Challenges Restaurants Experienced in 2024
In 2024 California’s restaurant industry faced another challenging year due to the items indicated below with many of the save challenges operators faced in 2023.
1) Restaurant operator profits continued to decrease due to rising costs. Food, labor, utilities, insurance, and occupancy expenses are among the major cost categories that grew due to inflation. Operators were not able to offset their increased costs dollar to dollar against menu price increases as customers disposable income decreased in 2024. People are eating out less due to having less disposable income as more of their income is taken up by increased housing, grocery, automobile, insurance, medical and other priority living expenses.
2) Labor Shortages. There has been a shortage now and for several years of back of the house staff including cooks and dishwashers as these are largely non-tipped positions and demand a lot of physical labor.
3) Wage Increases – Minimum wages in most California cities rose again and chain restaurants with 60 or more units raised the minimum wage to $20 per hour as mandated by state law. This has resulted in raising the bar for all restaurants to increase their wages above local required minimum wages – independent and smaller chains alike to aggressively increase their wages.
4) Health and Safety Regulations – New procedures have been set up because of COVID-19 regarding food handling procedures, distancing, and more emphasis on outdoor dining. There is an emphasis for operators to meet environmental regulations and to use products that reduce the carbon imprint such as reducing single-use plastics. Emphasis on reducing food waste and composting and donating excess food to people in need.
5) Major city’s downtowns have major problems. Cities such as San Francisco, Los Angeles, San Diego, and Sacramento are still plagued with homeless encampments, large retail and office vacancies, illegal drug use age, unsanitary living conditions and crime. Many restaurants in these areas have gone out of business or on the verge of going out of business as customers do not want to go into these areas due to the reasons indicated above.
6) Increased Construction Costs – Increased construction costs and high interest rates have resulted in many operators not bei
7) Debt incurred doing COVID- 19 – Operators are still trying to pay off various loan programs the government offered during this period. Additionally, PPP monies and grants received by operators during COVID have either been used up or will be used up shortly and these monies have been the life line for many operators during COVID and the years following COVID.
8) Major restaurant chains are having problems. Many sit-down restaurant chains are going out of business – Due to sales decreases and increased costs many restaurant chains are having a difficult time surviving. Among a few of the restaurant chains that filed for bankruptcy recently include Red Lobster, TGI Fridays and Buca di Beppo. Other chains having financial challenges include among a few are Denny’s, Appleby’s, Rubios, Hooters. P.F. Changs, Boston Market and Melt and Grill.
How Restaurants Have Dealt with the Challenges Indicated Above in 2024.
1) Self–service operations have helped reduce labor costs. Fast food and casual dining restaurants have put added emphasis on self-service.
2) Increased takeout and delivery service to minimize labor cost and meet customer demand. Also there has been an added emphasis on drive throughs for many restaurants that lend themselves to this type of service.
3) Variations of food items to meet customer demand such as gluten free, vegan and plant food products and offering a variety of foods such as oat milk, coconut milk, soy milk, etc. Also, with alcohol consumption being down in some parts of the state and people drinking less wine there has been some emphasis on non-alcoholic beverages. To reduce food costs some operators have eliminated the higher food cost items from their menus and have concentrated on putting lower food cost items in their place.
4) The use of Ghost Kitchens has increased efficiency in handling takeout and delivery food items and in some cases reduced labor costs for restaurants with a high volume of takeout and delivery orders.
5) Using technology to increase efficiency – Point of sales (POS) systems are becoming more sophisticated with hand hold terminals to reduce labor costs. New technology gives operators the ability to better control inventories, minimize internal theft and shorten the turnaround time to get current updated financial statements. Some fast-food operators are successfully using robotics to perform various back of the house functions including food prep.
6) Change of operating hours – In an effort to reduce labor costs many restaurants have reduced days and/or hours of operation.
Challenges Restaurants Could Experience in 2025
Many of the challenges operators faced in 2024 as indicated above will continue to be challenges operators will experience in 2025.
1) Labor shortages – With the new Trump administration clamping down on deporting illegal immigrants this will impact the availability of some restaurant employees who fall under this category and this will further exasperate the shortage of employees in the restaurant industry.
2) High interest rates and increased construction costs – These will affect some operator’s ability to open new locations and remodel existing locations.
3) Shift in population -Many people are leaving expensive urban areas and moving to more affordable suburban and/or rural areas in the state that are more affordable. Consequently, restaurants in many suburban areas are performing better than downtown city located restaurants as many customers do not want to go into cities that have many problems with homelessness, crime, and other related issues.
4) People are frequenting restaurants less often due to lower disposable income – People have less buying power due to inflation with more of their income going to housing, groceries, gas, medical and other necessary expenses.
5) The market for buying and selling restaurants will continue to be a buyer’s market – The post COVID years including 2024 have continued to be a buyers’ market and we believe this could be the trend in 2025 as well.
Opportunities for Restaurant Operators in 2025
1) Restaurant operators taking over second, third and fourth generation restaurants that have failed. Some operators will have the opportunity to take over these types of restaurants for little or no cost versus building out a restaurant from scratch for hundreds of thousands of dollars.
2) Negotiating better lease terms – Operators will be able in some cases to negotiate more favorable lease terms with landlords in some areas due to high retail vacancies in many areas. Some landlords will consider a percentage rent with no minimum rent for the early years of a new lease. In high retail vacancy areas landlords will give new tenants many months of free rent and/or landlords will contribute giving money to new tenants for capital improvements for remodeling.
3) Use of technology to increase efficiency and reducelabor costs. Automation, AI, and robotics are transforming operations. Predictive inventory systems, serving robots, and AR-enhanced menus are helping restaurants manage labor shortages, reduce waste, and enhance the customer experience.
4) Food and labor efficiencies will be implemented to reduce costs. Menu’s will be simplified to minimize costs and increase efficiency. Additionally, menus will be developed to emphasize popular lower food cost items coupled with the self-service model in many operations to reduce labor costs. Fast casual and quick service restaurants reduce labor costs and are attractive to many consumers and help reduce operators inflationary cost increases.
In Summary
2024 has been a challenging year and 2025 will have its challenges as well. However, with the uncertainty of the presidential election outcome behind us, a trend for interest rate reductions and a general feeling that the new administration’s policies regarding the economy will be positive there is a sense of optimism that 2025 will be a better year for business and for certain restaurant operators.
All of Restaurant Realty’s Agents and Brokers are well equipped to deal with a diversified group of sellers and buyers. For further information, please contact Principal Broker Steve Zimmerman at steve@restaurantrealty.com or call 888-995-9701.
Now celebrating our 28th year, Restaurant Realty Company® has a successful track record helping over 3,200 clients in completing over $1,000,000,000 (billion) in Business and Real Estate transactions including the following: Selling/leasing ove
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