Industry Forecast

Each year, the Industry Forecast provides valuable insights into the year ahead based on publicly available and proprietary research.


2024 Foodservice Industry Forecast: Back to the Future

What’s old is new again in the foodservice industry as operators and the supply chain prepare for 2024.

When COVID-19 hit in early 2020 and brought the restaurant industry to a halt, most people had plenty of time to wonder when things would get back to normal. Was 2023 that year?

“COVID-19 changed the world, and it certainly changed the restaurant industry in tandem with it. Despite the host of challenges, 2023 was probably the most normal year for the industry since 2019,” says Hudson Riehle, senior vice president for the National Restaurant Association’s (NRA’s) Research and Knowledge Group. “The consumer still prioritized restaurant spending. It’s an environment where they want to allocate dollars toward restaurant experiences and meal solutions away from home.”

Despite myriad challenges, U.S. gross domestic product (GDP) is projected to grow 2.1% in 2023, per the U.S. Bureau of Economic Analysis and the NRA. That is the same rate of growth as last year and 0.2% less than 2019. Next year, though, projections call for an even smaller 1.0% growth rate.

At the same time, after some wild swings in recent years, the forecast calls for tightening among consumers’ disposable personal income (DPI). DPI grew by 6.2% in 2020, which was a 2.7% increase from 2019. DPI moderated considerably in 2021, growing by 1.8% before declining 6.1% in 2022. DPI projections for 2023 and 2024 call for increases of 3.4% and 1.8% respectively, per data from the U.S. Bureau of Economic Analysis and the NRA.

The good news is that inflation moderated in 2023. After spiking at 8.0% in 2022, per the U.S. Bureau of Labor Statistics, inflation was down to 4.4% as of September 2023. While that’s an absolute improvement, 2023’s inflation rate was more than double 2019, when it was 1.8%. In other words, the U.S. Federal Reserve will likely keep interest rates higher until inflation gets a little lower.

What does this mean for the foodservice industry in 2024? “For the industry moving into 2024, it will certainly post overall national sales gains again,” Riehle says. “But the expectation is the sales growth of the industry will moderate in tandem with the national economy.”

And data from the NRA and other industry sources continues to back up that line of thinking. In its “State of the Restaurant Industry 2023 report,” released earlier this year, the NRA projected annual restaurant industry sales would grow to $997 billion. That would translate into a 6.4% growth rate that would shrink to 1.1% when factoring out inflation.

Similarly, Chicago-based Datassential projects consumer spending at restaurants and other foodservice operations will total $845.7 billion in 2023, up from $790.0 billion last year. (It’s important to note that Datassential’s numbers do not include alcohol sales.) For 2024, Datassential projects consumer spending will reach $889.7 billion. Most of this growth, though, can be attributed to inflation. Looking specifically at the Datassential projections, which the company released earlier this year via a webcast, after factoring out inflation, industry sales will grow only $0.6 billion in 2023 and $1.8 billion in 2024 in real terms.

Still, real growth is real growth. As such, there’s no doubt that consumers continuing to spend at restaurants represent a ray of necessary sunlight piercing a seemingly never-ending series of operational storm clouds that operators must weather in the form of higher food costs, countless labor challenges, changing customer preferences and more. “From the operator perspective, those ripple effects of COVID-19 continue to play out in real time month after month,” Riehle adds. “The challenges can be quite varied by segment, geography and more. Operators need to adjust.”

Operational Pressures

While labor tends to dominate the conversation, recruiting employees was the second most pressing business challenge operators face, per a September 2023 Restaurant Industry Tracking Survey from the NRA. Topping the list was increasing sales volume. The economy, labor costs and food costs/availability were third through fifth on the list.

Posting a 7.7% increase through September of 2023, menu prices grew 1.5% faster than grocery store prices, per the U.S. Bureau of Labor Statistics; this is another factor that undoubtedly impacts consumers’ ability to spend at restaurants. Interestingly, restaurant menu prices have been flat compared to 2022 yet grocery store price increases declined 5.2% compared to 2022. Going back to 2019, menu prices increased 3.1%, and grocery store prices were up 0.9%.

David Portalatin, senior vice president, food industry advisor for Circana.David Portalatin, senior vice president, food industry advisor for Circana.While the year-over-year numbers do a good job of illustrating some of the pricing challenges that operators face, taking an even bigger step back can be more telling. An increase in menu prices is up “closer to 25% or 30% over four years. So, inflation remains a big headwind for the industry,” says David Portalatin, senior vice president, food industry advisor for Circana. (Earlier this year, market research firms Information Resources and The NPD Group came together to form Circana.)

Pricing pressures manifest themselves in multiple ways, most notably, labor. “With the industry being so labor intensive, the typical labor costs for a restaurant operator have increased substantially,” Riehle says. “The typical pretax profit runs from 4% to 6% of sales. But when you look at labor costs, it has remained substantially elevated compared to industry growth rates. As a result, some table service concepts are moving to more of a quick-service operating model, and that’s because of labor costs. The traditional model can’t be sustained when your labor costs are so much higher.”

Still, some believe operators could be in line for a little relief when it comes to labor. “If anything, I think we start to work toward an environment where labor inflation turns from a stout headwind to being relatively neutral, with minor exceptions (like California’s recent $20 per hour FAST Act compromise),” says Sean Dunlop, CFA, equity analyst for Morningstar Inc. “Hourly wage inflation in leisure and hospitality has fallen dramatically over the past few months, though it remains elevated relative to historical benchmarks at 5% annually. I’d expect that to continue to trend lower, as we’re now within 2% of pre-pandemic industry staffing levels. We don’t expect an outright recession in the U.S. at Morningstar but do expect a marked slowdown in consumption spending, which could mean that we see an uptick in unemployment in consumer-facing sectors and a commensurately less tight labor market for restaurants.”

Regardless, operators will continue to lean into technology more — both in the front and back of the house. “That will continue to be of value to restaurants. You have to be as efficient as possible with the labor you have because we are not likely to see a big increase in the supply of restaurant workers any time soon,” Portalatin says. “That may lead to using more value-added products from suppliers. And any equipment that’s faster or easier to use will be of value to operators.”

Following a key trend from recent years, technology will play a bigger role in shaping the customer experience, thus defining a concept’s brand promise. In February of 2020, digital accounted for 5% of all restaurant orders placed, per Circana data shared by the NRA. As of August of 2023, though, digital accounts for 15% of all orders placed. Among QSRs, digital orders increased to 16% as of August 2023 — from 7% in February 2020. And among full-service restaurants, digital orders swelled to 10% of all orders as of August 2023, up from 3% in February 2020.

But processing transactions represents just the tip of the digital iceberg. “Digital is moving beyond transactional. It’s the platform where we create loyalty and value. Oftentimes, the better performing operators are the ones that have the deeper digital engagement with their customers,” Portalatin notes.

Rewarding customer loyalty will become a business imperative for many restaurants as they strive to address their revenue concerns. “Operators are finding new ways to reward customer loyalty,” Riehle says. “As that income growth tightens, the typical consumer does become more price conscious when it comes to that restaurant experience.”

With the digital experience becoming more important to the industry as a whole, one operator segment seems to benefit from this development more than others. Year to date, overall restaurant visits have declined 0.5%, Portalatin notes, but visits to QSRs increased by 2%. “That really indicates the overall direction of the industry,” he adds. “We are on this long-term structural shift in the industry toward more quick-service restaurants. And that’s going to continue,” Portalatin adds. “We have more quick-service restaurants today than we did pre-pandemic. It was a trend that was already in place pre-pandemic. The momentum is on the QSR side. Moreover, that QSR growth has been concentrated around the morning meal and afternoon or between meal engagements.”

As of August 2023, consumer traffic during the morning daypart increased 1.6% compared to the same month in 2019, per Circana/CREST data provided by the NRA. Late-night snack traffic increased 1.7% during that same period. Conversely, lunch and dinner traffic declined 1.8% and 1.4%. “From the restaurant operator perspective, we drive home the point of how important it is for them to know not only the demographics of their trading area but also the consumer demographics and why they are using their brand,” Riehle says. “Demographics is destiny.”

Growth in the morning and late-night snack dayparts points to a larger shift in consumer behavior, one fueled by lifestyle changes. Prior to the pandemic, maybe 10% of consumers worked from home, Portalatin estimates. That’s grown exponentially since then. “There are all kinds of ways to earn income without traditional jobs. And those of us who have traditional jobs are not as beholden to the office hours as we once were. People are able to live in the moment,” Portalatin points out.

Many consumers tend not to view dining occasions through the daypart lens of the past. “Notions of time of day, like when is lunch or what is lunch comprised of, are up for redefinition. We are seeing a lot more fluidity in consumer dining occasions,” Portalatin says. “They just don’t have the same sway over our lifestyle as they used to.”

Because of this, there’s less incline and decline among the peak and shoulder QSR periods, which report increased traffic during the mid-morning, mid-afternoon and, yes, even late-night periods. One telling example is the performance of brunch. “Brunch is a relatively small daypart; it’s less than 2% of all occasions but until the second quarter, it was up 14%,” Portalatin notes.

One byproduct of these consumer shifts is more QSRs and fast-casual chains designing and developing units that emphasize the off-premises consumption of their food. Earlier this year, for example, Chicago-based Portillo’s updated its growth projections, saying the chain could hit 920 units systemwide over the next 20 years, of which 120 would be off-premises-only locations. Full-service operators, like P.F. Chang’s, are getting into the act, too. The Asian-themed chain has to-go-only locations in multiple states.

In other words, off-premises-only locations represent a trend with some staying power — and for good reason.

“I think these have been broadly successful,” Dunlop says. “At least in the quick-service space, dine-in traffic has been in structural decline for more than a decade, with consumers shifting spending toward takeaway, drive-thru, and increasingly the delivery channel. Consumers are accustomed to receiving what they want across multiple mediums — we certainly see this in the retail space — so brands do well to make themselves accessible insofar as they can. My meal occasion with Chipotle in downtown Chicago, for instance, might look quite a bit different than it would with my family. I want the brand to provide both.”

As a proof point, Dunlop references the success of Chipotle’s Chipotlane format units, which have a mobile-order only drive-thru. Chipotlanes are available in about 15% of total stores and are featured in 70% to 80% of new builds. But the restaurants with Chipotlanes “feature higher average unit volumes, higher digital sales mixes, and better profitability,” he adds.

Mobility Matters

The foodservice industry continues to see movement on several fronts, which is positive.

“We are opening new restaurants,” Portalatin notes. “The restaurant count is about 1% less than 2019 but it’s still up 2% year over year. So, there is some positive momentum out there.”

Increased consumer mobility, be it return to the office or more travel for leisure or business, will also impact some operator segments in the coming year. For example, Tuesday through Thursday tend to be busier days for restaurants in urban areas and business districts, Portalatin adds. Lodging and entertainment venues are other examples of segments that could benefit from increased consumer mobility. “The corporate dining segment continues to grow, and we expect to see outsized growth there,” Portalatin says. “These are smaller segments — but important ones to note when you are looking for where the year-over-year growth is coming from. All of this is driving more on-premises dining occasions. This is where the real recovery is. People want to enjoy differentiated dining experiences.”

At the same time, it’s important to note that industry recovery has varied considerably by segment, geography and more. Nowhere is that difference more pronounced than in business districts and city centers. Those areas traditionally relied on a heavy lunch crowd and after-work traffic to generate business. But most major cities now hover between 50% to 60% of pre-pandemic traffic levels during the week, per various studies, which impacts how foodservice operators go to market. “Even if you are in the office 3 or 4 days a week, your potential market is decreased by 20% to 40%,” Riehle notes. “That’s why those operators have had to change their business models. This can include changing hours of operation, emphasizing off-premises sales more and using technology more.”

Hudson Riehle, National Restaurant AssociationHudson Riehle, National Restaurant AssociationEmbracing these types of challenges, though, can ultimately create a more resilient industry. “There’s a host of opportunities going forward in terms of creating a new model and new strategy to be the most efficient and effective,” Riehle says.

Bottom line: Will 2024 be a better year for restaurants? “It’s similar to 2023. We saw a little deceleration since the summer, but I am expecting some improvement in the fourth quarter,” Portalatin says. “But this would still keep us 4% less than 2019. We still have a way to go.”

Adds Dunlop, “I think 2024 will shape up to be a challenging year for restaurants. Consumers continue to spend a larger share of their wallets on dining out but are spending fewer meal occasions at restaurants — in other words, paying more and receiving less. That’s not a tenable equilibrium forever, and I’d expect an increasingly price-sensitive customer to benefit from an increasingly promotional environment in 2024 as brands compete for declining traffic share. The industry has emerged from the pandemic leaner and more competitive than ever, but I don’t expect a full margin recovery for two to three years.”

While much has changed, a few things remain constant for the industry. One is the relationship between employment levels and restaurant industry activity. “When employment growth is positive, there’s less time at home for meal prep, and there’s more money to support restaurant use,” Riehle says.

Second is that convenience and socialization remain prime drivers of restaurant use. “All of these societal trends impact how the restaurant industry performs. As a result, it is a true national industry that reflects the societal and economic trends as they develop,” Riehle adds.

2024 will be a good year for restaurants if …

“There are no major external social issues which impact consumer confidence and consumers’ ability to spend at restaurants. The best surprise is no surprise. The operator and supply community have to have good intelligence in real time to be able to adapt. There’s no substitute for having good data in real time to make good business decisions to adapt to these changing business conditions.”

— Hudson Riehle, National Restaurant Association

“We don’t have any major external disruptions. We need the unemployment rates to hold steady and disposable income to continue to grow moderately.”

David Portalatin, senior vice president, food industry advisor for Circana

“We skirt a recession in the U.S., inflation comes down on its own and the Federal Reserve is able to start cutting its fed funds rate (or at least thinking about it). Consumer sentiment needs to tick back up, and that probably requires some cocktail of better job security, lower revolving credit balances, a shot in the arm for the sluggish housing market and maybe a rally for risky securities. Seeing a bit of organic disinflation would get us a good chunk of the way there.” 

— Sean Dunlop, CFA, equity analyst, Morningstar Inc.

An Analyst’s Take on the Industry

Sean Dunlop, CFA, equity analyst, Morningstar Inc.Sean Dunlop, CFA, equity analyst, Morningstar Inc.Sean Dunlop, CFA, is an equity analyst on the consumer team for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar Inc. He covers restaurants and e-commerce stocks.

Q: From labor issues to rising food costs, and too many other factors to list here, restaurants have had to deal with challenges across the board this year. How well has the industry fared?

A: It depends a lot on where you’re sitting. For large, publicly traded restaurateurs, things are largely business as usual. At the end of the most recent quarter, our coverage sat about 65 basis points (0.65%) behind pre-pandemic restaurant margin levels despite both hourly labor and commodity costs spiking 26% to 27% since February 2020. With strong comparable store sales (5.5% to 6% annualized on a 4-year stacked basis), many are generating record EBITDA at the store level, helping offset rising construction and financing costs. The picture looks a lot less rosy for concepts which skew heavily toward in-restaurant dining, and independent restaurants have struggled to pass through proportionately higher cost increases without the negotiating leverage that thousands of stores beget.

Q: How are high interest rates impacting chain operators’ growth plans? 

A: For the large, public restaurants, it’s permitting that has been posing a larger constraint over the past few quarters. It’s almost certain that higher interest rates will affect growth aspirations at some point, particularly for restaurants with softer four-wall economics and for smaller chains that may find it more challenging to secure financing. It’s always easier to secure a bank loan for a Taco Bell than for a local independent restaurant, so I’d expect development to skew toward large, well-capitalized chains over the next few years. That said, the biggest operators — the Starbucks, McDonald’s, and Chipotles of the world — will continue to invest through the cycle and should continue to grow company-owned units at a similar pace, in our view. 

Q: Are franchisees starting to feel the pinch of higher interest rates too?

A: Absolutely. While there are some benefits conferred to franchisees of well-recognized chains with proven economic models, it’s hard to ignore that the fed funds rate is roughly three times as high as it was just a year ago. All else equal, let’s say you want to build a $2 million restaurant and plan to put 20% down — there’s every chance that you’re paying 7.5% interest on that $1.6 million, or $120,000 per year. That can blow a pretty big hole in your economic model, even if you’re running an
otherwise healthy restaurant. I suspect that operators will have to think twice about expansion plans, particularly within restaurant systems that have slightly softer economic models or smaller franchisees.

Q: Plenty of chains continue to test high-tech options, like AI and robotic solutions, but the industry has yet to see widespread adoption of these solutions. Any thoughts about the potential impact of these solutions over the next two to three years?

A: It’s a great question, and we’re certainly starting to see changes on the margin today. Given the high upfront cost tied to most robotics’ expenditures and the relative affordability of labor, I think it’s unlikely that we see widespread automation — like sweetgreen’s Infinite Kitchen or Chipotle’s automated makeline — within that timeframe. Where I think we’ll see the bulk of technology investment channeled is toward software, which is easier to deploy across a system and can both increase throughput capacity and reduce operators’ dependence on hourly labor. For instance, it’s not implausible that an operator who sees 40% to 45% of its sales come through digital channels (like a mobile app or in-store kiosk) being able to save hours that would otherwise be allocated to the drive-thru window. I’d expect an increased emphasis on inventory management software, payroll and tip management, and omnichannel ordering for most operators.

Q: Any industry trends or developments that excite you about the industry moving forward? 

A: I’m really excited to see where brands go with loyalty programs. The frequency uplift is one thing, but we’re in the very early innings of learning from that data. McDonald’s launched its program during the pandemic, for example, and only knew about 5% of its customers prior to launch. Moving forward, I expect brands to emphasize personalization and wouldn’t be surprised to see menu development tie to loyalty program learnings — who would’ve thought that cold beverages would represent more than 75% of beverage sales at Starbucks?