This article was originally published by QSR Magazine.

In some respects, inflation is holding restaurants hostage while also forcing the sector’s evolution. The past few years have often felt that way. Material challenges, but with setbacks in labor and inflation compressing margins. “At the same time, consumers are demanding a better digital and in-store experience, which requires an investment in their physical and digital presence,” says Mark Wasilefsky, head of TD Bank’s Restaurant Franchise Finance Group.

This tightening of profits has stalled growth across the sector, leading many to forecast 2023 as more of a setup year than one of robust development. With construction, permitting, and other delays tossed it, the calendar feels more like a two-year approach, where developers are back-ending the pipeline.

In the National Restaurant Association’s State of the Industry Report, 90 percent of operators said inflation posed a significant challenge for their restaurant; 92 percent cited food costs as the same; 89 percent for labor costs.

The foodservice industry is predicted to reach $997 billion in sales in 2023. However, as was the case in 2021 and 2022, expansion will be driven in large part by higher menu prices as operators try to offset elevated costs across the board. So while nominal F&B sales should surpass pre-pandemic levels this year, they won’t on an inflation-adjusted basis.

Also to consider, over the past two years, the economy proved a catalyst for growth thanks to healthy household balance sheets, abundant jobs, and rising wages, the Association said. That could slide in 2023. The Federal Reserve’s aggressive fight to stamp down inflation sent interest rates rising at their fastest pace in decades. Coming off historically low rates, it still had the effect of slowing the economy, the Association said, adding it expects the national economy to “weather the storm of rising interest rates and not suffer a significant downturn in 2023.”

It's a mixed climate operators have learned all too well since COVID began to settle: “Fueled by consumers’ unwavering desire for the convenience, socialization, and experiences that the restaurant and foodservice industry provide, sales are projected to rise in 2023,” the Association said.

And yet, “staffing shortages and elevated costs will remain at the forefront, with the vast majority of restaurant operators labeling them a significant challenge for their businesses. Although costs are not expected to rise at the same rate they did in 2021 and 2022, they will likely not decline much either. As a result, restaurant operators will still need to factor an elevated cost environment into their 2023 business model, and that will continue to squeeze margins.”

A slowing economy? But still, high demand for dining? Elevated costs in labor and continued challenges to staff up?

Focusing on the labor topic, one of the realities of today’s pool is that it’s readjusted to an altered landscape. Given the industry’s long-tenured role as an entry to the workforce for so many, the truth is, tens of thousands of workers joined restaurants mid-, or post-COVID, for the first time.

Per the Association’s report, first-time employees filled 22 percent of openings last year. It was even higher—27 percent—in quick service. Fourteen percent of job openings in 2022 were filled by people promoted internally. Four in 10 quick-service positions were taken by either new entrants to the workforce or people being promoted from other positions within the same restaurant. In table service, the number was three in 10.

And although jobs are being added, understanding how to staff this version of foodservice, spread across the omnichannel, remains a work in motion. Sixty-two percent of operators said their restaurant couldn’t support customer demand with the number of people employed.

Eighty-six percent felt labor costs were higher last year than 2019 and labor outlayers rose 18.3 percent.

Among those who claimed to be understaffed, 67 percent said their restaurant was more than 10 percent below necessary levels; a little over a quarter were 20 percent-plus under. Seventy-nine percent indicated they currently have openings that are tough to fill. In family, casual, and fine dining, 83, 85, and 84 percent, respectively, said they were struggling to staff the back of the house.

It doesn’t appear to be easing all that much: 35 percent of operators actually think it will get harder this year.

Let’s take a look into why:

In 2021 and 2022, as highlighted by Black Box Intelligence, annual inflation rates rose to 7 and 6.5 percent, respectively. For context, the previous eight years averaged 1.6 percent. Wages, though, didn’t keep up. According to the BLS, “real average weekly earnings,” which factor inflation, declined by 1.9 percent in February, year-over-year. “The consumer lost buying power because pay growth was lower than price increases on goods and services,” the company said.

Additionally, per the BLS, the last two years witnessed all-time high quit rates. Restaurant workers realized their best way to get a raise on pace with inflation was to go to the understaffed location down the street (or leave hospitality altogether). As of February, those who switched jobs saw their wage increase by 7.7 percent on a trailing 12-month basis, Black Box said. Those who stayed in their current position watched wages increase only 5.6 percent. “To be clear, except in times of recession, ‘job-switchers’ typically see more growth than ‘job-stayers,’” the company noted. “However, this 2.1-point difference is staggering given that the historical difference is a mere 0.7 percentage points.”

It's been clear in restaurants. Both 2021 and 2022 reported record turnover, according to Black Box’s Workforce data. In 2022, full-service witnessed a 14 percent increase compared to 2019. Limited-service venues reported a whopping 24 percent spike.

Unlike hourly wages on a macro level, the company explained, restaurant hourly wages have kept up with, and in some cases, surpassed inflation. “This is due in part to turnover rates being much higher than in most industries and therefore speeding up the process of wage inflation,” Black Box said.

And remember when the race to $15 per hour was a pulsing topic? The fact hourly wages in restaurants were lower than much of the competition during the “Great Resignation” essentially took care of that. At least for now. Restaurants had to grow compensation at a blurred pace to recruit and retain. Again, going back to this notion that so many restaurant workers entering the industry today don’t have a pre-COVID baseline to compare with. The only option to truly lure this fresh employee was to pay on par with what the marketplace offered, in restaurants, retail, and otherwise. And, by and large, that hourly figure was simply much higher than 2019 wages.

Black Box compensation data showed hourly wage growth reaching its peak in March 2022, when limited-service brands witnessed hourly crew wages increase a substantial 19 percent year over year, while full-service-restaurant line cooks had a 10 percent increase. 

The rate of new hires played a significant factor in elevating the rate. That’s a product of the aforementioned new labor pool as well as getting those “job-switchers” to come over. For full-service line cooks, new hires made more than the median pay for all employees in this position in 28 percent of designated market areas measured by Black Box. Compare that to two years earlier, where new hires out-earned the median cook wage in just 15 percent of DMAs.

Black Box does see a balance approaching, however. January wage increases moderated from the March 2022 peak. Limited-service hourly crew wages had a 10 percent increase, year over year, while full-service line cook wages only saw a 6 percent increase. New-hire wages for full-service line cooks were higher than the median wage for all cooks in 11 percent of DMAs, a signal that wages are finally finding equilibrium, Black Box said.

“Wages will most likely continue to normalize in 2023 as the Fed has signaled its willingness to continue raising interest rates to fight inflation, despite recession fears, and turnover is likely to decline. In the coming year, workers may find that their best strategy is to be job-stayers,” the company said.

The makeup of “job-stayers,” and the challenges ahead in keeping them, can’t be understated. The BLS predicts the number of teens in the labor force to decline by 1.1 million between 2021 and 2031, while 20–24 year olds will fall by 500,000. Only 30 percent of 16–19 year olds are expected to be in the labor force by 2031, down from 37 percent today and the lowest level on record. It also estimates 68 percent of 20–24 year olds will be in the labor force by 2031. That’s down from 71 percent rate and would represent the lowest figure since 1968.

Older adults, meanwhile, will represent the fastest-growing age cohort. The BLS projects 4.9 million adults aged 65 and older will enter the field during that span.

From 2019 to 2022, the average restaurant with annual sales of $900,000, according to Association data, watched its labor costs jump 18.3 percent from $297,000 to $351,351. Food costs rose 21.8 percent from $297,00 to $361,746.

Utility costs (11.8 percent), occupancy costs (8.3 percent), other costs, like supplies and G&A (16.7 percent) all climbed. The end result was pre-tax income falling $155,824 from 5 percent of sales ($45,000 on that $900,000) to negative $110,824.

And so, it becomes transparent why menu prices are climbing. Nearly 90 percent of operators (87 percent) said they increased menu prices in 2022 to combat rising costs; 59 percent changed the F&B items they offered; 48 percent reduced hours of operation; 32 percent closed on days they normally would have been opened; 38 percent postponed expansion plans; 35 percent stopped operating at full capacity; 32 percent cut staffing levels; 19 percent postponed plans for new hiring; 21 percent said they incorporated more tech; and 13 percent eliminated third-party delivery.

In quick service, only 18 percent said they’d postpone hiring.

Since 2019, 65 percent of quick-serves said they’ve invested in equipment or tech to enhance the customer experience; 55 percent on systems to make the front of the house more productive or efficient; and 50 percent to do the same in the BOH.

More than four in 10 operators noted they planned to ramp up investments in equipment or tech going forward.

Can tech help with labor specifically? Fifty-eight percent said using tech and automation will become more common in their segment in 2023. And more to enhance than replace humans—17 percent claimed their restaurant made investments that resulted in the permanent elimination of any positions during the pandemic.

Fifty-nine percent of quick-service operators said the use of technology and automation to help with the current labor shortage would become more common this year.

A lot of this data mirrored a report from TD Bank that surveyed 300 restaurant franchise operators. In addition to inflation as the top challenge, they also cited the labor shortage (32 percent), supply chain disruptions (16 percent), and rising interest rates (11 percent) as factors impacting their businesses. When asked to describe the labor quality and availability due to the current macro environment, 69 percent said they noticed a decrease in labor quality and availability. Just 24 percent reported they have seen an improvement.

But to Wasilefsky’s earlier point, restaurants still understand they need to invest as the consumer takes them there. Namely, around physical locations, digital, and delivery services: 41 percent of restaurant franchise operators in the survey said they plan to invest in in-store reimagining, remodeling or in digital and delivery systems.

Many operators are looking to invest in technology to further streamline the process from placing an order to receiving your food, with 38 percent looking to invest in technology such as a new POS, digital signage or other in-store tech, and 37 percent expecting to invest in mobile ordering. Respondents also reported their restaurant franchise plans to invest in delivery service (23 percent) and alternative payment methods for speed and convenience (16 percent). Only 15 percent said they had spending cuts planned, and 11 percent have no investments planned. “The plethora of investment opportunities that are available to restaurant operators speaks to how much the restaurant industry is constantly changing to meet consumers' demands," Wasilefsky said.