State of the Restaurant Industry 2022: Labor and operating costs

Together, food and labor costs account for about two-thirds of every dollar of a typical restaurant’s sales.¹ That’s why 2022 has proved so challenging for restaurant operators and their bottom line.

After increasing wages to attract staff following the initial closures and resignations caused by the pandemic, operators have been hit hard by food price inflation. In confronting this one-two punch, each operator has had to decide how much of those cost increases to pass on to customers, given that some food inflation may be short-lived.

Restaurants — independents, franchisees and chain stores — have increased wages not only to attract workers, but also to compete with other employers, particularly large retail outlets that have upped their minimum hourly wages. “The change in the industry’s labor cost structure is permanent,” says vice chairman of investment banking for BofA Securities, Roger Matthews. “When major employers like Target, Amazon and CVS move to a $15 wage, it doesn’t matter what the federal minimum wage is. Restaurants have to compete.”

The labor side is more of a known and better story at this point. It took franchisees a while to realize they had to start paying increased hourly wages. One day they woke up and the restaurant was half staffed. They couldn’t open the dining rooms, or had to institute shorter hours of operation. Some couldn’t open at all due to lack of staff. So they increased their employee wages, and increased prices to compensate.

However, the labor picture still has room for improvement. Although restaurant industry employment has rebounded, as of August, eating and drinking places still were 5% below pre-pandemic employment levels, according to the Bureau of Labor Statistics.² In a National Restaurant Association survey, two-thirds of operators said their restaurants still don’t have enough employees to support higher customer demand.³

“We are in a historically tight labor market,” BofA Global Research economists say, “with many people leaving the labor force during the pandemic. Now, with federal stimulus payments over and consumer prices high, how many of those workers will start looking for jobs again? And how many people who took jobs in warehouses and delivery will move back to hospitality?” Those are critical questions for restaurants in particular. “The economy is rotating back from goods to services, and the labor market is rotating to services as well,” the BofA Global Research team says. “The question is, how much friction will there be in that rotation back?” 

But while we’re seeing stabilization in the labor market, BofA Global Research economists experts are not as sanguine about the outlook for food costs. Wholesale food prices posted double-digit percentage increases for 12 straight months through July, according to the Bureau of Labor Statistics. Over the past year, the wholesale food price index has included huge increases for many key commodities. In August, for instance, the price of eggs was up 140% year-on-year, while butter was up 75.8%, processed poultry 22.9% and milk 23.6%. The fresh vegetables index increased 57.8% from July 2021 to July 2022, with the fresh fruits and melons index up 21.2%.⁴

BofA Global Research economists are concerned that food inflation appears stickier. One key contributor is the ongoing war in Ukraine. Not only is current food production an issue, but as the war delays sowing new crops, the future harvest also is disrupted. The war has impacted not only the availability and prices of basic grains, but also the cost and supply of animal feeds and fertilizers — with a downstream effect on items like beef and chicken, and other crops as well.

It’s not only the Ukraine conflict that has played a role in the huge increase in food prices. Weather and climate issues have been a big factor, including drought, fires and record-setting heat. Matthews says, “If we don’t have water for crops, that makes things like tomatoes more expensive. Brands may find themselves short on French fries next year because the potato crop is coming in weaker than usual.”

Some things seem completely out of anyone’s control. One mystifying development: Around the world, chickens seem to be laying fewer eggs. Is it avian flu? The environment? Both? No one is sure.

When you talk about food costs and food inflation, there are all kinds of moving pieces, and it’s difficult to predict what is going to happen. “Chairman Powell isn’t the only force influencing the world of food prices,” says Matthews.

Sources:

¹ https://restaurant.org/research-and-media/research/economists-notebook/economic-indicators/menu-prices/

² https://restaurant.org/research-and-media/research/economists-notebook/analysis-commentary/restaurant-job-growth-slowed-significantly-in-august/

³ Ibid.

⁴ https://restaurant.org/research-and-media/research/economists-notebook/economic-indicators/food-costs/