a variety of different types of foods and beverages as well as to eat out as a form of entertainment.
Restaurant Realty Company was founded by Steven D. Zimmerman in the San Francisco Bay Area in 1996. Since inception the company has developed into the largest California restaurant brokerage specializing in sales, acquisitions and leasing of restaurants, bars, nightclubs, other types of food service businesses (convenience stores, catering companies, commercial kitchens, inplant feeding facilities, food trucks, etc.) and related commercial buildings. We have completed transactions in over 80% of all California cities and in over 70% of all California counties and we have representation throughout the state including the San Francisco Bay Area, Sacramento, Central Coast, Los Angeles, Orange County and San Diego markets.