UB Consulting: The Foodservice Industry – Are We in a Bubble?
Thursday, 18 May 2023One word to describe the current state of the foodservice market would be “perplexing.”
Menu prices remain strong and increasing while the economy is slowing down. According to the latest consumer price index report, the food away from home index rose 8.6 percent year over year in April 2023. Despite the overall increase in the cost of living, as shown in the CPI figures, consumers are still dining out. At the same time, restaurant owners have incurred increased costs, including energy and wages, rightfully, justifying higher menu prices (to a degree). The industry has experienced robust sales growth amidst an economic backdrop of sticky inflation, tight labor markets, and low consumer confidence. Given the situation’s complexity, we ask ourselves – is the foodservice sector experiencing a bubble?
In a previous post, we analyzed whether the foodservice sector had recovered. Our empirical findings in June 2022 suggested that the industry had yet to do so. As an extension to that piece, we used counterfactual estimates to derive these indicators in a world where COVID did not happen.
Where is the industry today?
As mentioned in other posts, the overall labor market remains strong. The unemployment rate has hovered around 54-year lows. In addition, the labor participation rate for prime-age workers in April 2023 surpassed the pre-pandemic baseline recorded in February 2020. Concerning the foodservice sector, the industry employed approximately 12.3 million people in April 2023, nearly 2 percent more than in February 2019. Despite having strong growth from a year-over-year perspective, our pre-pandemic estimates suggest the sector lagging by 8.4 percent or about 1.1 million employees from the proposed counterfactual estimates.
Employment pressures have raised wages, along with other factors such as increased state-mandated minimum wages. In March 2023, the average hourly earnings hovered approximately 6.3 percent higher than year-ago wages. According to the counterfactual estimates, earnings were projected to be below $17 per hour in April 2023. Current earnings sit at $19.38 per hour.
Regardless of the struggles in the labor market, retail sales for the industry have been increasing. In March 2023, retail sales within the foodservices and drinking places sector increased 12.5 percent year over year to $87.6 billion. According to our calculations, the industry still has lost a great deal in terms of nominal value. The counterfactual would suggest that from March 2020 to March 2023, the sector lost approximately $185.3 billion.
As we can see, the foodservice sector is far from the expected estimates provided here.*
Are we in a bubble?
Consumers are still willing and able to spend on dining out. However, increased inflationary pressures may break the system. Compared to the food away from home index, the food at home index has been decelerating**. When hardships occur, consumers are more than likely to cut discretionary spending, and numerous studies support such behavior; dining out is a sector that has suffered in the past. The latest CPI report has highlighted just this. Airfare prices decreased year-over-year while prices for lodging away from home have decelerated. At the same time, consumer debt has increased, probably more likely due to increased interest rates. Still, the data is not yet conclusive, but trends may be more visible soon. Could the slowdown be imminent?
Despite these alarms, the index for service and limited-service food establishments increased 7.2 percent and 8.2 percent year over year in April 2023. Given where the industry stands, we still believe the foodservice industry has not yet recovered. Despite rising labor problems and food costs, increased sales could create a market bubble-like atmosphere.
If consumers were to cut spending on dining out as more uncertainty builds around the prospects of a recession, the foodservice industry might take an even more significant hit, bursting what appears to be a bubble. Although such a conclusion is not difficult, the signals remain somewhat mixed, but as time goes by, they continue tilting towards a deterioration in the indicators. The sector, however, could be more cautious than we think, and its resiliency—or lack thereof—might not be as clear-cut to many, particularly after enduring a pandemic supported by government stimulus and low-interest rates. The current situation is now the opposite. Unfortunately, we typically never know we are in a bubble until it is too late.
*It is important to note that these are hypothetical scenarios, and counterfactual estimates should be taken with a grain of salt. We presented them here to give a barometer of where the industry could have been.
**It is imperative to emphasize that the term “decelerating” does not mean prices are coming down but that prices are rising at a slower rate.
Photo Credit: Pavel L Photo and Video / Shutterstock,com
Andrei Rjedkin
Urner Barry
1-732-240-5330 ext 293
arjedkin@urnerbarry.com
Angel Rubio
Urner Barry
1-732-240-5330
arubio@urnerbarry.com