A McDonald's restaurant in El Sobrante, California, on October 23, 2024.
David Paul Morris | Bloomberg | Getty Images
After a difficult year for the restaurant industry, executives can't wait for 2025 to begin.
“I don't know about you, but I'm ready for Year 24 to be behind us, and I think Year 25 is going to be a great year,” said Kate Jaspon, CFO of Dunkin parent company Inspire Brands, the restaurant Finance and Development Conference this week in Las Vegas.
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 fell 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 Starbuckshave disappointed investors with same-store sales declines for at least a quarter.
However, early shoots have emerged that are fueling cautious optimism for the future of the restaurant industry.
Sales are recovering from this summer's lows. Traffic to fast food restaurants increased 2.8% in October compared to a year ago, according to data from Revenue Management Solutions. The company's data confirms anecdotal reports from companies like the owner of Burger King Restaurant Brands Internationalwhich said earlier this month that same-store sales increased in October.
Plus, interest rates are finally falling. In early November, the Federal Reserve approved its second straight rate cut. For restaurants, lower interest rates mean it's cheaper to finance new locations, spurring growth. Previously, higher interest rates had done little to hurt performance as restaurants were still catching up on pandemic delays and riding the peak of the post-coronavirus sales boom.
Shake Shack storefront with illuminated sign on a busy street, New York City, New York, October 22, 2024.
Smith Collection | Gado | Archive photos | Getty Images
At the burger chain Shake ShackAccording to CFO Katie Fogertey, higher interest rates in recent years have not slowed development. However, it expects a “strong increase” in consumer confidence as interest rates fall.
“As credit gets cheaper, people feel like they can borrow more, even though it doesn't make sense that that would necessarily lead to $5 budget spending. It’s just the psychology behind it,” Fogertey told CNBC.
Shake Shack has reported rising same-store sales every quarter so far this year, even as consumers have been more cautious.
Restaurant valuations are also improving, raising hopes that the IPO market will finally cool down.
“We are currently working with various people on preparations,” said Damon Chandik, managing director of Piper Sandler at RFDC. “The window isn't quite open at this point…I think the bar is particularly high given the traffic pressures we're seeing across the industry.”
He added that he expects to see some restaurant IPOs next year, hopefully in the first half of the year.
A sign marks the location of a Cava restaurant in Chicago, Illinois, May 28, 2024.
Scott Olson | Getty Images
No major restaurant company has gone public since the Mediterranean restaurant chain Cavas IPO in June last year. While Cava stock has risen more than 500% since its debut, its success hasn't encouraged other large private restaurant companies to take the plunge. Instead, general market conditions have deterred other competitors.
Nearly a year ago, Panera Bread confidentially filed to go public again, but an IPO has not yet materialized. Inspire Brands, owned by private equity firm Roark Capital, is another likely candidate for a blockbuster IPO in the future. Inspire's portfolio includes Dunkin', Buffalo Wild Wings, Jimmy John's, Sonic, Arby's and Baskin-Robbins.
Nevertheless, there is not only optimism in the industry.
“I think we will still see macroeconomic and industry headwinds next year.” Portillos Chief Financial Officer Michelle Hook told CNBC.
The fast-casual chain, best known for its Italian beef sandwiches, has reported three consecutive quarters of declining same-store sales. Portillo's has steered clear of some of the discounts offered by others in the restaurant industry, such as McDonald's and Chili's.
Price wars are likely to last until 2025, squeezing restaurant profits and increasing competition between chains. For example, McDonald's plans to introduce a broader value menu in the first quarter after extending its $5 menu offer over the summer and into the winter. For some restaurants, the threat of bankruptcy has not gone away, especially for the chains that rely on discounts to win back customers.
And while a recession next year seems unlikely, it could take longer than expected for consumers to recover from years of high costs.
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