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Restaurant industry outlook 6 min read

Resilient restaurateurs have tools to thrive through tough times

Canada’s restaurant industry faces a post-pandemic squeeze this year. Learn about the challenges – and the crucial elements owners need to tackle them

Some of the statistics used in this article are drawn from The Foodservice State of the Nation, a keynote address co-presented by Circana and CWB Franchise Finance at the 2023 Canadian Restaurant Investment and Leadership Summit.

Canada’s restaurant industry can expect “a bit of a tough reckoning” in 2024, though restaurant owners will still thrive if they respond to the challenge with creativity and focus, says CWB’s lead industry lender.

 

The pandemic, inflation, a tight labour market, and rapidly changing consumer demands and appetites have thrust Canadian restaurateurs into uncharted waters, said Jacob Mancini, AVP Restaurants and Breweries, CWB Franchise Finance.

 

A turbulent arc began in 2020, as the COVID-19 pandemic – with its lockdowns and restrictions on public gatherings – obliged owners to completely overhaul their business model in favour of takeout and delivery.

 

In 2022 and the early months of 2023, Canadian restaurants roared back as cooped-up consumers returned in droves to local eateries of all styles and sizes.

 

“We saw full-service restaurants jammed with customers at mid-day and late at night, well beyond traditional eating hours. It was demand that we’d never seen before,” Mancini recalled.

 

Several structural shifts, though, started to bleed momentum from the industry through 2023.

 

As Mancini recently revealed at the Canadian Restaurant Investment and Leadership Summit, growth in diners has slowed dramatically since the start of the pandemic recovery, and is expected to drop from seven per cent in 2023 to three per cent in 2024.

 

Among those who intend to cut back on restaurant spending, most say they’ll simply purchase fewer restaurant meals, as opposed to less impactful measures such as ordering fewer items during a night out.

 

Mancini noted that 2023 also saw a dramatic “trade-down” effect in the industry, where restaurant-goers abandoned plans for fine dining and full-service in favour of more affordable options.

 

“And we saw that happen down the line. Let’s say you’re a family who went to a casual dining spot once a week. Maybe that’s too much for you now. Now you’re going to choose another quick-service restaurant. Or, you choose not to eat out at all.”

 

As traffic started to decline across all restaurant categories in 2023, owners tried to cushion the brunt of fewer patrons by raising menu prices. But inflation’s impact on restaurant costs – food, packaging, transport, labour – wiped out much of the effort to maintain sustainable margins.

 

The challenge is stark, and mathematically simple.

You’ve got a business that’s used to operating at a certain margin, and that margin right now is getting squeezed on both ends. Costs are up. Sales are down.

What was once a 10-per-cent margin business is now, say, a five-per-cent margin business,” Mancini said.

 

“If you have bank debt, prime went from 2.7 per cent to 7.2. If you rent, that’s going up five per cent a year. Most provinces have hiked their minimum wage in recent years.

 

“Put all of it together and you’ve got a scenario where it’s getting really hard to make enough money to meet all your obligations. Unless you have deep pockets or you’re exceptionally well-capitalized – and some are, but not everybody – that’s where we see the fundamental challenge.”

 

Labour shortage compounds complexity

Exacerbating the margin squeezes wrought by inflation and slowing traffic is a chronic labour shortage. A Restaurants Canada report released in 2023 suggests “restaurants have the highest job vacancy rates of any industry, accounting for one of every six private-sector job vacancies in Canada.”

 

Total employment at restaurants is almost 175,000 less than 2019 levels, the report says.

 

Mancini echoes the report’s concerns, particularly as young Canadians – the traditional stalwarts of the Canadian restaurant labour force – seemingly flock to other employment and education options.

 

“Where exactly all those young workers went is a bit of a guess, but I have a couple of theories. I think many went into the tech industry at the beginning of the pandemic. There was so much opportunity there compared to other industries.

 

“Similarly, I think a lot of people went into warehousing. Look at Amazon, for example. It just exploded. A young person could enter that sort of opportunity at a local fulfillment centre and earn a similar wage in a less stressful working environment.”

 

Mancini muses that the sorts of young workers or new Canadians who might have once applied for restaurant roles have been increasingly drawn to ride-sharing work like Uber, or food-delivery services.

 

It all sets up a bumpy 2024 for restaurant owners, a reckoning-of-sorts that Mancini feels is several years in the making.

 

He said the industry was already “overbuilt” at the tail end of the last decade. Then, when the pandemic hit, federal government subsides – like Canada Emergency Business Account (CEBA) loans – kept some restaurants afloat that might have otherwise shuttered to due to natural attrition.

 

Mancini said the industry’s typical ebb-and-flow – openings and closings – was disrupted by these artificial forces, and some restaurants outlived their normal lifespan.

 

“Now that the world is re-balancing after the pandemic, we’re going to see some closures. And that’s unfortunate, because behind every closure are the livelihoods of good people. But – also unfortunately – it has to happen to allow this industry to right-size again and get back in line with population and demand.”

 

There is light on the near horizon, though, for restaurant professionals who respond with their trademark resilience and creativity, Mancini said.

 

As he showed at the recent Summit, “social visits” to Canadian restaurants that promise engaging and memorable experiences have soared nearly 40 per cent since 2022.

 

This is good news, Mancini told the Summit, as experiential visits drive profitability. Social/experiential visits are typically marked by bigger tables, more items per order, and higher spending.

 

“On the experience side, it’s been so interesting to watch restaurant owners’ response. They know they have to offer more than good food and good service. They have to offer more enjoyment, more fulfillment, they have to create a better experience for customers,” Mancini said.

 

“Maybe it’s bowling. Maybe it’s pickleball. It’s billiards or trivia nights or other kinds of games. Here’s some great food, some great drinks, but also here’s an experience that’ll bring you here next week or next month.”

 

Prioritize picking a lane

 

Mancini said “it’s pretty clear” that the tastes and habits of millennials and Gen Zers are driving new patterns in the industry.

 

“They want to spend money with their friends and have the kind of experience they can share on social media. Or, they crave convenience, and they want to buy their $9 frappé using seamless digital technology and they want to get in and out of the restaurant as quickly as possible,” he said.

 

“Restaurant owners have done a great job in recognizing consumer demand and responding with real change. They understand they can be about convenience, or they can be about experience, but they need to choose. You can’t be all things to all people. That’s a big part of my advice to owners: pick a lane.”

 

Mancini also advises owners and franchisees to choose their partners carefully. That’s more crucial than ever during fraught times, he said.

 

Find a lender who understands why your food costs are up. Find one who understands your challenges with competition or labour or the impact of the prime rate at 7.2 per cent. Find one who sees it, hears it, lives it,” he said.

 

“It’s one thing when times are good and banks are throwing money at restaurants because the headwinds aren’t there.

But in challenging times, your partner is important. Expertise and experience is important. Some partners might look at what’s happening and misunderstand it, or see it as risky. But if you really focus on the industry every day, really understand it, it’s not risky.

 

“You can be flexible and helpful. You can get to the heart of why a deal or a decision makes sense when you’ve seen these challenges and have the expertise to work through them together.”