Restaurants are under threat as costs skyrocket and consumers cut back

CNN

10-08-2025

Food & drinkFacebookTweetLink
Follow
Ike's Chili in Tulsa, Oklahoma, has been around for 117 years, surviving a myriad of challenges like the Great Depression, the Covid-19 pandemic and a once-in-a-generation burst of inflation. But 2025 already holds an even more complicated challenge.
'The cost of everything's just going up, and we've got to figure out how to manage it right,' Len Wade, a managing partner at the restaurant, told CNN.
He pointed to surging beef prices as an example, specifically hamburger meat on the wholesale level. In July, those prices were up nearly 21% compared to the same month 10 years ago, federal data shows. And passing the buck to customers might not be the best solution, Wade said.
Local restaurants across the country are reeling as some key costs skyrocket and consumers — who remain nervous about the economy's future — cut back and become less willing to pony up for higher prices. Taken together, that's forcing restaurants like Ike's Chili to scramble for solutions.
'I need to raise my prices again right now, but I'm concerned that I'm going to price people out,' Wade said, adding that the restaurant has considered tweaking the dishes on its menu to cut costs. But doing that, Wade added, could compromise the quality of the product.
It's not just beef that has gotten more expensive.
The prices of other restaurant staples like coffee, eggs and cocoa have also ratcheted higher at various points this year.
In June, food costs overall were up about 21% compared to the same month four years earlier, according to the Producer Price Index, which tracks the prices that businesses, including restaurants, pay their suppliers. The rise in food costs outpaced the 17.5% increase in wholesale prices across the board during the same period.
Restaurants have very little wiggle room to deal with these cost increases before they begin to eat into their profits. President Donald Trump's trade war, which remains in flux, could continue to jack up the prices of other foods, such as tomatoes.
'They typically have profit margins of around three to 5%, so the math has to work,' said Chad Moutray, the National Restaurant Association's chief economist. 'But if it doesn't, then they have to close up shop.'
Restauranteurs are feeling price pressure on another front, too: Labor.
Since 2021, finding quality talent has been one of the top issues for small businesses across the country, according to monthly surveys from the National Federation of Independent Business. That's forcing some restaurants to make a tough choice: offer higher wages to attract more applicants, or stick with paying minimum wage but deal with lengthy spells of staffing shortages.
Wade said that in the mid-2000s, he'd receive three or four job applications every day. Since 2019, he said, he's received about a dozen in total.
'It's just hard to find good quality (applicants),' he said.
Trump's crackdown on immigration this year is also complicating the labor situation of the restaurant industry. In 2024, there were about a million undocumented workers in the restaurant industry, according to an estimate from the Center for Migration Studies of New York, though that figure is now likely lower.
In addition to higher costs, restaurants are getting squeezed by another trend: Consumers aren't eating out as much.
In the first half of 2025, US restaurants and bars saw one of the weakest six-month periods of sales growth in the past decade, according to a CNN analysis of Commerce Department data. This year has shown weaker growth than even during the Covid-19 pandemic, when restaurants and bars closed due to lockdown orders.
The slower pace of spending comes as low-income consumers continue to feel the weight of the higher cost of living.
In a recent earnings call, Ian Borden, chief financial officer at McDonald's, said low-income households are skipping meals like breakfast 'or they're trading down either within our menu or they're trading down to eating at home.' Executives at Jack in the Box and Dine Brands, the owner and franchisor of restaurants including Applebee's and IHOP, said they have noticed similar trends in recent earnings calls.
Layoffs aren't rising, but it's gotten harder to find a job in the past two years, and Americans remain on edge as Trump carries on with his volatile trade war, according to various surveys on consumer attitudes toward the economy.
US consumers have also been worn down by years of high inflation — and it's not just poor people, either. The American middle class is feeling the heat, too.
'Traffic at restaurants has generally been down for a couple years largely due to the lower-income consumer being stressed by inflation, but now the middle-income consumer is also under pressure,' said Michael Zuccaro, vice president of corporate finance at Moody's Ratings.
Linda Ford owns and manages several restaurants in the Tulsa metropolitan area with her wife, Lisa Becklund. Ford said there's a real risk that middle-class families will decide eating out simply isn't worth the money anymore.
'In our years of owning restaurants, we're clear that guests are very oriented toward perceived value, so if the price no longer matches their perception of the value, they'll quit coming,' she told CNN. Ford said middle-class consumers are her restaurants' bread and butter.
An increasingly cautious consumer means restaurants these days don't have the flexibility to set prices that they had a few years ago, Moutray and Zuccaro said. That's putting many restaurants in a tough spot as they feel the sting of weaker sales and tariffs all at once.
However, it hasn't been doom and gloom for every eatery.
In New York City, for example, 'restaurant visits have continued to pick up… especially in Brooklyn,' the Federal Reserve said in its latest Beige Book report, a compilation of survey responses from businesses across the country.
But the same report noted that times have been tough for food services businesses in other places.
'Restaurants (in the southeast) reported depressed volumes as increasingly value-conscious consumers traded down or opted to eat at home,' the Fed said.