Input costs for restaurant operators are finally showing signs of cooling, raising hopes that 2024 could mark a return to some semblance of normalcy in the post-COVID era. However, there are various factors at play that may challenge this anticipated recovery.
One notable challenge comes in the form of California’s AB 1228, which raises hourly wages for quick-service restaurant (QSR) workers to $20, potentially squeezing profit margins and setting a precedent that could spread to other regions. Additionally, beef prices remain persistently high, and the unpredictable nature of weather poses an ongoing concern for businesses reliant on foot traffic.
Weather-related disruptions can be particularly damaging. A recent example is Shake Shack’s experience in the third quarter, where they estimated losses of approximately $500,000 in sales due to rainy conditions on the East Coast and a hurricane in Southern California. Extreme heatwaves during the summer also took a toll, with Texas seeing a drop of up to 5% in seated diner traffic in August 2023 compared to the previous year. In another instance, McDonald’s employees in Los Angeles staged a walkout during an October heatwave, impacting operating hours, and local restaurants in Arkansas had to reduce their hours during a summer heatwave.
These extreme weather events are expected to persist and possibly worsen due to climate change. Research published in the journal Climactic Change predicts that up to 1.8 billion workforce hours, roughly 11 hours per U.S. worker, could be lost annually in the next three decades due to extreme heat linked to climate change. Consequently, Technomic has listed “extreme weather” as one of its predictions for the restaurant industry in 2024, highlighting that these events will continue to affect restaurant sales and traffic.
The potential impact of El Niño in 2024 further complicates the situation. This weather phenomenon could result in warmer oceanic waters pushing the Pacific jet stream southward, leading to drier and warmer conditions in the northern U.S. and Canada and increased flooding in the south.
As these extreme events become more frequent, property insurance rates and availability have become a major challenge. Insurance industry experts, like Tim Smith at IMA Financial Group, have noted that the current insurance market is the toughest in decades. Property insurance rates are rising primarily due to the high number of catastrophic weather events, with losses averaging $100 billion in the past five years. Finding insurance carriers has become increasingly complex, particularly in weather-affected states. This situation is expected to persist until weather-related events subside.
To mitigate costs, Technomic recommends various strategies within restaurant operations, including kitchen reconfigurations, energy-saving equipment, misters, fans, and upgraded HVAC systems and windows. Additionally, menu updates during the summer can include dishes that require less heat, creating a more comfortable back-of-house environment. Adapting to changing climates may also necessitate diversifying sources and products to maintain item availability, taste, and quality.
Property insurance is not the only insurance-related challenge for restaurant operators. General liability claims are on the rise and becoming costlier, partly due to a tight labor market that resulted in hiring less experienced staff. The increase in “premises liability” claims from customers, ranging from slips and falls to improper food handling and customer service issues, has added to the financial pressure on operators.
Overall, it’s likely that insurance rates will continue to climb. Operators may explore opportunities through leveraged buying pools or negotiate insurance programs with franchisors for franchised restaurant groups to help manage these escalating costs. Smith emphasized that proactive planning and thoughtful insurance packages can help operators navigate these challenges and minimize the impact of claims on their bottom line.
