Restaurant executives worry less about tariffs, more about the consumer

Image by Nico Heins

Restaurant operators have been hit with a lot over the past few years: A pandemic, inflation, regulations, supply shortages, labor shortages, frustration over high prices. 

You can now add tariffs to that list. President Trump earlier this year instituted new tariffs on Canada, Mexico and China and then earlier this month announced sweeping new import taxes on the bulk of world countries. The current average effective tariff rate is 28%, according to The Budget Lab at Yale. 

Such taxes will likely mean higher costs for everything from spoons to imported beer to construction equipment, likely adding further cost pressures to an industry that hardly needs it. 

But in discussions with operators this week at the Restaurant Leadership Conference and elsewhere, the bigger concern was on the impact on the consumer itself. 

“The consumer is shaken,” said James O’Reilly, CEO of Ascent Hospitality Management, owner of Huddle House and Perkins.

Tariff talk has hit the U.S. consumer hard. Consumer sentiment fell off a cliff in April, according to the University of Michigan, falling to its lowest level since the 1950s. Consumers believe tariffs will lead to higher prices and they’re worried about the state of jobs. 

That is diminishing what many believed would be an improved economic environment. On the surface, in fact, the environment is as strong as it’s been in years. Inflation is falling. Unemployment remains low. What’s more, the number of teenagers in the workforce is as high as it’s been since the Great Recession, noted Jason Schenker, president of Prestige Economics. 

But the prospect of inflation has shattered any sense of economic improvement and has wiped out trillions of dollars in market value from publicly traded companies as stock prices plunged. While high costs could certainly make life difficult for a number of chains, that pales in comparison to the prospect of a consumer that could quickly grow even more reluctant to spend money.

“I think it’s going to be a big deal, but it may be a big deal from a macro-economic reason than a direct reason,” said James Walker, a longtime industry executive and CEO of the tech provider Lunchbox. 

Walker believes the supply chain challenges of 2021 and 2022 taught restaurant operators how to deal more effectively with supply and cost issues. Many chains have stronger supply chains than they did before the pandemic. A few have C-level executives specifically devoted to supply chain management. 

But all that depends on a consumer willing to spend enough that the restaurant needs the supply in the first place. “I do think the industry is in a better position to handle supply chain issues,” Walker said. “But the macro-economic issues, the fact that the stock market is taking a beating and people aren’t logging into their 401ks without going through a warning screen, that may show up in disposable income and consumer sentiment, and that generally impacts the restaurant business very rapidly.”

“You may pump gas once a week, but you probably eat three times a day,” he added. “We tend to feel the pain a little sooner than other industries.”

None of this is to say that tariffs won’t affect restaurants. They will. And operators are definitely concerned about the potential impact they could have on costs. According to Restaurant Business sister company Technomic, the percentage of operators concerned about food costs, tariffs and the ability to raise prices all increased substantially from February to March.

In March, for instance, 63% of operators told Technomic they were concerned about tariffs, up from 49% in February.

Mark Bucher, owner of the upscale-casual Medium Rare steak concept based in Washington, D.C., with eight units, described the current tariff chaos as like being a 6-year-old riding Space Mountain for the first time. “You’re in the dark, jarring side to side, not knowing what’s coming.”

Brands are paying close attention to the market and to see the impact of the import taxes and supply issues. “All of us are checking, monitoring closely,” said Lawrence Kim, president of the family-dining chain IHOP. “Just daily monitoring on supply, on costs, and I think a fortunate part is, first, we’ve had no supply constraints.”

The uncertainty is also causing issues. One tech company executive told us that one of their vendors set plans to raise prices 24% when Trump’s initial wave of “reciprocal tariffs” hit. That prompted an executive meeting. Before the meeting was over, Trump had rolled back the tariffs.

There are some other potential impacts outside of costs, too. Bucher is looking to put Medium Rare in high-volume locations with lots of tourists. But there are problems.

“Tourism has really slowed,” he said. “You walk through New York City, and it’s weird. There’s nobody here, nobody visiting.”

Some things may actually end up going restaurants’ way. For instance, if domestic producers of certain cheeses will export them less because of tariffs other countries put on U.S. products, that could help pizza chains because there will be a higher supply, which could actually lower those prices—even as most cheese prices rise.

Tariffs on food costs will also have a bigger impact on grocers, which spend more of their revenues on food than do restaurants and may be forced to raise prices more quickly. If grocery prices go up, that could lead consumers to shift some spending to restaurants, which might be a relief after many companies were pounded in recent years over menu prices. 

On the food cost side, Bucher said, “There are some weird things happening.”

Egg costs are dropping, and so is beef and chicken. That’s a good thing for operators, especially for Medium Rare, which is a steak frites concept. The largest buyer of American beef was China, and now Chinese importers are looking to Australia and Brazil, rather than the U.S., Bucher said.

Typically beef is at its highest pricing in the period before Memorial Day, said Bucher. “This year, we’re actually going to see it at a five-year low, that’s what I’m seeing. That’s not so great for the farmers, but it’s good for the operators.”

“At first I thought I was isolated and would not be involved in the tariff whiplash. But I realize I have three stores in development and have to sign construction contracts.” -John Lintz, a Jersey Mike’s franchisee.

But economists widely expect inflation and supply constraints. 

Take, for instance, coffee, most of which is imported. “The big shock to our system was coffee. That went up 50%,” Bucher said.

Packaging will be another major issue, as some things simply aren’t readily available in the U.S. Chili’s has put on hold plans to change from plastic to better-designed takeout bags over uncertainty regarding tariffs.

“Tableware, silverware, glassware, paper products and chemicals, all these things could become more expensive, let alone equipment or any technology you source from China could be at risk,” Schenker said. “These things you may not be able to get, the same way in COVID we played scavenger-hunt economics with gloves, with facemasks.”

Bucher said he’s been struggling with the cost of things like stainless steel flatware, which started increasing in price after the war in Ukraine. “Now it’s going through the roof.”

Arguably the biggest impact could be on development. As it is, construction costs have soared in recent years. Some systems have cut the size and scope of their prototypes just to keep costs of new development from increasing. Tariffs could further drive up the cost of building materials and new equipment. 

“At first I thought I was isolated and would not be involved in the tariff whiplash,” said John Lintz, who owns four Jersey Mike’s restaurants and has three under development. “But I realize I have three stores in development and have to sign construction contracts. I wanted to sign before the tariffs started up, but the other two will come later, and I wonder what it will do to the cost of future openings.”

Lintz said the franchisor hadn’t given guidance on the tariff impact, as of Monday. He had already factored in higher food costs, given much of his produce comes from Mexico.

Beyond that, Lintz, who is building the business with his son, said he was taking a wait-and-see approach.

“I’m 77, late in life, and I’m trying to get this accomplished for the next generation, for my family.”

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