Restaurant owners say hiring is increasingly challenging and delta could spoil recovery

• The National Restaurant Association projects restaurant and food service industry sales will jump nearly 20% to $789 billion this year, from $659 billion in 2020.
• The estimate is still far below pre-pandemic sales of $864 billion.
• Labor challenges have intensified this year, according to restaurant owners. They also are concerned about rising food costs and the potential for the Covid delta variant to stall recovery.

After a dire 2020, the restaurant industry is staging a comeback, but headwinds will likely keep it from bouncing back to 2019 levels, a new report shows.

The National Restaurant Association projects restaurant and food service industry sales will jump nearly 20% to $789 billion this year, from $659 billion in 2020. But the projection is still far below pre-pandemic sales of $864 billion, the group said in its midyear "State of the Industry" report.

Pent-up consumer demand, stimulus payments and vaccine availability fueled restaurant sales in the first half of the year and helped restaurant owners climb back from the losses the industry faced during the early months of the health crisis.

But serious challenges such as labor shortages and rising food and fuel costs are limiting gains. Even more worrisome, a resurgence in Covid-19 cases in recent weeks is clouding the picture for the months ahead. It has delayed plans for some companies to return to the office, limited travel and could impact consumer behavior.

"2020 was certainly the most challenging year in the history of the restaurant industry, and 2021 is shaping up to be the year of transition and rebuilding," said Hudson Riehle, senior vice president of the trade group's research and knowledge division.

"There are recruitment and retention challenges, food cost challenges, rapid changes in consumer demand for both on site, and off-premises dining … but the pandemic impacts still are being dealt with on a week-to-week basis," he said.

Labor challenges intensify

Staffing has grown, the data shows, with seven consecutive months of employment gains. But eating and drinking places are still nearly 1 million jobs below pre-pandemic staff levels at 11.3 million in July.

Labor challenges have intensified, with 75% of operators saying recruiting and retaining workers was their top business challenge — the highest level recorded in the 20 years the group has tracked this data. In January, just 8% of operators said labor was their top challenge.

Owners are also grappling with how to handle vaccination requirements.

At Olamaie, a modern Southern food restaurant in Austin, Texas, owner Michael Fojtasek is short three employees and has been requiring vaccinations. He said his vaccine mandate hasn't hurt the hiring process so far.

He opened a second business, Little Ola's Biscuits, two months ago as a spinoff of his main location. Things are going well for the new business, which offers a contactless, curbside model, but Fojtasek said the future feels uncertain as the pandemic wears on.  

"Our top challenge today is uncertainty," he said. "As operators, we don't know the best pathway in order to run the business. We are all, as we have been from the beginning, trying to figure it out for ourselves. And I would argue that we haven't had a great amount of leadership from our elected officials around this for the hospitality industry."

Delta weighs on recovery

The fast spread of the delta coronavirus variant is a looming threat. The summer kicked off with high hopes in the restaurant industry as rising rates of vaccinations brought diners back. But now, Covid-19 cases are rising throughout the U.S. in some places, and the increase rivals numbers seen during the winter peak. Some Southern states are seeing their worst outbreaks of the entire pandemic.

A recent National Restaurant Association survey of 1,000 adults found that 6 in 10 say they have changed their restaurant habits due to delta. One in five say they choose to sit outdoors when dining, 37% say they've ordered delivery or takeout instead of dining on site, and 19% said they stopped dining in restaurants altogether.

Last week, McDonald's and its franchisees discussed what data should prompt dining rooms to close again, according to internal company materials viewed by CNBC.

Cava CEO Brett Schulman said the Mediterranean food chain has seen a steady, slow recovery in urban restaurants level off over the summer as delta took hold, but consumers are continuing to seek out familiar experiences in varying ways. The recovery has held steady in suburban locations, where the bulk of its restaurants are located.

"People have gotten conditioned to using our digital contactless channels even more than they did prior to the pandemic, that's helped us engage with them more frequently as the in-store businesses come back. They realize there are multiple ways for them to get their Cava lunch," he said.

Schulman said digital sales have grown more than 65% and account for 45% of the company's channel mix today. The privately held company doesn't disclose specific sales totals.

Lasting changes

Owners are also facing higher food and fuel prices and menu prices have also risen. Consumer prices for food away from home were up 3.9% year to date through June, which will correlate to menu prices increasing at their strongest annual rate in more than a decade.

Many of the creative solutions operators leaned on during the pandemic have bolstered business in a positive way and are likely here to stay. Customers surveyed said technology made ordering and payment easier, improved customer service and sped up the overall restaurant experience.

Alcohol to go, which became a staple last year, is also here to stay. Sixteen states and Washington, D.C., will allow it permanently, and 14 states have extended their initial programs.

Similarly, outdoor dining and parklets remain popular. Ninety percent of operators who took advantage of expanded access to outdoor seating areas said they would continue to offer it if their jurisdiction allowed these options post-pandemic. Off-premise demand has also remained above pre-pandemic levels.

"The two fundamental drivers of the restaurant industry are convenience and socialization, and that convenience component during the pandemic has been emphasized and accelerated for greater availability," Riehle said. "Recent months have demonstrated there remains substantial pent-up demand for the socialization driver — in other words, the onsite restaurants. So those two in tandem, engage in an ebb and flow as pandemic progresses and then wanes."

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