Q1 forecast: restaurant margins will continue to decline

Image via the California Restaurant Foundation

published on November 15, 2021 – 10:26 AM
Written by Business Journal staff

Restaurants will continue to see their operating margins shrink in the first quarter of the new year, resulting in slower mergers and acquisitions (M&A) for the industry.

The Groupe Finance Restaurant at Mitsubishi UFJ Financial Group (MUFG) presented its outlook in the wake of the annual Restaurant Funding and Development Conference earlier this month in Las Vegas. Rising commodity prices, labor shortages and the need to increase spending to attract labor continue to eat into incomes.

“Despite strong sales, most restaurant businesses have seen their margins erode due to rising costs of food, fuel, labor and transportation,” said Nick Cole, head of financing of restaurants at MUFG. “In addition, they are finding it increasingly difficult to hire staff amid persistent labor shortages, which will be a financial burden as catering companies try to attract new workers and retain existing workers in a labor market that demands higher wages and is more selective in choosing employers. “

Cole and his team expect lower margins to slow the pace of mergers and acquisitions in the first quarter of 2022. willing to pay for that liquidity – are the main drivers attracting buyers, so unless we see a improving margins, we expect the decline to be significant. “

Cole adds that the generational transfer of companies, especially in the fast-service sector, combined with their extraordinary financial performance have fueled the recent M&A boom.

On the labor side, inflationary pressure will only increase the cost of attracting workers, according to Quinn Hall, who heads loan underwriting and portfolio management for MUFG Restaurant Finance.

Hall highlights the looming financial challenges restaurants face in overcoming staff shortages. “Since it is not enough to offer higher wages, catering companies will have to consider a range of improvements in their benefits and employment opportunities, from health benefits to flexible working hours, which would also increase. the costs, ”he says.

The pressure of technology – and providing diners with the most convenient customer experience – is also eating into margins.

“Restaurants are evolving their digital platforms to give customers the ability to order food from anywhere and on the go,” said Brian Geraghty, loan origination manager at MUFG. “On-site digital kiosks in some establishments are now in the form of proprietary or third-party applications on a mobile device available to everyone. “

Geraghty adds that the technology investments are part of a larger effort to support more offsite businesses, where a significant portion of orders and meals now occur after the pandemic. This effort includes re-equipping restaurant real estate to allow more drive-thru and digital pick-up lanes while reducing dining space to reduce reliance on restaurant operations.

“Over the long term, we believe restaurant sizes will decrease to reflect a smaller customer base on-site, but better built to support off-site operations,” said Geraghty.

For now, those who qualify have access to capital, supported by rising sales. But a balance sheet could be on the horizon.

Restaurant financing terms continue to benefit from a healthy supply of capital and record financial performance, particularly among fast food establishments and restaurant operating companies, from the second quarter of 2020 to the second quarter of this year.” , Hall said. “For now, banks continue to accept a higher leverage profile among borrowers and offer flexible amortization, pricing and commitment terms.”

If margins continue to erode, financing conditions will tighten next year, especially if interest rates rise and borrowing costs rise, and some companies could experience credit downgrades, Hall adds.

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