Now that we have the first major conference of the year under our belts (ICR) and a little bit of color from several public and private restaurant companies, we can paint a clearer picture of the current state of the restaurant consumer. That said, we do so cautiously given last year’s inconsistencies and a relentlessly tough operating environment.
For starters, the end of 2024 looked much stronger compared to the beginning and middle of the year, as evidenced by sequential improvements in both traffic and sales at many, if not most, concepts. Sales at foodservice and drinking places declined by 0.3% month-over-month in December, according to new data from the United States Census, tempering any extreme bullishness, but they were up 2.4% vs. the same period in 2023.
Cumulatively, traffic turned positive in the fourth quarter for the first time all year, according to Revenue Management Solutions. It rose 0.8% in the quarter, compared to Q4 2023 when traffic was negative 1.1%.
What does any of this mean? According to William Blair analyst Sharon Zackfia, it means a “stable to improved environment.” She said lower-income consumers will likely remain pressured in the near term, but consumers are generally just returning to “normal” – meaning their pre-pandemic habits.
“The consumer was discerning in 2019, too, and not all these companies were doing great in 2019,” she said, adding that the pandemic and the environment since has made things much murkier given stimulus money and pent-up demand combined with skyrocketing costs.
“I do think maybe (consumers’) debt has peaked and maybe inflation has peaked for them,” she said, providing a little bit of optimism.
Bloomberg Intelligence senior industry analyst Michael Halen confirmed in a note that credit card debt and auto loan delinquencies rose at a slower pace toward the end of the year, while credit card delinquencies also fell.
“Restaurant sales will advance with better consumer spending in 2025, we believe, as most recent sentiment and (Consumer Price Index) data showed improvement year-over-year,” he wrote.
Potbelly chief executive officer Bob Wright is seeing some of these same signals.
“Some of the syndicated data looks like consumer debt has peaked and maybe even started to shrink a little,” he said. “That debt has been a significant hit to disposable income, which is where restaurant purchases come from, so we’re seeing some breathing room now. I’m also reading that wages continue to outpace current inflation, so I think there’s an opportunity to close the gap. Consumers are still a little behind, but we expect wage inflation rates to be a little higher than actual inflation, which I think is good. I think we’ll see a little more stability.”
Where it goes from here is anyone’s guess (see, again, 2024). But Fitch Ratings’ senior director, North America Corporates Jose Luis Rivas told attendees at the ICR Conference that the expectation is a low-single-digit increase in restaurant spending this year, while traffic is expected to be flat or slightly negative, driven by continued inflation and a likely cooler labor market. Rivas also forecasts more selectiveness for consumers choosing to dine out, which aligns with Zackfia’s outlook.
“We expect a continuation of the themes that underscored 2024 – increasingly picky consumers demanding high-quality offerings, elevated service levels, and convenience (preferably all three),” Zackfia said. ““Consumers don’t necessarily equate price with value, and some of the concepts that did the best last year happened to have the highest costs. Consumers are saying if they’re going to spend a dollar, they want it to be for the best overall value.”
Contact Alicia Kelso at [email protected]
