2023 was a rather challenging year for the hospitality industry. On a positive note, finally removed from the devastating effects of the pandemic, 2023 marked the return of pre-pandemic levels of restaurant visits. Thankfully, people will always crave great food, amazing guest experiences, and human connection.
However, beginning with the collapse of Silicon Valley Bank earlier this year, followed by rising interest rates and consumer prices, and increased demand throughout the country for a higher minimum wage, the year was not short of difficulties. I think it is fair to say that most are looking forward to a new calendar year, understanding that 2023 is likely a small blemish on the otherwise inevitable growth trajectory of the hospitality industry.
As we close 2023, reflecting on the year, I’d like to offer three predictions going into 2024.
Restaurants are going to look, and feel, smaller
I believe a key focus for restaurants next year is going to be efficiency. As they did in 2023, it is expected that labor costs and food costs are going to continue to rise, forcing operators to remedy cost management with tools already at their disposal. According to Kevin Burke, partner of Franchise Equity Partners, “restaurants got comfortable raising prices and were focused on invoices versus customers. Sales were up, so everyone was high fiving, but traffic was down, and margins were suffering. Indiscriminate pricing increases have sent traffic away, and when that becomes a secular trend, which it has, it teaches (operators) to be more thoughtful about menu, portions, mix, everything you can do besides that sticker shock, and I think we’ll see more of that.” (NRN) I anticipate restaurants will actively shrink menus in an effort to reduce waste, with notably less items available in your typical restaurant.
Next, given the increasing number of states raising minimum wage, such as California raising fast food minimum wage to $20/hour, restaurants will find creative ways to decrease staffing. Already aided through technology advancements, such as the rise in kiosks in quick service, voice automated drive through, or self pour beverage machines, restaurants will continue to lean further into automating typical human labor, recording historically low levels of staffing.
Lastly, looking forward, big chains are beginning to design their restaurants to drive delivery and takeout sales as opposed to dine in. In fact, some restaurants are entirely doing away with their dining area for this exact purpose. I expect this to continue, with overall square footage of new locations visibly decreasing in 2024.
Market activity will rebound in a significant way
2023 was a quiet year for the public markets. M+A activity was much lower than typical years, with only a handful of major acquisitions, while the IPO market, both within hospitality and all other sectors, was notably sleepy. Roger Matthews, managing director of Bank of America’s Consumer and Retail Investment Banking Group thinks “a lot of assets will come to market in the beginning of the new year. There’s pent up demand on the buy side from institutional investors and on the sell side from operators interested in an exit, both of whom have been holding out for a better deal-making environment.” (NRN)
As far as IPO’s, Cava set the framework for successful restaurant groups. Mike Esposito, cofounder and managing partner of Franchise Equity Partners commented, “If you look at the history of time since the 1950s, the IPO market is 100% correlated with the equity market, and with equity bouncing back, IPOs should be strong by the latter half of 2024. We’ve had two years of very little IPO activity. If I’m a betting man, when the flood gates open, it will be unusually high.” (NRN) While it may not be at the level of a Cava, restaurant group GEN Korean BBQ House went public earlier this year with less than 40 units. Going back to the basic lessons from Econ 101, supply and demand always find a way back to equilibrium. Deals may get done at lower multiples and for smaller brands than historically typical, but the IPO market within hospitality should become significantly more active in 2024.
There will be less restaurant technology companies in 2024 than the year prior.
2024 might be the year of restaurant technology consolidation. Over the past twenty years, the restaurant technology sector has exploded, with fierce competition in every sector. However, I anticipate this number to actually decrease in 2024 for two key reasons: Dissolution of weaker companies and increased M+A activity.
First, 2023 proved that capital for early-stage companies is no longer as free flowing as it once was. According to Carta, “the amount of tech startups shutting down due to bankruptcy or dissolution more than tripled in two years. In the long run, this will mean less chaos for the average restaurant startup and more quality options.” (NRN) Smart investors and venture capital firms will reserve their dollars for investments they believe are true winners, as opposed previously taking gambles on high upside opportunities.
In addition, as many of these early-stage companies have matured into platforms, some now on the verge of going public, they are continually seeking strategic advantages in the form of acquiring feature companies. As the M+A market switches back on, I expect larger players in the restaurant technology space to restart their acquisition activity, take advantage of record low valuations, and build a set of features that can elevate them above their competition. According to Michael Schatzberg, managing partner of Branded Hospitality, “The hospitality industry is now embarking on a transformation that so many other industries have already gone through,” said Schatzberg of Branded Hospitality Ventures. “Operators are going to go back to their roots of ‘hospitality first,’ and with that, their tech stacks will comprise of all-in-one solutions. … So, we’re going to see continued consolidation and acquisition in the tech space." (NRN)
While 2023 could be seen as a year of stagnation within the industry, I believe 2024 will be remembered as a year of strategic, thoughtful, and meaningful progress. Restaurants will continue to shrink, but become more efficient. There will be continual M+A and IPO activity, but at prices that are fair to both buyer and seller. And 2024 will be the year of intense consolidation, differentiating a handful of market leaders within the hospitality technology space. I remain overwhelmingly positive in regards to the future of the hospitality and foodservice industry, and could not be more excited to see what 2024 holds.
For all readers of the Hospitality Headline, I appreciate your continued support and look forward to sharing more articles in the New Year.