High Debt Levels to Dampen Canadians’ Appetite for Eating Out

Tapped-out consumers will dampen sales in the food services industry over the next five years. Restaurant sales are forecast to grow by an average of just 1.4 per cent per year between 2018 and 2022, according to The Conference Board of Canada’s Canadian Industrial Outlook: Food Services

“Canadians’ ability to spend will be squeezed not just by high debt levels, but by rising interest rates that will increase the cost of servicing their debt,” said Michael Burt, Director, Industrial Economic Trends, The Conference Board of Canada. “This will leave Canadians with less disposable income and likely diminish their willingness to dine out.”

“Weaker sales growth will increase competition for Canadians’ food dollars”

 

Highlights

An anticipated slowdown in consumer spending growth will weigh on the outlook for the food services industry.

Aggressive discounting practices by major Canadian food retailers resulted in price deflation at grocery stores in 2017. With Amazon set to makes inroads into the Canada food retail landscape, grocery prices will post modest growth at best. This will provide some cost relief for restaurant operators.

Industry pre-tax profits are expected grow by 3.4 per cent to reach $1.9 billion in 2018.
 
Weaker sales growth will increase competition for Canadians’ food dollars. Already facing increased competition from trends such as meal kits, many restaurant operators will be hard-pressed to maintain sales growth. Such an environment will present the largest challenges to full-service restaurants, which not only have the lowest margins within the industry, but have already lost sales to limited-service restaurants over the past two years.

Despite moderating sales growth, the financial performance of the industry will remain healthy. On the cost side, significant minimum wage hikes in both Ontario and Alberta will raise industry labour costs this year and next. At the same time, these wage hikes will drive down demand for labour, with the industry projected to shed 6,000 workers between 2017 and 2019. A lower headcount, combined with lower food prices, should keep overall cost increases in check.

On the revenue side, moderating growth in restaurant traffic is expected to dampen revenue gains over the forecast period. However, rising adoption of technologies (such as mobile pre-ordering apps) and a shift in culture toward data-driven business should help drive operational efficiency and labour productivity gains that will offset at least some of the negative impact on revenues of slower growth in customer visits. In all, industry pre-tax profits are expected to reach $1.9 billion in 2018, while profit margins will remain low at 2.7 per cent.