Costco CFO sounds urgent warning for restaurant industry

The past few years have not been particularly kind to the restaurant industry.

Inflation has battered restaurants the same way it’s hurt retailers. Costs are up, and many dining establishments, from fast food joints to casual sit-down eateries, are feeling the strain.

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There have been a number of notable restaurant bankruptcies since the days of the pandemic. Red Lobster filed for Chapter 11 in May of 2024 and closed more than 100 locations as part of the bankruptcy process.

Related: Costco CFO sounds tariff warning members need to hear

TGI Fridays has also been closing restaurants in the wake of its November 2024 bankruptcy filing. The company operated about 600 restaurants before seeking Chapter 11 protection.

Even restaurant chains that haven’t resorted to bankruptcy have been moving forward with closures.

Denny’s, one of the country’s most well-known breakfast chains, announced plans earlier this year to shutter underperforming locations. Red Robin also shared plans to close a number of locations this year as the company attempts to get ahead of its debt.

Changing consumer habits are hurting restaurants

The reason for so many restaurant closures and bankruptcies doesn’t boil down just to the fact that food establishments are facing higher costs to operate. It’s also a matter of changing consumer behaviors.

In the wake of rampant inflation, many consumers are having a hard time making ends meet. And when push comes to shove, they need to prioritize essential spending over non-essential costs.

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Dining out falls into the latter category.

Though food is an unquestionable necessity, restaurant meals are what many would consider a luxury. This extends to fast food, too, which is no longer the inexpensive prospect it may have been a few years ago.

Inflation has eased somewhat in recent months. And there’s also a lot of pressure on the Federal Reserve to cut interest rates, which could spell relief for cash-strapped consumers.

But that doesn’t mean restaurants are out of the woods. 

Costco CFO discovers pattern that restaurant chains must heed

Costco CFO Gary Millerchip recently uncovered a trend that could spell trouble for the restaurant industry at large.

During the company’s most recent earnings call in March, Millerchip was quick to point out that Costco members are being more choosy about how they spend their money in light of current economic circumstances. And he also noted that customers are prioritizing groceries over restaurant meals.

Related: Costco raises more membership fees

“There’s some indication that members are spending a little bit more on food at home versus food away from home overall,” he said.

Rising food costs have been a big driver of year-over-year increases in the Consumer Price Index, which measures changes in the costs of common goods and services. In March, overall food costs were up 3% annually.

But when broken down further, restaurant costs were up 3.8% year over year, compared to just 2.4% for grocery costs.

If this trend continues, consumers may be even less inclined to spend their money at restaurants, especially as they work to conserve funds due to recession fears. And if consumers continue to spend less on restaurants, more closures and bankruptcies could be in store.

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Let’s also not forget that tariff policies have the potential to impact restaurants for the worse.

If the cost of imported ingredients goes up, restaurants will be forced to pass that expense onto diners, which could drive more customers away.

Restaurants might also face supply chain disruptions as tariff policies unfold. That could lead to unwanted menu changes, to which customers may not take kindly. And when going out to dinner evolves into more of a treat, it can become less common. 

Maurie Backman owns shares of Costco.

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