Restaurant Dive Outlook for 2023

Though 2022 marked a return to financial health for many restaurants and adjacent businesses as the pandemic’s peak disruption faded, the new year holds continued challenges for operators, experts say. 

As inflation drives up menu costs and shrinks consumers’ discretionary spending power, many diners will choose to trade down by visiting inexpensive categories like QSRs or by ordering value-focused meals, sources said. Low-income consumers may cut back on their restaurant frequency altogether, so restaurants will need to be strategic with menu pricing — especially since a volatile supply chain is expected to hike ingredients costs amid shortages and delays.

“Restaurants are treading water, but it’s in the form of modest declines in transaction volume being countered by increases in spend per transaction that are at or slightly above the rate of inflation,” said Andrew Custage, head of insights at Medallia Market Research. 

So far, consumers are only dining out 10% less than they were in 2019, said Paul Westra, managing director of restaurant investment research at Capital One, said.

The job market also remains strong and consumers have $1.7 trillion in extra cash compared to 2019, Westra said. While that dollar amount is shrinking, it could provide a cushion for restaurants for most of 2023. 

“Any slowdown and recessionary impact will probably be occurring in the third or fourth quarter [in 2023]” Westra said. “Restaurants have a window here to recoup some of their lost profitability.” 

Supply constraints will disrupt restaurant development plans, as construction delays increase the cost to build and renovate restaurants. An ongoing labor shortage will push restaurants to find operational efficiencies. In 2022, restaurants already cut operating hours by an average of 6.4 hours per week compared to pre-pandemic, according to a Datassenial report. For independent operators, that hourly reduction jumps to 7.5 weekly hours. 

“With these challenges, with the supply chain, and the employees and everything else, you’ve got to get money, and money's gonna come either as debt or equity. And when you look at debt, a lot of banks won’t lend to restaurant companies,” said Jay Halpern, partner at ArentFox Schiff.

Some pandemic-era restaurant models may begin to lose relevance in 2023 as well, experts said. Ghost kitchens, for example, may struggle amid slowing delivery demand and food quality struggles, said Rishi Nigam, CEO of Franklin Junction. In 2022, some prominent platforms in the ghost kitchen space began to see restaurant deals fall through despite the ongoing success of Kitchen United, one of the first players in the game. 

The new year may hold new opportunities for restaurants despite obstacles, however, experts said. Diners still crave premium experiences from their restaurants, said Zhong Xu, CEO and co-founder of restaurant ordering platform Deliverect.

Consumer demand and food spending dollars may also hold steady enough in 2023 to help improve the restaurant category’s recovery, Westra said. 

“I think restaurants will succeed in clawing back the vast majority of their lost profits from the last 18 months. I think they’ll have an ability to take the necessary pricing. They’ll be able to go back to their suppliers and get the necessary disinflation to rightset their margins,” Westra said.  “The consumer is strong enough … for that to occur at least for the first half to three quarters of next year before we probably see a slowdown in the macro economy and consumer.”

Learn more about five trends experts predict will shape the restaurant industry in 2022. 

Diners will trade down, but still value premium experiences

Price has become an increasingly important driver of consumer decisions, Custage said. In an August 2022 survey, Medallia found 49% of respondents cited price as a driver of household decisions, compared to 29% a year prior. That percentage has held steady over the past few months, Custage said. 

A larger portion of restaurant transactions are coming from affluent customers, as low-income customers find ways to cut back on transactions at eateries, Custage said. 

“But I do think there is still some trade down occurring where maybe if somebody was going to a sit-down restaurant beforehand, they’ll turn to takeaway fast casual or quick-service restaurants more often,” Custage said. 

Many major brands have been increasing menu prices to make up for inflation and wage pressure. But customers would prefer if restaurants implemented a mix of cost adjustments,  such as service reductions or smaller portion sizes, Custage said.

“A little over half of people would prefer this blended approach,” Custage said. “That’s better than keeping everything as is and making prices jump even higher in order to continue affording all of it from a restaurant’s … perspective.” 

Climbing prices aren’t necessarily keeping customers away, however. 

“Brand perception about affordability has gone down quite a bit more than any other attribute, but it might not be enough to really get a consumer to turn away from restaurant purchases fully even if they’re a little bit frustrated about how expensive it has gotten,” Custage said. 

Customers may be willing to pay premium prices for dine-in experiences or meals with prestigious brands, Xu said. Xu cited instances of restaurants in New York where customers waited in line for 45 minutes to get tables as an indicator of strong customer preference for brands with notably high quality.

“You would think with inflation, pricing, everything costing more people would pay less for quality,” Xu said. “They want to have that extra experience and not do something normal.”

Another shift in consumer behavior is occurring at Titan Hospitality Group’s fine dining restaurants. Customers are increasingly dining at the bar, James King, founder and CEO of Titan Hospitality Group, said. Typically the bar has had more drink sales, but food sales have been increasing over the past six months. This has been a favorable trend for his restaurants, since it increases sales and keeps diners around longer, he said. 

“We like this trend. It’s a great thing for us and we're having conversations now about how do we expand on that and make [the bar] more dining friendly and really entice people,” King said. “It helps us turn seats and takes a little pressure off the kitchen because it’s coming in at different times.” 

Price will eventually take a toll on consumer spending habits regardless of how or where they dine, Custage said. Medallia asked consumers how much a five-point increase in the inflation rate would impact their spending. Although the question is a bit vague about exactly how much people would change, 96% said they would at least change their spending habits. 

“I think [this] is indicative that people are reaching a breaking point soon, especially when over two in five Americans say they’re barely or unable to make ends meet with household budgets as it is today,” Custage said.

Tight labor markets will make efficiency vital

Labor markets may cool as the Federal Reserve continues to raise interest rates in hopes of increasing unemployment. But that may not happen for a while: Bureau of Labor Statistics data shows foodservice wages are likely still climbing, reaching $17.24 an hour in October. Sectoral employment has also increased in recent months, topping 11,898,000 in preliminary numbers for November, while unemployment numbers have held relatively steady. The quit rate in foodservice also remained steady in later 2022, hovering between 5.6% and 6.2% depending on the month.  

Given high turnover, low unemployment, growing wages and rising employment in foodservice, employers are likely to prioritize efficiency as workers remain harder to find and more expensive to train and employ than in 2019. 

For Titan Hospitality, the push toward efficiency has meant increasing the prep work done in advance of shifts, according to King. Cooks are working to get dishes prepared as much as possible without cooking, which means all line cooks have to do during a rush is pop it in the oven.

Restaurants are increasingly adding pay at table or tableside ordering, which is helping reduce front-of-house costs by 30%, Peter Dougherty, GM of hospitality at Lightspeed, said. 

“It’s about reducing labor costs as much as possible without affecting the guest experience or affecting it the least amount as possible,” Dougherty said. 

Nigam said the push for efficiency, and the general labor market tightness, means pre-pandemic staffing levels are unlikely to ever return in some segments. High-volume restaurants and full-service restaurants emphasizing experience may be able to sustain high staffing levels, but many other concepts will feel considerable pressure.

“I don't see restaurants ever going back to having 20 people in a fast casual restaurant,” Nigam said. “I think you're gonna lose a lot of middle ground here along the way.”

One issue that’s unlikely to change is turnover, Halpern said. Mass layoffs in 2020 changed the way many workers think about their jobs, and the premium restaurants are willing to pay qualified staff may keep workers moving from job to job. Publicly traded companies, subject to the short-term interests of investors, may find it hard to make serious investments in staffing, Halpern said.

One way to combat turnover, Halpern suggested, is to improve aspects other than pay, like workplace culture.

“I feel like the opportunity is really building culture,” Halpern said. “You’re always subject to someone paying yet another dollar.” 

Titan Hospitality has increased its training, King said. The company is focusing on hiring younger workers with personalities compatible with the company’s culture and then training them intensively for several weeks. 

Darcy Kurtz, CMO at BentoBox, said continued staffing shortages may lead restaurants to be more flexible in turning ordering channels off.

“Instead of having to just close and to be closed for a day, they can do kind of a modified operating model where they're doing just the online ordering,” Kurtz said.

More drastic measures, like full automation, may be unlikely, according to Nigam.

“It might be the unpopular position, but I don't see robots replacing anything to be honest. Maybe 20 years from now you'll see fully robotic restaurants,” Nigam said.

David Madland, a senior fellow for the American Worker Project at the Center for American Progress, agreed, saying that the exogenous shocks to the labor market in recent years dwarf sustained pressure from turnover.

“We already had the biggest possible intervention in the labor market that anyone could imagine: COVID-19. And it didn't fully transform or automate these jobs,” Madland said in an interview for Restaurant Dive’s coverage of the FAST Recovery Act. “It slightly changed the jobs.”

Continued labor shortages may benefit workers by driving up wages, and may benefit unions by making workers feel more secure in their employment and less afraid of temporary unemployment, though macro-economic changes, including a recession, could change that dynamic. 

Smaller menus, dynamic pricing could protect bottom lines

Restaurants will need to take a hard look at menu strategy and dollars spent on sourcing in order to protect the bottom line amid fluctuating ingredient costs and operational pressures, experts said. 

“[Restaurants] are definitely going to have to figure out how to have a more streamlined menu that doesn’t necessarily serve every taste of the people coming in. … They’re having to get more precise with what their offering is … because it costs too much to carry that many different offerings on the menu,” Kurtz said. 

The costs of ingredients are so high that they can’t be fully passed on to the consumer without hurting sales, and diners are already growing wary of high menu prices, Kurtz said. 

“The ability to know what you’re going to sell days in advance to prep correctly and labor schedule correctly is mission critical for restaurants to become efficient,” Westra said. 

Menu prices will continue to rise in 2023, but at a slower pace (5%) than last year, which saw prices grow about 8%, Westra said. Specifically, restaurants should be taking 200 basis points more in pricing than their food, labor and energy cost increases to protect margins without hurting sales, he said.

To successfully trim menus, as many major restaurant chains did in 2022, operators will need to launch a total strategic review of food offerings and cull items that are the least profitable, Westra said. Even menu items that are well-liked by diners but create additional complexity due to the total ingredient mix or the preparation of that item, should be considered for cuts. 

“If you have that no sacred cow point of view, you’d be shocked that certain items could be causing significant inefficiencies and product loss,” Westra said. 

Kurtz doesn’t expect smaller menus to curb diner excitement around eating out, despite rising costs.

“The [restaurant] discovery process is becoming more visual. It's becoming more experience-oriented … that will offset any decline [in interest] because the menu isn't quite as big as it used to be,” she said. 

Dynamic menu pricing could also help restaurants maximize profit during peak hours, Xu said, and digital technology could help operators change their offerings or prices several times a day. Deliverect is working with many restaurants to implement dynamic menus and to make it easier for restaurants to change menu prices, he said. 

“These days, we see restaurants have baseline pricing, and then they do a lot of experiments where they say, ‘hey, this weekend during these times, the price will rise by 20%’ depending on peak hours, events, weather,” Xu said. 

But Nigam thinks that as this solution becomes more common, it could be met with customer resistance. 

“There’s going to be a bit of [a dynamic pricing] adoption curve for consumers, because there's so many substitute options for food,” he said. “So unless you're making something that people just have to have, [for example] Chick-fil-A has obviously dominated … that chicken sandwich product. So if you have something like that, you can demand different pricing based on cost, based on time of day.”

Ghost kitchens will face economic headwinds

Ghost kitchen companies finished 2021 on a high note, signing expansion deals left and right. But 2022 saw many of these businesses punished by softening delivery demand and higher capital costs. Lack of consumer trust in online brands may also be a stumbling block for this sector, Nigam said. 

“You could try to order food from Uber or DoorDash or whatever. And there's like 85 restaurants on your street that are just kind of made-up restaurants, all coming from the same two buildings. But there's no quality control,” he said. “I think people are going to want to go pick up their food, I think they're going to want to know where their food is coming from.” 

According to Nigam, customers will look for brands they know and recognize. Another factor driving the success of some ghost kitchen and virtual brand companies and the failure of others, is disparate familiarity with restaurant operations, Xu said.

“You have ghost kitchens built by real restaurant operators and brands that have been quite successful,” Xu said. “[There are] ghost kitchens built by pure techies, they thought ‘hey, let's set it up, how hard can it be?’ and then [they] realize that it's very much an operations game as well a brand game.”

Consistent quality in food production is what will differentiate ghost kitchen concepts that succeed from those that fail, Xu said. 

There are more significant limits to ghost kitchens in the U.S. compared to European and Asian markets, Nigam said. The population density of American suburbs may mean delivery is simply not economical for many concepts, limiting the reach of ghost kitchens to a handful of more densely populated major cities.

Even ghost kitchen concepts based in major downtowns are not immune to failure: Butler Hospitality, whose hotel ghost kitchen operations were based primarily in city centers, collapsed in May 2022. 

Still, some ghost kitchen companies have found ways to adapt or have continued to grow. Kitchen United, for instance, raised $100 million in Series C funding last July, partly from Kroger, Restaurant Business International and Circle K. In December, Saladworks opened two units in Kitchen United Food Halls in two Ohio Kroger stores. 

Restaurant operators have deserted Travis Kalanick’s Cloud Kitchen concept in droves, according to Business Insider. Meanwhile, Reef’s major ghost kitchen partnerships have seen shakeups, with Wendy’s canceling the vast majority of its projected units. Reef has attributed Wendy’s move to a change in Reef’s overall strategy, which prioritizes multi-branded units and locations in places like stadiums, hotels and airports.

“I think ghost kitchens are dead,” Nigam said. “We don't have to beat that horse anymore. I don't think that that idea has worked out too well.”

Supply chain shortages to impact operations, growth plans

Restaurants will continue to be plagued by supply chain and construction delays in 2023 as labor shortages continue to tighten supplies, Nigam said. 

“Most restaurant operators are probably not going to see immediate relief anytime soon on the supply chain side. And so we're gonna have to figure out a way to continue to generate sales in a manner that is a balance between increasing prices, but also finding savings and other places and really delivering value to customers,” Nigam said.

The impact of supply chain shortages has shifted how Titan Hospitality develops its menus. Product availability and cost have led the company to change its menu development from twice a year to quarterly. It’s more expensive to maintain this frequency of menu development due to printing costs, but King sees this strategy as necessary to stay ahead of ongoing supply challenges. 

Titan Hospitality has focused on menu items that it can cross-utilize so it can achieve consistent food quality and sell items at a reasonable price. The company used to sell jumbo crab meat, but the cost of this ingredient rose to $65 per pound so the restaurant took it off the menu. But it’s not always easy to make such menu changes. Potato prices spiked 63% last year, but it’s nearly impossible to take items like french fries off the menu, he said. 

King expects current supply chain and inflationary pressures to last at least two years before stabilizing. With so many different issues compounding, including the war in Ukraine, this isn’t a two-month problem, he said. 

Product availability isn’t the only supply chain issue impacting restaurants, either. Titan Hospitality is also in the process of building two restaurants and it’s taking 16 weeks to get materials and 30 weeks to get a walk-in freezer box. There aren’t enough electricians and plumbers to complete work within a typical three-week time span. These delays are extending construction timelines, putting the company 30% over budget on these projects, King said. A new build of a fine dining restaurant usually takes four to six months to complete. 

Titan’s experience isn’t uncommon. Inflation and supply chain issues are driving up the cost to build, Halpern said. Businesses that are expanding and have the money to do so are running over budget and blowing past deadlines. Businesses are paying for leases without the additional revenue to start building cash flow, but can’t open because certain equipment hasn’t arrived, Halpern said.  

“It drives the cost structure out of whack, because if you can’t build it in the timeframe that you thought, you can’t open in the timeframe that you thought. Supply chain is a really, really big deal,” Halpern said

Companies rushed to try out ghost kitchens as the segment attracted significant funding in 2020 and 2021, but cracks soon emerged in the popular model. Low unit volumes, operational troubles and permitting problems have dogged the segment to the point that several experts now doubt the model's efficacy.

A few major restaurant chains and provider platforms are pumping the brakes on their delivery-only investments. Chili’s closed its off-premise-only unit after two months of operations. Reef Technology saw Wendy’s cut its projected Reef unit openings by more than 500. Reef later exited its Houston market and laid off 5% of its workforce amid low sales and a rash of permitting and safety violations. 

Butler, a company that combined hotel food service with ghost kitchens, imploded last spring. The five-year-old company shut down overnight after a run of new openings, suddenly leaving hotels partners without food service and vendors without payment. Cloud Kitchens faced an exodus of restaurant partners in 2022 that culminated in corporate layoffs. C3 closed its Miami food hall, and Wonder, a van-based ghost kitchen company, abandoned its initial model entirely. 

These well-publicized failures and sudden strategy shifts suggest a rocky future for the ghost kitchen model. But there could still be success stories, restaurant executives and experts said, as long as companies are equipped to face several ongoing challenges.

The model has problems driving sales

Executives at restaurants that once tried ghost kitchens, such as Fat Brands, are more hesitant than ever over embracing the concept, and say ghost kitchens don’t generate enough sales. The company operates some of its brands as delivery-only virtual concepts, based out of existing stores. Fat Brands did try a couple ghost kitchen units in the U.S., but Andrew Wiederhorn, CEO of Fat Brands, said the company has hit pause on most of those, while international ghost kitchen units are doing well.

“I’m not a believer in [ghost kitchens] and never have been, I like virtual restaurants, but not ghost kitchens” Wiederhorn said at the ICR Conference in Orlando. “I don't see the ghost kitchens, doing enough delivery volume per venue.”

Wiederhorn said delivery doesn’t add enough of the sales mix at QSRs to make ghost kitchens viable in that segment. Despite some savings on labor, real estate and development, he said, the delivery-only model does not produce sufficient revenue.

But Atul Sood, chief business officer at Kitchen United, said ghost kitchens that focus on a variety of channels, rather than just delivery, tend to perform better.

“I think it’s always been underrepresented or underappreciated, how important pickup is to the ghost kitchen model,” Sood said. “Pick up is critically important to the success of the ghost kitchen model.”

Sood said adding catering and takeout offerings alongside delivery may be key for ghost kitchens going forward, especially as office occupancy begins to recover from COVID-19 pandemic lows, making catering attractive to operators again. The early stages of the pandemic led to a lot of optimism among investors in the space and ghost kitchen platforms themselves, which has since dissipated.

“There was a lot of hype to it, and everybody expected it to just be a given, particularly as the pandemic increased customer acceptance of the model, but you need to put work into it,” Sood said.

During a presentation at the ICR conference, Michael Montagano, CEO of Kitchen United, told investors the company looks for locations that are situated in areas that enable them to serve as hubs for delivery, walk-up traffic and catering. This omni-channel approach, Montagano said, is crucial to the company’s ongoing growth.

Sood said there are two factors that can make it difficult for ghost kitchens to generate sufficient sales through delivery, in the United States. First, American consumers tend to prefer drive-thru and takeout. Second, conditions in the U.S. market make delivery less competitive. Markets, such as South Korea or the United Arab Emirates, tend to see much higher rates of delivery, driven by fast delivery completed on scooters and lower labor costs. Labor costs in both countries are politically constrained: The South Korean government recently raided the headquarters of one of the country’s major unions, and the UAE is a confederation of monarchies where strikes and unions are illegal.

The delivery-only ghost kitchen model was not well adapted to the American market, said Rishi Nigam, CEO of Franklin Junction, a company that connects virtual brands with host kitchens.

“That’s just not a good business model, at least in our country,” Nigam said. “Maybe there’s other places globally where [a ghost kitchen] works. But in America, it’s just not a successful model.”

Fees, wait times and cold food all contribute to problems with delivery, Nigam said. Many customers may choose pickup over delivery, especially as disposable income falls as macroeconomic problems grow, because pickup has fewer or no added fees. 

James Walker, CEO of Frisch’s Restaurants, said part of the quality problem with delivery comes down to restaurants surrendering control of the customer experience to third-party services. 

“A delivery-only experience being executed by another party makes it more difficult to craft a fantastic customer experience,” Walker said. “I think brands have to be mindful of that.”

Data collected by Tattle, a firm that specializes in collecting and analyzing customer feedback for the hospitality industry, shows guest satisfaction at ghost kitchens was lower across a variety of categories. 

Guests at conventional restaurants reported 20% higher satisfaction with order accuracy, 23% higher satisfaction with food quality and 16% higher satisfaction with value than guests at ghost kitchens, according to thousands of Tattle reviews. 

Those gaps narrowed, Tattle noted, when only restaurant delivery was considered, rather than occasions across channels. Still, across the fourth quarter of 2022, ghost kitchen customer satisfaction declined, while restaurant scores remained generally steady. 

Another negative constraint, even though it applies unevenly across the space, is the cost of real estate, said Zhong Xu, CEO of Deliverect. Some ghost kitchen companies, such as Cloud Kitchens, do not operate the restaurant brands that use their spaces. Instead, they function as a sort of high-tech, commercial kitchen landlord. With interest rates driving up the cost of borrowing, such real estate plays may become less lucrative for ghost kitchen providers.

“Free money is done,” Xu said. “Your mortgages have increased, that means that it puts pressure on your general p[rofit] and l[oss].” This makes a high occupancy rate imperative for such ghost kitchen companies, he said.

With dine-in traffic returning to normal levels, Xu said, there’s less pressure on independents or small brands to focus exclusively on off-premise business, making operators less willing to experiment with ghost kitchens.

Yet another factor that can hurt delivery-only kitchens is a lack of customer familiarity with the brands, Walker told Restaurant Dive. 

Wiederhorn made a similar point, arguing that brand awareness is improved by a physical presence. “Customers like to see brick-and-mortar restaurants around them, and then order from them, rather than ordering from a black box.” 

But high brand awareness could be an important draw for legacy brands entering the ghost kitchen or virtual-brand spaces, as accumulated consumer trust makes those brands more attractive choices.

But there are still success stories

Legacy restaurant brands still can operate successfully in a delivery-only environment, Walker said.

“I look at it as a way for brands that may already have a history – Frisch’s has been around 75 years, Nathan’s Famous been around over 100 years – ghost kitchens or delivery-only kitchens created an opportunity for those brands to bring their product to customers in a way that was really efficient,” Walker said. 

For some growing brands too, ghost kitchens have proven lucrative. Hawaiian Bros, a growing fast casual brand, operated a ghost kitchen out of a Kitchen United Mix in Austin, Texas. At the ICR conference, Hawaiian Bros CEO Scott Ford told investors that by prioritizing speed of service, that unit, which takes up 350 square feet of space, has managed $3.5 million in annual sales.

Walker said brands, including new brands, that are designed to operate with lower capital costs, lower labor requirements and whose food is designed to be easy to execute and easy to deliver at a high level of quality, are likely to grow or to see delivery-only offerings function well.

Xu also emphasized the premium that delivery puts on operational excellence. “If you're a pure virtual or ghost kitchen operator, it’s about you know, very much owning and being very successful at that operational excellence side.” 

Xu said the current environment would benefit ghost kitchen operators who are able to combine a full technology stack, a stable of known or easily marketable brands and operational excellence.

Sood said well-publicized incidents of legacy brands severing ties or reducing development commitments with ghost kitchen companies has hurt the perception of the segment as a whole. “When a brand like Wendy's decides to pull back from 700 units to less than 150, that kind of percolates through the industry,” he said. “Other big restaurant brands take notice of that.”

Sood said companies that are able to demonstrate that they have all the basics down, such as permitting and inspections – benchmarks some ghost kitchen companies have struggled with – are still attractive partners for brands looking to get into off-premise focused models. He said Kitchen United, which supports brands with marketing and a technology stack, but largely leaves the operational side of things to brands themselves, was one example.

Companies, such as Reef and Wonder, are shifting toward more conventional restaurant development plans. Reef is focusing on single-branded units, hotel kitchens, airports and stadiums. Wonder, which had one of the flashiest and most unique business models among ghost kitchen operators, has ditched its idling vans for locations combining pickup and delivery, which is supported by commissary kitchens.

As the restaurant industry moves toward multi-channel operations, or expansion through extant foodservice locations, ghost kitchens eventually may adopt a similar omnichannel model to maximize profitability.

From Jack in the Box to California Pizza Kitchen, major restaurant brands have spent the last two years pushing for growth via franchising and signing multi-unit deals. It’s not just legacy chains that are accelerating franchise expansion. Many midsize chains, such as Modern Market Eatery and Dog Haus, have struck deals with operators big and small to create robust pipelines. 

New and existing franchisees will face challenges due to high costs that are squeezing margins and pressure to deploy technology that caters to modern consumer needs, experts said. But the prospect of operating a restaurant still holds a lot of excitement for those entering the field. 

“Franchising is growing as fast as it’s ever grown right now,” said Mark Siebert, CEO and founder of consultancy iFranchise Group. “We’re just seeing a lot of people getting into business for themselves.”

While new business applications remained steady in the past decade in accommodation and foodservice with about 20,000 monthly new business applications, that number has been elevated since mid-2020. The segment reported roughly 30,000 new business applications per month by mid-2020 and have since remained above 20,000 monthly applications, according to U.S. Census Bureau Business Formation Statistics.

Although experienced restaurant business owners and operators understand how difficult it is to run a restaurant, some new entrants view these businesses as a fun way to score guaranteed cash flow from day one, Siebert said — a goal that is far from guaranteed. 

“There’s excitement to the restaurant business that there isn’t to mowing people’s lawns or being a janitorial service person,” Siebert said. 

In some ways, that excitement is warranted. Consumer demand to eat out remains high. In the middle of the week, when business tends to be slow, desirable restaurants are still really busy, said Greensfelder franchising attorney Lenny Vines. 

If a recession occurs in 2023, experts predict an economic downturn will slow inflation and wage growth. These possibilities are driving people to enter franchise deals now, in advance of a potentially more hospitable market in the next few years, Siebert said. 

But despite these possibilities, new franchisees and longtime operators will face a host of challenges this year. Fierce competition for real estate and high technology costs, for example, will threaten franchisees’ profitability, experts said. 

“This is a very, very, very difficult business,” Vines said. “Don’t think that this is going to be a cakewalk. Be prepared to really work hard.” 

Big chains seek multi-unit franchisees

It’s already harder for aspiring single-unit operators to break into restaurant franchising, at least with the big players. In the last five years, well-capitalized groups — often backed by private equity — have bought large blocks of restaurants, said John Ramsay, vice president of franchise sales at Noodles & Company.

Legacy brands are capitalizing on this shift. It’s easier for franchisors to help a large operator group expand from 50 to 60 units versus finding and training 10 individual franchisees, Ramsay said. Many restaurant chains with complex operations don’t want to sell locations to mom-and-pop franchisees anyway, Siebert said, because they prefer the experience of multi-unit foodservice operators.

Subway, which has a long history of working with single-unit franchisees, said last year that it would target more multi-unit operators. In August, Jack in the Box began offering operators discounted royalty rates for their first five years if they agreed to develop at least three units. 

Noodles & Company isn’t seeking first-time franchisees, either. Ramsay said the chain feels larger, long-term franchisees are better equipped to deal with current challenges in the industry, such as the increasing cost of real estate and construction. In 2021, Noodles & Company focused on attracting multi-unit franchisees to expand in the South and Southwest.

However, major restaurant brands’ disinterest in single-unit operators has left room for small brands to add franchising to their growth strategies. Franchising is still a great model for someone locally connected, especially if a restaurant offers a simple, assembly-focused menu that doesn’t require extensive foodservice experience, such a sandwich shop,  Siebert said. 

“There’s always going to be space in the franchisee world for that first timer,” Ramsay said. “If anything, franchising has gotten more sophisticated and better. A lot of these emerging brands have access to better systems than they did in the past.”

A push for profitability

Even if ideal franchising partnerships are formed, profitability will demand creative solutions in 2023, said Tim Doherty, president and CEO of franchise group Doherty Enterprises. The company owns and operates 135 restaurants, including Panera and Applebee’s units in four states.

While Doherty’s restaurants saw strong sales in 2022, profitability was hard won due to inflation’s impact on both wages and food costs, he said. 

“I think that there needs to be an approach with the franchisor and franchisee on making sure we are developing menu items that are both an excellent value for guests, but are also profitable for the restaurant,” he said. 

Applebee’s and Panera have both developed menu items that could be LTOs or long-term menu items, depending on performance and food costs to keep the restaurants profitable, Doherty said. Panera, for example, has added several new menu items within the last few years, most recently adding toasted baguette sandwiches earlier this month. 

“Franchisees are super hyper [aware] about what the margins look like, what are specific brands doing to combat [low margins] and how is that going to impact them in the long term,” Ramsay said. 

Noodles & Company, which had 366 company-owned stores and 93 franchised restaurants as of September 2022, uses data collected across its corporate stores to help predict upcoming trends for franchisees. This can help operators prepare for fluctuations in commodity prices, labor costs, interest rates or lease costs, Ramsay said. The chain has been purchasing kitchen equipment, such as refrigerators, HVAC units, stainless steel tables and other fixtures, for company-owned and franchisee-operated stores. This will allow franchisees to share in the company’s purchasing power, Ramsay said. 

“There’s a level of comfort there that we had a plan in place and actions that we can take and we’re not just going to be reacting to what happens,” Ramsay said. 

Franchisees consider more cost-effective real estate options

As cost concerns grow in the restaurant space, franchisors are developing smaller stores emphasizing off-premise business, which continues to drive a large portion of diner traffic. These smaller stores are more cost-effective to build, experts said, which can create openings for upstart operators. Other restaurant companies are focusing on store conversions to expand, and are using second-hand equipment to save costs. 

Competition for drive-thrus has increased alongside property values, which makes development more challenging, said SG Ellison, president of Diversified Restaurant Group. Those values will stabilize heading into a recession, but with interest rates rising, financing these properties will be difficult. 

However, Ellison said companies with decent cash positions and the ability to grow their balance sheets, or finance their development on their own, will be in a good position to find opportunities that weren’t available in the last year or two. 

Diversified Restaurant Group continues to look for places where it can leverage Taco Bell’s Go Mobile store format, as well as drive-thru assets and strong delivery demand, as it plots expansion. Ellison said the Diversified delivery and digital channels have grown more than any of its other channels in the past two years, which has created more opportunities for experimentation. 

 

Last year, Diversified opened a Taco Bell Go Mobile store format with two separate drive-thru lanes to reduce delivery pickup times. Typically, a Go Mobile store will have two lanes meet to form one lane for the final pickup.  

“We’re continuing to look at design and how we best design the layouts for the digital traffic that’s coming through from an order ahead or delivery,” Ellison said. 

Both Applebee’s and Panera are experimenting with alternative ways to develop new restaurants, which Doherty is taking advantage of. The franchisee is working on building an off-premise-only Applebee’s restaurant in Long Island that won’t have a dining room. Applebee’s also is adding more mobile order pickup windows after an initial test with a separate franchisee in 2021.

Doherty is partnering with Panera to test urban units, as well. The franchisee’s New York City territory includes Brooklyn, Queens, Staten Island and Long Island. 

Brooklyn and Queens are underpenetrated markets for Panera because the chain didn’t have a model for urban or light-urban settings, he said. But Panera has opened two corporate locations in the city, including one in Manhattan, and Doherty plans to test two in Queens to see if Panera’s urban model can work in that borough. 

“There are lots of interesting and unique ways that both the franchisor and franchisee are looking at getting into markets that may be underpenetrated and that’s something I am actively looking at doing for both my brands,” Doherty said. 

Because so many restaurants closed during the COVID-19 pandemic’s early days, Vines said there could still be opportunities for franchisees to open units at a lower rent rate than what had been previously available. There could also be ways to acquire used equipment and fixtures that are in good condition at bargain prices, he said. 

More brands are considering conversions as well, Dan Rowe, CEO of Fransmart, wrote in an email to Restaurant Dive. In 2021, a Curry Up Now franchisee converted a closed Indian restaurant, which already had most of the necessary equipment in place, into a Curry Up Now within three weeks for roughly $100,000, according to Nation’s Restaurant News. 

By contrast, the restaurant’s franchising site lists startup costs ranging from $392,000 to $1.6 million to open a restaurant from scratch. Nathan’s Famous is providing half off of its franchisee fees to operators willing to convert their existing restaurants to a Nathan’s to take advantage of similar savings. 

In general, a new restaurant could cost a new franchisee $600,000, Rowe said. If that operator makes $1.2 million in sales and $200,000 in profits in the first year, that’s 33% of the way toward making a return on the investment. On the other hand, conversions can cost as little as $200,000, creating a path to profitability as early as year one, Rowe said. 

Technology increasingly critical to operations

Many of the store designs available to new and existing franchisees center on technology that drives sales or cuts costs as chains look to optimize their systems for on-the-go diners. Much of that innovation is designed to streamline off-premise channels and improve the guest and staff experience.

While delivery demand has leveled out for many restaurants, some — such as, Taco Bell — are still capturing growing sales in the channel, Ellison, said. 

“I think there’s still a lot of room for growth in our order-ahead mobile apps as well as delivery,” Ellison said. 

On March 17, 2020, Applebee’s on-premise business made up 87% to 88% of sales, with off-premise only generating 12% to 13% of sales, Doherty said. 

Nearly three years later, off-premise makes up over 25% of sales, Doherty said, adding that he expects off-premise will likely make up 25% to 30% of sales in casual dining going forward. 

“The guest has found a service that they have gotten very comfortable with using … whether it is delivered or it is picked up at the restaurant through our carside to go,” Doherty said.

Siebert said technology has improved restaurant service as more brands adopt integrated software solutions managing orders, loyalty, delivery and third-party apps, which creates more efficiency with the ordering process. 

Doherty Enterprises has been testing food pickup locker systems that keep both staff and delivery workers accountable for maintaining food quality. 

The lockers notify drivers when the food is ready to be collected, Doherty said, which boosts driver efficiency and helps ensure food is delivered hot. This also frees up restaurant staff to help carside pickup customers and improve that experience. Doherty also uses a system that notifies staff where a car has parked so staff can get the food to guests faster. 

Doherty said his company uses a sticky printer to help improve accuracy for off-premise orders. An expediter will take a sticker of each item in the order to help him/her pack that order ensuring that nothing is missing.

“Accuracy is a killer for off-premise business. You can’t recover that the way you can in the restaurant,” Doherty said. 

Noodles & Company has an app for online ordering that also integrates with third-party delivery to take pressure off of franchisees who are processing digital orders. The company’s in-house team manages the technology integration so franchisees can focus on building their employee base and improving retention and training, Ramsay said.  

Technology will continue to be critical to address ongoing customer needs, experts said. 

“Brands that are able to deliver a very positive customer experience through really good interactions with their staff stand to see a lot of success,” Paul Woody, franchising attorney at Greensfelder, said. “Technology is part of the answer, but it’s not the entire answer. Just continuing to have a brand presence that is very positive for customers and is very attractive to customers is going to continue to be really important.” 

Communication is crucial

Franchisors will need to establish transparency with their franchisees to scale successfully amid cost pressures and diner preferences for faster, off-premise-focused service. 

“Franchisors need to be very cognizant of shifts and changes in customer expectations and be prepared to quickly roll out solutions to that to their franchisees,” Woody said. “Of course, franchisees need to be prepared to make those adjustments.” 

Systems that are nimble will have a leg up over the competition, and franchisors that have good relationships with their franchisees and provide them with support will be in better shape, Woody said.

Brands, such as McDonald’s, Jack in the Box and Subway, have experienced discontentment among their franchisee networks in recent years over a multitude of issues, including fees and remodels. McDonald’s updated its franchising guidelines last year to create more clarity and consistency within its system and devoted $250 million over the next five years to help franchisee candidates that may be facing socioeconomic challenges.  

To avoid such issues, Vines said franchisors should test significant restaurant changes in their company-owned stores to show that a new idea works and is worth the expense before requiring it of franchisees. 

One way franchisors can establish transparency is by creating a franchise advisory committee that is a good cross-section of their franchisees and not just the top operators or those with the most experience, Woody said. Wings & Rings created a franchise advisory council in 2018, which has led to the creation of a forum for franchisees to discuss and test initiatives, such as picking a new point-of-sales system. 

Franchisor to franchisee communication also should include electronic communications and/or interactive platforms where operators can get assistance or provide input in real time, he said. 

“If you’ve got franchisees that are either distrustful of their franchisor or franchisors that have not established good communication paths with their franchisees, then they’re going to struggle to basically have the relationship to make those changes,” Woody said.