Q: How do you view the current state of the restaurant industry?
A: The industry still has not fully recovered from the COVID-19 pandemic. We are seeing restaurants, and particularly mid-tier restaurant chains like Applebee’s and Chili’s, struggle with high interest rates, persistent inflation, rising minimum wage, and high overhead costs. Conversely, high-end restaurants have maintained steadier profit margins as their consumer base has not felt as financially pinched.
Q: What successful strategies have you seen restaurant chains employ to counter inflation and increased overhead costs?
A: As consumers have become more price sensitive, mid-tier restaurant chains, whose product is undifferentiated through the eyes of the consumer, have had to cut costs or prioritize value-based pricing to stay afloat. Franchise owners of quick-service restaurant chains like Taco Bell and McDonald’s have benefited from their ability to lower prices. They are offering meal deals for a limited time to boost sales among lower-income customers who have been hit hardest by higher food prices. Now that grocery inflation is slowing significantly, there is an incentive for restaurant chains to be associated with value and affordability. Those operators that provide a unique product offering like Chick-Fil-A or Shake Shack, have been more resilient to value trend – although not impervious.
Q: Do you notice geographic factors impacting restaurant chains?
A: The geographic location of restaurants is becoming an increasingly important indicator of success. Rising minimum wage in states like California has pushed restaurant chains to make monetary and operational adjustments to stay afloat and avoid compromising the consumer experience. We have seen large restaurant chains who could not adapt quickly enough be forced to file for bankruptcy. Conversely, lower labor and real estate costs in the southeastern United States have incentivized restaurant chains, like Taco Bell franchisee Tacala, to expand in the region.
Q: Restaurant chains occupy a substantial corner of the retail real estate market. What do restaurant owners or operators need to understand about the current real estate environment?
A: In 2023, restaurants occupied 19% of all retail leases – an all time high in the industry, as inflation drove up grocery prices and Americans ate out more. This occupancy trend was surprising as property owners have historically viewed restaurants as risky tenants with a high rate of failure. Heading into 2025 – with pressure easing following multiple rate cuts – operators should understand that landlords are still looking to keep space occupied and are often open to negotiations. Deferring rent payments to the end of a lease or transitioning to a % of sales lease structure are mutually beneficial ways to keep locations occupied and restaurants profitable.
Q: Recent bankruptcies in the restaurant industry have made some firms more cautious about making investments in the industry. Is this a trend you expect to continue?
A: Many of the investors we see in the restaurant industry specialize in these types of investments and come in eyes wide open. While dealmaking remains a bit depressed across the board, there are opportunities for alternative investment platforms, like the secondary market, within the restaurant industry. The marketplace is changing to accommodate consumer constrictions, and those who are slow or unable to adapt will be more susceptible to a bankruptcy filing.
