This post is part of the On the Margin blog.
Consumers have been spending more of their discretionary income at restaurants amid rising employment and falling gas prices.
This, combined with lower operating costs thanks to commodity deflation, should be a boon to the restaurant industry, according to a new outlook from Moody’s Investors Service.
“We believe improved spending and lower operating costs will bolster top-line growth and operating income for the industry over the next 12 to 18 months,” Moody’s wrote in its industry outlook.
Moody’s raised its operating income forecast for the industry, calling for operating income to grow 5 percent to 6 percent over the next 12 to 18 months, compared to its earlier call of 2 percent to 4 percent.
The restaurant industry suffered through a highly inflationary commodity environment for years, particularly for certain commodities such as beef and chicken wings. And 2014 was particularly bad, with high costs and weak sales.
But commodities as a whole declined by 3.4 percent last year as proteins such as pork fell off of the previous year’s highs. This year, beef is expected to fall, which should pull commodities down further.
At the same time, industrywide sales are up. According to federal data, sales at eating and drinking places rose 5.5 percent in March from the same month a year ago. Restaurant sales picked up 6.8 percent the first three months of the year, according to Census data.
Restaurants also continue to build and expand, adding 374,000 jobs over the past year. Few signs likely point to a healthy industry quite like job creation.
Moody’s believes that technology innovation could improve operating efficiency and the customer experience. Tabletop tablets, mobile ordering and kiosks should all enable restaurants to operate better locations while improving customer experience by reducing wait times and improving order accuracy.
But it also believes that headwinds should intensify in the coming years thanks to wage inflation. A higher minimum wage combined with increasing competition for a more limited labor pool should contribute to higher industry labor costs in the coming years.
The agency also has an interesting take on the minimum wage. Moody’s believes that, while higher wages should crimp margins by increasing labor costs, the higher wages should also boost spending.
“We don’t believe the benefit will be a dollar-for-dollar spend at restaurants because any additional spending power from wage increases will likely be distributed among other consumer needs,” Moody’s wrote. “Moreover, restaurants will be absorbing higher labor costs, which will partially offset the increased discretionary spend that they will be getting as more consumers dine out.”
And other things should take a bite out of discretionary spending currently going to restaurants, such as prescription drugs, rent, health care, car payments and cell phone bills.
Still, for now, this should be a good year for restaurant earnings.