Kevin O’Leary is known around the world for his extensive understanding of the economy and, more specifically, how and why businesses thrive or fail.
In a recent article, the successful businessman and economic expert explained why so many American restaurants have either closed their doors for good or are struggling to stay afloat. His answers may surprise you.
Hundreds of American Restaurants Have Closed Their Doors for Good
Before hearing what O’Leary has to say, it’s important to understand the dire situation of the American restaurant industry.
Restaurant companies, both small and large, have closed thousands of brick-and-mortar eateries throughout the US over the past four years, and the industry as a whole is seriously suffering.
Closings Left and Right
The restaurant industry has always been extremely challenging to break into; some reports say that 60% of all new restaurants close within the first year of operation, and 80% don’t make it past five years.
However, now, many well-established, financially successful, and previously popular restaurants are closing, too.
Red Lobster, Applebees, and Denny’s Are Closing Their Doors
Red Lobster has filed for bankruptcy and closed more than 100 locations and Applebees has shuttered more than 300 of its restaurants.
Others, including Denny’s, TGI Fridays, and Outback Steakhouse, have each closed around 50 restaurants, and could close more over the coming months.
O’Leary Says COVID-19 Is to Blame
The situation is certainly problematic for restaurant owners, employees, customers, and even the United States economy as a whole. While Kevin O’Leary doesn’t claim to have a solution, he believes he at least knows why it’s happening.
O’Leary explained he believes there are several reasons why this is happening, though he argues that the major influence is undoubtedly the COVID-19 pandemic.
The World Has Changed Drastically Over the Past Four Years
During the COVID-19 pandemic, people all but stopped eating out at restaurants. While some opted for delivery services, others started cooking more of their meals themselves.
Now, even though the pandemic is over, millions of Americans never returned to their old ways. Many continue to prepare meals at home or order delivery from their few favorite restaurants, and it’s led to a significant decrease in sales throughout the industry.
The Pandemic Increased Food Prices
Meanwhile, while American trends were changing, the pandemic also led to issues in the nation’s supply chains, which have persisted well into 2024.
These disruptions have led to an increase in food prices. In fact, the US Department of Agriculture reports that the cost of food products increased by 25% from 2019 to 2023. This reality has forced restaurants to increase their menu prices, further alienating the American consumer.
Urban Restaurants Can’t Afford Their Rent
While product prices have increased, so have other costs, such as rent and utilities. O’Leary mentions that restaurants in urban areas are struggling to make enough money to pay their bills.
The businessman said, “Eateries in urban locations have been hit especially hard as their expensive locations are no longer receiving the footfall they need to meet rent.”
Americans Are Eating Out Far Less Than Before
Additionally, he explained that as millions of Americans now work from home or have a hybrid schedule, far fewer people go out to eat on their lunch break. O’Leary noted, “This has been devastating to businesses that invested in brick-and-mortar locations.”
He also explained that while some Americans are skipping restaurant meals because they don’t work at an office every day, others have decided to change their eating habits simply to save money.
More Americans Than Ever Are Cutting Back on Spending
Several reports, including one from Wells Fargo Bank, show that Americans are drastically adjusting their budgets. According to the bank’s survey, 67% of Americans say that they’ve cut back on spending.
It also found that 62% of Americans “say that even though they are able to pay their bills, they have little left over for ‘extras.’”
Even Fast Food Chains See a Decline in Sales
A Morning Consult survey reported that 62% of Americans had reduced spending, specifically at restaurants and bars, in 2023. That includes fast-food eateries like McDonald’s, Starbucks, and Domino’s.
For decades, fast food chains offered low enough prices to attract all Americans, even those on a budget. But in 2024, nearly 80% of Americans say fast food is a luxury they cannot afford.
Some Businesses Are Offering Deals to Entice Customers
In response to this reality, many restaurant chains are making changes to their price tags. Companies like McDonald’s and Starbucks are now offering substantial discounts to attract customers.
However, only big-name chains will be able to offer such deals as they make enough to cover their rent and product purchases. With the current operation costs, independent restaurants simply won’t be able to lower their prices enough to appease the average consumer.
Every Day There’s Another Restaurant Closing
O’Leary said, “Seemingly every day, there’s a headline announcing a bankruptcy, layoff or store closure impacting one of the country’s most beloved brands.”
And he’s certainly not wrong; thanks to ongoing inflation, Americans simply cannot afford to eat at restaurants, and these restaurants cannot afford to lower their prices.
Big Chains Will Survive, But Hundreds of Other Restaurants Won’t
As O’Leary explained, “McDonald’s and Starbucks will survive,” but dozens or even hundreds of other companies will likely fold if something doesn’t change in the very near future.
So the question remains, what can change? It’s certainly a complex question, but realistically, it boils down to inflation, wages, and the overall economy of the United States. So let’s find out if restaurant prices will ever go down again.
Inflation Is Decreasing, But Restaurant Prices Aren’t
One of the most confusing realities for Americans is that their lawmakers have proudly announced inflation is decreasing, but the prices for food, products, and housing have not.
In order to understand why this is happening, it’s first crucial to learn exactly what inflation is and how it affects the cost of living. Inflation is a gradual loss of purchasing power, calculates as the average increase of goods and services.
Trying to Understand Inflation
Here is an anecdote to help you understand inflation: A person weighed 200 pounds in 2019, then in 2020, they gained 5 pounds. In 2021, they gained 11 pounds, in 2022, 9 pounds, and in 2023, 6 poounds.
If in 2024, they only gained 3 pounds, it would seem as their their weight gain has gone down, but they still weigh 34 more pounds than they did in 2019.
Inflation Is Technically Going Down But It’s Still Much Higher Than Before
With this story in mind, it’s easier to understand how, even though inflation seems as though ti’s going down, it’s still much higher than it was just five years ago.
And as William Hauk, an associate professor in the Department of Economics at the University of South Carolina, explained, “If inflation goes down, it means that the rate at which prices increase is slowing down, but it generally is not going to mean that prices are going down.”
Decreasing Prices Are Actually a Bad Sign
Although Americans desperately want prices to go down, it’s highly unlikely that this will actually happen. And contrary to popular believe, decreasing prices would actually be a bad thing, not a good thing.
Economists explain that cheaper prices, also known as deflation, is a terrible sign for the overall economy and could lead to a recession.
An Increase in Wages Isn’t the Perfect Solution Either
If prices are going to stay at least as they are now, or even increase in the coming years, many Americans argue that the best course of action is to increase wages and salaries.
However, this isn’t the perfect solution either. As one economic text book explains, “As the money wage rate rises, the [aggregate supply] curve shifts leftward and the price level rises and real GDP falls.” In other words, higher wages will simultaneously increase the cost of living.
Seeing This Effect in Real Time in California
An example of this reality can be seen in California right now. The Golden State governor, Gavin Newsom, passed a bill last year that increased the minimum wage for all residents to $16 and for fast food workers to $20 per hour.
Since that bill went into effect on January 1, 2024, the cost of fast food has skyrocketed across the state. So while some people are making more money, all Californians are now paying more too.
Giving American Consumers What They Want
It’s important to understand that, since the prices of restaurants will not be decreasing in the near future, more businesses will continue to close. However, Americans still have to eat.
Even though, as Kevin O’Leary explained, the restaurant industry as a whole is suffering, there are certainly some businesses that will continue to profit simply because they are offering what Americans want.
Now Is the Time to Perfect Your Business Model
According to a report by Restaurant.org, 9 in 10 Americans say they enjoy going to restaurants, but because most consumers are cutting back on spending, they are being more selective in their restaurant choices.
The report said that “45% of operators expect competition to be more intense [this year] than last year.” In other words, restaurants need to ensure their service, food quality, and of course price tags, are desireable for as many Americans as possible.
The Restaurant Industry Will Continue to Make Money
The Restaurant.org report also noted that “The food service industry is forecast to reach $1 trillion in sales in 2024.”
Meaning the industry will continue to thrive overall, even if certain companies don’t make it. But which restaurants will survive and thrive and which won’t remains to be seen.
What’s Next for the American Restaurant Industry?
Inflation, customer spending, and general trends play a huge role in the American restaurant industry. Each of the factors discussed here will absolutely affect not only the industry as a whole, but individual restaurants and companies as well.
There’s no question that the restaurant industry will survive; however, only the businesses that ignite customer loyalty and present the best possible food, prices, and services will last.
