McDonald's restaurant in El Sobrante, California, on October 23, 2024.
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After a difficult year for the restaurant industry, executives can't wait for 2025 to begin.
“I don't know about you guys, but I'm ready for 24 to be behind us, and I think 25 is going to be a great year,” said Kate Gaspon, CFO of Inspire Brands, Dunkin' parent company. Restaurant Finance and Development Conference in Las Vegas this week.
Restaurant bankruptcy filings are up more than 50% so far in 2024, compared to the same period last year. Traffic to restaurants open at least a year declined year over year in every month from 2024 through September, according to data from industry tracker Black Box Intelligence. And many of the country's largest restaurant chains, from McDonald's to Starbucksdisappointed investors because same-store sales declined for at least one quarter.
But green shoots have emerged, sparking tepid optimism about the future of the restaurant industry.
Sales are improving from this summer's lows. Traffic to fast-food restaurants rose 2.8% in October from a year ago, according to data from Revenue Management Solutions. Company statements confirm anecdotal evidence from companies like the owner of Burger King International restaurant brandswhich said earlier this month that its same-store sales rose in October.
In addition, interest rates have finally dropped. Earlier in November, the Federal Reserve agreed to cut interest rates for the second time in a row. For restaurants, lower interest rates mean it's cheaper to finance new locations, which fuels growth. Previously, higher interest rates didn't hurt development much because restaurants were still catching up on pandemic delays and riding high on the post-Covid sales boom.
A Shake Shack storefront with an illuminated sign on a busy street, New York City, New York, October 22, 2024.
Smith Group | Jadu | Photo archive | Getty Images
In a burger chain Shake ShackHigh interest rates in the past few years have not slowed development, according to Finance Director Katie Fogerty. But it expects a “big boost” in consumer confidence as interest rates fall.
“If credit becomes cheaper, people feel like they can borrow more, even though it doesn't make sense that that would necessarily lead to them spending $5 on a burger. It's just the psychology behind it,” Fogerty told CNBC.
Shake Shack has reported an increase in same-store sales every quarter so far this year, even as consumers are more cautious.
Restaurant valuations are also improving, raising hope that the IPO market will eventually thaw.
“We are working with a number of different people right now to prepare,” said Piper Sandler, RFDC Managing Director Damon Chandek. “Right now the window is not wide open…I think with the traffic pressure we're seeing across the industry, the bar is particularly high.”
He added that he expects to see some initial public offerings for some restaurants next year, hopefully in the first half.
A sign marks the location of Cava restaurant in Chicago, Illinois, on May 28, 2024.
Scott Olson | Getty Images
No major restaurant company has gone public since the Mediterranean restaurant chain reward The IPO took place in June last year. While Cava's stock has risen more than 500% since its debut, its success has discouraged any other large private restaurant company from making this decision. Instead, broader market conditions scared away other contenders.
Nearly a year ago, Panera Bread secretly filed to go public again, but the IPO has yet to come to fruition. Inspire Brands, owned by private equity firm Roark Capital, is another potential candidate for a massive IPO in the future. Inspire's portfolio includes Dunkin', Buffalo Wild Wings, Jimmy John's, Sonic, Arby's and Baskin-Robbins.
However, there is no optimism in this industry.
“I think we will continue to see headwinds next year within the macro economy and within the industry.” Portillo CFO Michelle Hook told CNBC.
The fast-casual chain, known for its Italian beef sandwiches, has reported same-store sales declines for three straight quarters. Portillo has moved away from some of the discounts offered by others in the restaurant industry, such as McDonald's and Chili's.
The value wars are likely to continue until 2025, putting pressure on restaurant profits and intensifying competition between chains. For example, McDonald's plans to unveil a broader value menu in the first quarter, after extending its $5 meal over the summer and into the winter. For some restaurants, the looming threat of bankruptcy has not gone away, especially for chains that rely on discounts to win back customers.
Although a recession seems unlikely next year, it may take consumers longer to recover from years of high costs than expected.
