The State of the Restaurant Industry: Minimum Wage Hikes, Inflation, and Competition Squeeze Profits

Workers fill food orders at a Chipotle restaurant in San Rafael, Calif., on April 1, 2024. Justin Sullivan/Getty Images

U.S. restaurants have been caught between minimum wage hikes and rising food material costs on one side and growing competition on the other, squeezing profit margins.

Recent financial reports show a slowdown in restaurant revenues and a rise in labor and materials costs. These two trends have resulted in lower gross margins, disappointing industry investors.

“Rising labor and food costs continue to pressure profit margins. Notably, labor costs now consume 40 percent to 45 percent of gross sales, up from 30 percent to 35 percent,” Philadelphia-based restaurateur Aaron Anderson told The Epoch Times.

Chipotle is a good example of the problem the industry has been facing. The popular Mexican-food restaurant chain reported year-on-year sales growth of 13 percent in the third quarter, below the 18 percent growth in the second quarter.

Meanwhile, food, beverage, and packaging costs reached 30.6 percent of total revenue, up from 29.7 percent a year earlier.

“The increase was due to inflation across several ingredient costs, primarily avocados, and dairy, higher usage of ingredients, as we focused on ensuring consistent and generous portions, and a protein mix shift from the success of our Smoked Brisket limited-time offer,” the company stated in its third-quarter press release.

Then, there are the persistently high labor costs, driven by minimum wage hikes. Labor costs accounted for 24.9 percent of Chipotle’s total revenue in the third quarter, which aligns with the third quarter of 2023. California-based restaurants have been hit the hardest, as restaurant owners have paid for the wage hike through lower profit margins.

Restaurant Brands International is another case in point. The parent of Burger King, Popeyes Louisiana Kitchen, and Firehouse Subs reported revenues and earnings that missed analysts’ expectations. Company-wide sales rose at an annual rate of 3.2 percent, while comparable sales were down by 0.7 percent at Burger King. In addition, data from Placer.ai show a decline in Burger King’s foot traffic for September.

Yum Brands is a third case. The parent of KFC and other franchise chains reported a 2 percent drop in worldwide same-store sales, with KFC’s U.S. sales falling by 5 percent, the third consecutive quarterly loss this year.

The fourth case is Cheesecake Factory, which reported customer losses at the company’s core stores, while there was only a slim gain of 1.6 percent in comparable sales, which were generated by 4.5 percent menu price hikes.

But there were some exceptions, too, such as Brinker International, which reported solid financial results across all its franchise segments, with Chili’s reporting a 14.1 percent rise in same-store sales.

Then there’s Shake Shack, which had a solid quarter. Promotions and flat traffic slightly offset the 6 percent increase in menu pricing, leading to 4.5 percent comparable-store sales increase and an expansion in the earnings before interest, taxes, depreciation, and amortization margin.

“We’ve seen a wide range of performance among restaurant chains in recent months, with some chains seeing strong visitation trends and others struggling amid competition from the grocery, superstore, and convenience store channels,” R.J. Hottovy, head of analytical research at Placer.ai, told The Epoch Times.

“Some restaurant brands like Chipotle, CAVA, and Sweetgreen continue to drive visits through menu innovation, including new proteins and flavors. Other chains like Chili’s are winning with emphasis on value.“

He notes McDonald’s as an example of a chain driving visits with value and innovation, including the $5 Meal Deal and Collector’s Meal this past quarter.

“Given that we continue to see promotional activity and other discounts from grocers and other food retailers, we'll likely see a very deal-driven consumer and the continuation of the restaurant value wars into 2025,” Hottovy said.

Equity analyst John Zolidis, a long-time industry follower, is mostly neutral on the sector but likes Brinker International.

“We remain bullish on shares of Brinker International following the September quarter results,” he said in a research note.

“The company’s efforts to improve execution in the stores, simplify the menu, and drive awareness with marketing have combined to produce two consecutive quarters of double-digit same-store sales gains underpinned by a remarkable positive inflection in traffic.”

Cathy Black, adjunct professor of marketing at Long Island University Post, is concerned about the growing competition in the industry.

“Competition is cutting both ways,” she told The Epoch Times. “Across franchises, competition takes the form of value proposition offerings like the $5 Meal Deal from McDonald’s. Within franchises, it takes the form of ‘cannibalism,’ as new stores compete with old stores for the same consumer dollars.”

Bassem Mostafa, lead market analyst and founder of Globemonitor Market Research Agency, sees profitability remaining a critical concern for the industry.

“Only 27 percent of operators anticipate improved profitability this year, highlighting ongoing challenges such as increased labor and food costs,” he told The Epoch Times. “Almost all operators cite these rising costs as substantial issues impacting their bottom line, with labor costs affecting 98 percent and food costs concerning 97 percent of operators.”