U.S. restaurants should start cooking up schemes to cushion their bottom line.
While the future looks stable for most in the restaurant industry, players are set to face a few fundamental challenges in the coming years, forcing them to adapt to a changing consumer, according to a note from Moody's Investors Service.
Consumers continue to value dining out, which is good news for a restaurant industry facing ongoing cost pressure over the next 12 to 18 months, Moody's wrote. Operating income for the sector is set to grow 5% to 7% in 2017, then slow some to grow between 4% and 6% in 2018.
Some of the stronger players, according to Moody's, are McDonald's Corp. (MCD - Get Report) , Starbucks Corp. (SBUX - Get Report) , Yum! Brands Inc. (YUM - Get Report) and Darden Restaurants, Inc. (DRI - Get Report) given their scale and financial flexibility.
Slowing operating income could be a product of rising employee costs. "As more states raise their minimum wage and companies try to attract a more engaged employee, higher labor costs will pressure margins," analysts wrote. To keep ahead of the pack, restaurants have been "proactively raising wages above state minimums and offering other incentives such as education assistance and healthcare."
Promotions, discounts and limited time offers will also stay high in the coming months, Moody's wrote, which "limits the sector's earnings potential at a time when commodity costs remain historically low and operators are striving to increase guest frequency and bring back lapsed users." But those attractive deals are paramount to attracting a growing customer base.
The casual dining sector will face the highest hurdles in the coming months, Moody's noted, as "the fight for U.S. market share continues to intensify." Quick service restaurants will fare somewhat better than other casual rivals.
"Delivery will continue to grow, but it will take time before it benefits the top line," Moody's said. Restaurateurs continue to test the best formats for delivery and take-out, with curbside pickups continuing to gain traction in the space.
But even as the restaurant sector changes quite dramatically, companies continue to add locations. In addition to opening new U.S. units, many firms are looking to Europe, Asia and Latin America - that means more openings than closings in the industry, analysts wrote.
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