By Morag McKenzie
It’s a small world. That’s a phrase we hear all the time as technology, the media and our inter-connected supply system combine to make it smaller every day. Our ever-shrinking world means the global macro-economy and events, including inflation, interest rates, immigration and geopolitical unrest, impacts Canadians — and Canadian restaurateurs.
Influenced by Interest Rates
Central banks around the world, including in Canada, have kept interest rates high to try to slow down the demand side of the economy so the supply side could catch up. “As we see inflation begin to slow down, the Bank of Canada (BoC), Federal Reserve and other countries’ central banks will lower interest rates, which will lead to stronger economic growth and will result in stronger foodservice sales,” explains Chris Elliott, Chief Economist and VP, Research for Restaurants Canada. “That’s why it’s so relevant for all restaurateurs to understand what’s happening in the macro economy as it directly impacts both the demand and supply side of their business.”
Higher interest rates have also led to a slowdown in new restaurant construction and expansion. “We’re seeing a greater focus on merger and acquisition of existing business versus new development in the restaurant and brewery sectors. Higher interest rates have also led to uncertainty as investors would rather realize the more immediate increased revenues from an additional existing business versus the longer time line and higher start-up costs associated with a new one,” explains Jacob Mancini AVP, Restaurants and Breweries, Canadian Western Bank.
Mancini adds, “We expect to see further consolidation in both restaurants and breweries due to the high overhead costs associated with each.”
Globally, we’re experiencing the highest inflation rates seen over the last 40 years. High inflation leads to sky-high food, energy and supply costs, resulting in less disposable income for Canadians to spend in foodservice operations. In the second quarter of 2022, inflation hit eight per cent in Canada. In 2023, Canada’s inflation rate began to come down to 2.9 per cent versus 4.1 per cent in the U.S., one of the lowest levels compared to other G7 nations.
Grocery store and menu inflation have risen, and decreased, at varying rates. “In a similar trend to the U.S., grocery inflation was much higher than menu inflation in 2022 and 2023, which had a positive effect on restaurants,” explains Vince Sgabellone, director of Client Development and Foodservice Industry Analyst at Circana. However, he says this trend has reversed in 2024, with menu inflation now out outpacing grocery inflation, a trend which requires special attention from operators.
Overall inflation is projected to continue to decrease in 2024 to 2.5 per cent in Canada and 3.2 per cent in the U.S., while in Europe it’s projected to remain stubbornly high at 7.3 per cent. As many Canadian restaurants rely on Europe for both menu ingredients and supplies, this will continue to affect Canadian restaurants.
“High inflation has an enormous influence on the cost of goods and generally resulting in higher menu prices, many which have reached the maximum price the market will bear. Breweries have also been impacted as the cost of aluminum for cans and grain has soared,” explains Mancini.
And while inflation impacts all foodservice operations, some sectors have been impacted less due to the demographic they attract. “Our core demographic is 18 to 25 (late night and university) and they don’t worry about inflation as much as their cost of living is generally lower (could be supported by parents) and yet still have high disposable income,” explains Mark Cunningham, CEO for Smokes Poutinerie, adding “inflation has affected our cost of food and equipment which has affected our pricing and new build and growth strategy.”
Global Conflict
Global conflict can also lead to higher food and supplies prices in Canadian restaurants. The Russian invasion into Ukraine led to higher energy prices as embargoes were placed on Russian oil and grain prices soared as Ukraine is a major grain producer.
“Certain types of grains and hops can only be grown in the Ukraine or other parts of Europe, significantly impacting Canadian breweries,” explains Mancini.
While most of the supply bottlenecks have been removed, global conflict also contributes to higher prices as wars in the Middle East require ships to travel longer and more expensive routes.
Immigration
Economists agree — Canada’s significant increase in population is due to immigration. “Canada’s economy grew three per cent due to population growth from immigration,” states Elliott.
New immigrants bring new spending into Canadian restaurants as well as providing much-needed labour-and capital. “Many immigrants have money and the desire to work and/or own a restaurant. This has been particularity strong in Western Canada,” adds Mancini.
Immigration has also had a very positive affect on restaurant franchises. “Many new Canadians want to become business owners and we have had a lot of success expanding into new markets including smaller cities in Manitoba, Saskatchewan and Alberta,” states Cunningham. “It has also had a very positive affect on staffing levels.”
Impact on Operations
Once adjusted for inflation and population growth, there has been weaker spending across some foodservices segments. “Drinking places have been hardest hit as Canadians are generally not going out to bars and are drinking less. To combat that, bars are adding more food to provide customers with the fuller experience they would get at a full-service restaurant,” explains Elliott. He adds, “Coffee shops have become the number-1 place for first dates and friends to meet.”
And while some restaurant segments continue to see weaker growth, others are expanding. “Traffic at full-service restaurants (FSR) grew four per cent versus QSR’s which grew three per cent over the last 12 months ending May 2024,” states Sgabellone.
Much of the FSR growth is concentrated in larger urban centres, including Toronto and Vancouver. “There have been several large new upscale casual restaurants open in Toronto, including a new Earls in the downtown financial core. As many workers are only going into their office two-to-three days a week, they are not brown bagging,” explains Mancini.
Where do we go from here?
Overall inflation is now within one to two per cent of Bank of Canada’s (BoC’s) target at approximately 2.9 per cent but is projected to decrease to two per cent in 2025. “We’re expecting to see the BoC lower interest rates in 2024 and additional cuts in 2025,” concludes Elliott. This same trend is projected in the U.S. and other central banks in Europe.
These lower interest rates is good news for Canadian restaurateurs, as the cost of borrowing decreases and disposable income, which can now be used for restaurant visits, becomes more available.
However, uncertainty in the global markets due to ongoing geopolitical conflicts, elections, et cetera could continue to affect Canadian restaurants. “The most immediate impact is the U.S. election, which could bring in new tariffs that would impact pricing,” states Elliott.
Restaurant growth and expansion is projected to continue in the short and long term. At its peak, Smokes Poutinerie had 12 operations in the U.S. and 120 in Canada and around the world. “Our current outlook in the U.S. and abroad, is to take a non-traditional approach to our operations. This focuses on ghost and shared kitchens, which we share with other leading brands,” explains Cunningham. The brand is also expanding into non-traditional retail locations such as Walmart, many of which offer delivery only.
Strategies to continue to grow profits include becoming an employer of choice, which decreases the cost of hiring while increasing morale and growing sales. “Restaurants need to elevate the entire dining experience, including attention to menu details, atmosphere and service,” concludes Sgabellone, adding other strategies include exploring new markets such as non-traditional catering (smaller, niche markets) and new dayparts such as brunch.
