It is no secret that the restaurant industry has been on a rollercoaster the past few years. Now, as we head into the new year, Erik Herrmann, Head of the Investment Group at CapitalSpring, a leading provider of private equity and debt capital solutions, offers a comprehensive look at the anticipated trends and challenges facing the restaurant industry in 2024.
All in all, the restaurant industry, which saw significant tailwinds in 2023, braces for a year that Herrmann describes as "a little bit tougher" in 2024.
“The restaurant industry is facing a convergence of factors that are collectively impacting consumer behavior,” Herrmann said. “We’re witnessing a slight decline in traffic, influenced by the dissipation of COVID stimulus, higher interest rates and overall rising costs. These elements are placing a burden on consumer spending generally.”
Additionally, with the likelihood of a politically turbulent year, Herrmann says there will almost certainly be a growing sense of uncertainty among consumers and the capital markets.
The labor market in the restaurant industry also remains a mixed bag. “While the labor environment is relatively healthy, ongoing pressures and regulatory changes, like the FAST ACT in California, present significant challenges to certain operators,” Herrmann said.
But, if there is one thing the QSR and fast-casual restaurant industry has proven over the past four years, it's that it can handle challenges.
“These segments are generally well-insulated from such economic fluctuations,” Herrmann said. “But the industry as a whole has limited room for further price increases, as consumers are reaching a threshold. Luckily, many concepts have taken steps to mitigate rising costs and labor challenges over the past few years. Overall, we remain bullish on limited service concepts.”
On the bright side, commodity costs are expected to stabilize next year, offering some respite for operators compared to the unprecedented volatility experienced in 2022.
When it comes to the franchise side of the restaurant business, Herrmann says franchisors are set to face their own set of hurdles.
“Increased build costs and financing costs are exerting pressure on franchisees’ return on investment, potentially leading to a slowdown in franchise sales,” Herrmann said. “Some franchisees in our portfolio are waiting for interest rates to come down before moving forward with growth.”
Overall, he notes that smaller franchisees, particularly ‘mom and pop’ operations, will likely struggle more in securing capital for expansion. In contrast, Herrmann points out success stories like CapitalSpring’s investment in Far West Services, which exited in 2023. The company demonstrated remarkable growth and resilience despite the challenging climate.
“There has been a lot of consolidation in the restaurant franchise industry over the past 15 years, leading to more multi-brand platforms that have the luxury of being able to pivot growth to certain brands and throttle back others when times are tough,” said Herrmann. “Until we get back to an environment where costs get back in line, there is going to be a general headwind on franchise development.”
Herrmann says many of these same factors are set to impact the investment side of the franchising equation, as well.
“With banks being somewhat out of commission right now, there has been a noticeable boom in alternative financing options, particularly from private credit funds,” Herrmann said. “This shift is partly due to the resilience demonstrated by the quick-service restaurant sector during the pandemic. Plus, with so much consolidation, more organizations have been able to scale to a point where they are relevant to institutional investors, whether private credit or private equity funds. Still, deals remain pressured by market volatility and interest rates.”
As 2024 begins, Herrmann and his team at CapitalSpring adopt a cautious stance. “While 2023 was a year of recovery and comeback, 2024 seems poised for a more sluggish pace,” he said. “Thankfully, the flexibility of our investment capabilities makes us relevant through market cycles, so we expect 2024 to be another busy year.”
ABOUT CAPITALSPRING:
CapitalSpring is a leading institutional investor with deep expertise in food service, multi-location business models and related industries. For over 17 years, we have supported proven management teams with financial, strategic, and operational resources to accelerate growth and realize their businesses' full potential. CapitalSpring offers one-stop solutions for a broad range of investments, including private equity, mezzanine capital and senior lending and has offices in Nashville, Los Angeles, Atlanta, and New York. For more information about CapitalSpring, please visit www.capitalspring.com.
CapitalSpring
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While 2023 was a year of recovery and comeback, 2024 seems poised for a more sluggish pace due to higher interest rates and cautious consumers.
It is no secret that the restaurant industry has been on a rollercoaster the past few years. Now, as we head into the new year, Erik Herrmann, Head of the Investment Group at CapitalSpring, a leading provider of private equity and debt capital solutions, offers a comprehensive look at the anticipated trends and challenges facing the restaurant industry in 2024.
All in all, the restaurant industry, which saw significant tailwinds in 2023, braces for a year that Herrmann describes as "a little bit tougher" in 2024.
“The restaurant industry is facing a convergence of factors that are collectively impacting consumer behavior,” Herrmann said. “We’re witnessing a slight decline in traffic, influenced by the dissipation of COVID stimulus, higher interest rates and overall rising costs. These elements are placing a burden on consumer spending generally.”
Additionally, with the likelihood of a politically turbulent year, Herrmann says there will almost certainly be a growing sense of uncertainty among consumers and the capital markets.
The labor market in the restaurant industry also remains a mixed bag. “While the labor environment is relatively healthy, ongoing pressures and regulatory changes, like the FAST ACT in California, present significant challenges to certain operators,” Herrmann said.
But, if there is one thing the QSR and fast-casual restaurant industry has proven over the past four years, it's that it can handle challenges.
“These segments are generally well-insulated from such economic fluctuations,” Herrmann said. “But the industry as a whole has limited room for further price increases, as consumers are reaching a threshold. Luckily, many concepts have taken steps to mitigate rising costs and labor challenges over the past few years. Overall, we remain bullish on limited service concepts.”
On the bright side, commodity costs are expected to stabilize next year, offering some respite for operators compared to the unprecedented volatility experienced in 2022.
When it comes to the franchise side of the restaurant business, Herrmann says franchisors are set to face their own set of hurdles.
“Increased build costs and financing costs are exerting pressure on franchisees’ return on investment, potentially leading to a slowdown in franchise sales,” Herrmann said. “Some franchisees in our portfolio are waiting for interest rates to come down before moving forward with growth.”
Overall, he notes that smaller franchisees, particularly ‘mom and pop’ operations, will likely struggle more in securing capital for expansion. In contrast, Herrmann points out success stories like CapitalSpring’s investment in Far West Services, which exited in 2023. The company demonstrated remarkable growth and resilience despite the challenging climate.
“There has been a lot of consolidation in the restaurant franchise industry over the past 15 years, leading to more multi-brand platforms that have the luxury of being able to pivot growth to certain brands and throttle back others when times are tough,” said Herrmann. “Until we get back to an environment where costs get back in line, there is going to be a general headwind on franchise development.”
Herrmann says many of these same factors are set to impact the investment side of the franchising equation, as well.
“With banks being somewhat out of commission right now, there has been a noticeable boom in alternative financing options, particularly from private credit funds,” Herrmann said. “This shift is partly due to the resilience demonstrated by the quick-service restaurant sector during the pandemic. Plus, with so much consolidation, more organizations have been able to scale to a point where they are relevant to institutional investors, whether private credit or private equity funds. Still, deals remain pressured by market volatility and interest rates.”
As 2024 begins, Herrmann and his team at CapitalSpring adopt a cautious stance. “While 2023 was a year of recovery and comeback, 2024 seems poised for a more sluggish pace,” he said. “Thankfully, the flexibility of our investment capabilities makes us relevant through market cycles, so we expect 2024 to be another busy year.”
ABOUT CAPITALSPRING:
CapitalSpring is a leading institutional investor with deep expertise in food service, multi-location business models and related industries. For over 17 years, we have supported proven management teams with financial, strategic, and operational resources to accelerate growth and realize their businesses' full potential. CapitalSpring offers one-stop solutions for a broad range of investments, including private equity, mezzanine capital and senior lending and has offices in Nashville, Los Angeles, Atlanta, and New York. For more information about CapitalSpring, please visit www.capitalspring.com.
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