Industry Reports

What’s Going on in the Restaurant Construction Industry?

restaurant construction industry

All around Toledo, it seems like every other day or so, a new restaurant is being opened.

Whether new builds or renovations to existing sites when a new brand takes over another, our area is continually plentiful with numerous options for food.

(This includes an overabundance of pizza places. The greater Toledo region is positively teeming with pizza joints – many of which are locally-owned. What can we say? Toledo must love pizza.[1])

The other day, I was on my way to work when I saw that yet another restaurant is coming to Toledo (a pizza place, of course), so this made me wonder about the restaurant construction industry, its current state, and what the future holds.

What I discovered was both expected and surprising at the same time. Here are some restaurant construction industry insights and trends based on a recent industry report from the market research firm IBISWorld.

1) There’s a reason that it seems like there’s been a significant influx in restaurant construction: There has been.

From 2014-2019, the restaurant construction industry grew at an annualized rate of 2.9%. With a stronger economy and a lower unemployment rate across the country, consumers had more disposable income that they could spend on restaurants (including Toledo’s many pizza joints).

Industry operators also benefited from lower interest rates. As a result, the restaurant construction industry revenue reached a total of $4.9 billion.

2) Nevertheless, the restaurant construction industry is expected to experience a decline in growth from 2019-2024.

Despite the favorable conditions over the past five years, IBISWorld predicts that the restaurant construction industry’s growth will stop starting this year. The expected trend is for the annualized growth to drop to -0.6% per year, leading to a decline from $4.9B to $4.7B.

The main factors driving the decrease in growth will be rising interest costs and a decreased level in consumer confidence. The latter factor can be derived from the Consumer Confidence Index (CCI), an economic indicator tracked by the Conference Board, Inc.

The CCI reflects prevailing business conditions and likely developments for the months ahead and measures consumer buying intentions and attitudes across the U.S.

According to the June 2019 report, the CCI declined in June. During this time, fewer consumers thought that business conditions were “good,” that jobs were “plentiful,” and that business conditions would be better six months from now. Consumers also reported a less optimistic outlook for the labor market, as well as short-term income prospects.

What does this mean for the restaurant construction industry? In summary, if consumers’ confidence in their job prospects, disposable income, and business conditions wanes, they will be less likely to spend income in restaurants.

But IBISWorld also predicts that there will be a slower growth (an annualized rate of 0.8%) in the number of American households that earn more than $100,000 per year. This, in turn, will mean that fewer families will have the disposable income needed to frequent restaurants.

3) The restaurant construction industry – which historically has been very fragmented – will remain as fragmented over the next five years.

From 2014-2019, the restaurant construction industry had a low level of market share concentration. There were no major industry players – especially nationally.

Instead, the majority of construction companies were local general contractors whose scale was regional at best. This industry fragmentation is expected to continue from 2019-2024 per IBISWorld.

Conclusion

The restaurant construction industry experienced a period of growth from 2014-2019 because of lower interest levels and an improved economy, but the next five years may prove to be less profitable for this industry. When it comes to market share, the fragmented nature of the industry will remain over the next five years as well.

And in Toledo, that may mean fewer pizza joints, but we can only estimate what the future will hold.

 

[1] My personal favorite is Pizza Cat. This statement in no way represents the views of COACT Associates, however. It just reflects the personal preference of this author.