By Evie Liu

Restaurant operators reliant on fresh, imported produce likely will feel the pain from the Trump administration's new tariffs sooner than others, but the damage may not be as bad as feared.

Stocks of restaurants, especially those with high valuations due to expectations of strong growth, have tanked on Thursday. Sweetgreen shares plunged 13%, Brinker International, the owner of Chili's, fell 12%. Shake Shack dropped 12%. Cheesecake Factory, Dine Brands, and Cava all declined more than 8%.

While other sectors may have inventories of imported goods that will blunt the damage, restaurant operators rely on fresh ingredients. Avocados, for example, can't be stored for long.

That means restaurant chains will soon be buying ingredients whose prices have been lifted by tariffs. Higher prices on their menus, the likely result, are likely to discourage consumers, who are already sensitive to costs. Foot traffic has been declining at some restaurants since last year.

"Applying new tariffs at this scale will create change and disruption that restaurant operators will have to navigate to keep their restaurants open," said National Restaurant Association President and CEO Michelle Korsmo in a statement on Wednesday.

The NRA said it would ask the White House to have food and beverages exempted from the tariffs. Korsmo said the restaurant industry has kept menu price increases to 30% in the last five years, even as food costs have gone up by 40%.

The stakes are higher because the U.S. has become increasingly reliant on agricultural imports over the past decades. Consumers increasingly expect year-round access to a diverse array of produce, including items that are either not grown domestically or are out of season.

According to the USDA Economic Research Service, as of 2023, imports made up 59% of the fresh fruit and 35% of the fresh vegetables available in the U.S. It simply isn't possible for American farmers to meet consumer demand.

Many agricultural products require a particular climate. For example, South and Central American countries produce around two thirds of the world's avocados, and Mexico alone fills 80% of the U.S. demand. California has been catching up, but it is still just a small portion.

On the positive side, Mexico wasn't included in Wednesday's tariff announcement because it is subject to its own 25% levies. Goods compliant with the USMCA trade agreement are exempt for now.

Also important to remember is that much of the meat and grains the U.S. consumes is produced domestically. And ingredients are only one part of restaurants' costs. Labor and rent are major expenses as well.

At Darden Restaurants, the owner of Olive Garden, about 80% of the items in its ingredients basket are from domestic sources, CFO Rajesh Vennam said on the latest earnings call.

"Our supply chain team is working on strategies to mitigate risk, whether it's through, in the near term, inventory management, or in the longer term, alternate sourcing methods and further negotiations with vendors," he told analysts.

Shake Shack management also noted on its latest earnings call that most of its ingredients are bought in the U.S. "We don't really have a huge outside risk," said CFO Katherine Fogertey.

That doesn't mean investors shouldn't worry. If tariffs bring on a recession, consumers likely would pull back, regardless of what restaurants charge.

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

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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April 03, 2025 16:03 ET (20:03 GMT)

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