Evie Liu

Restaurants this year will continue vying for hesitant customers with meal deals while using technology to make their service more efficient.

Last year was a reckoning for restaurants. As the pandemic recovery faded, consumers dined out less often amid inflation pressure. Comparable sales stayed flat or declined at many restaurant chains, leading to falling stock prices. The industry has seen a spat of bankruptcies and executive changes as a result.

Although sales have recovered a bit in recent months due to the many promotions fired up since the summer, economic headwinds are expected to continue in 2025. "We expect this underlying trend to continue into the first-half, as the consumer environment remains largely the same," BTIG analyst Peter Saleh wrote in a December note.

Saleh expects heavy promotions -- intended to recapture customer traffic and attention -- to continue next year. Promotional activities escalated over the summer, led by McDonald's $5 meal deal. Others, from fast-food peers like Restaurant Brands' Burger King and Wendy's to full-service restaurants like Outback Steakhouse, have followed suit.

McDonald's shares are down 2.3% so far this year, Restaurant Brands lost 16.9%, and Wendy's fell by 16.5%, each underperforming the S&P 500 index's 23.8% gain.

With McDonald's poised to launch its McValue menu in early January, that could start another round of promotions, Saleh says: "Given the constant drumbeat of value from behemoths like McDonald's, we expect the rest of the industry to follow suit, doubling down on value through at least the first quarter, but likely through the summer."

Some corners might perform better than others. According to data from Black Box, November sales for full-service restaurants increased 5.3% from the same period last year, and half of the growth can be attributed to better traffic. This is the first time the number turned positive this year except for a 1.4% gain in May.

The trends for quick-service restaurants are less rosy. Although November sales increased 3.8% from a year ago, it was mostly driven by higher prices. Store traffic was actually down by 1%, according to Black Box. In California, particularly, the casual-dining sector has outperformed national average since June, while quick-service chains underperform national trends.

This likely reflected consumers' response to the narrowing price gap between the two segments, as fast-food chains imposed outsized price increases in California after the state raised the minimum wage for fast-food workers from $16 to $20 per hour in April, Raymond James analyst Brian Vaccaro wrote in a recent note.

As restaurant operators continue to face labor shortages and wage inflation, they will install more technologies to simplify time-consuming and repetitive tasks, and to save on costs. "We think this will be an emerging theme this year, as numerous tests proceed towards wider deployment in search of labor savings and efficiencies," wrote Saleh.

Ordering kiosks are becoming more common, robots and drones are used to deliver food. Many fast-food chains are already using artificial intelligence-powered voice assistants to take orders at drive-through windows. Chipotle Mexican Grill and Sweetgreen are working on automatic systems that could assemble salad bowls in just seconds.

Chipotle has been a leader in its automation efforts. This year, it also unveiled a robot that can peel, pit, and chop avocados. The investment seems to be paying off. The California location where the machine is deployed saw 10% more visits compared with the average Chipotle restaurant in the area, according to Placer.ai.

"With workers able to focus on other aspects of food preparation and customer service, the innovation appears to be resonating with diners," the data company wrote in a November post.

Visitors are getting their food more quickly, according to the firm, 43.9% of visits at this location lasted 10 minutes or less, compared with 37.5% at other stores in the area.

Write to Evie Liu at evie.liu@barrons.com

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January 02, 2025 01:00 ET (06:00 GMT)

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