BOSTON – The restaurant industry and other foodservice operators are on a tear, with sales growth outpacing retail for a decade, and revenues surpassing retail for the first time since 2015. But despite that, foodservice industry professionals see many threats on the horizon, including rising food and labor costs, and fierce price pressure from grocers that offer prepared foods, suggests a new study by L.E.K. Consulting.

Overall, the industry is marked by significant optimism. More than three quarters (78%) of foodservice professionals expect growth to increase over the next three years compared to the last three years, and 76% think there is less than a one-in-five chance of a recession impacting their business in the next three years.

"However, despite overall optimism, foodservice professionals do recognize they will have to respond to cost and competitive pressures if growth is to continue," says Manny Picciola, managing director in L.E.K. Consulting's Food & Beverage Practice and an author of the study. He adds that restaurants and other foodservice establishments plan to fight back by updating their menu offerings, negotiating better terms with suppliers and creating digital services like online ordering.

The 2017 L.E.K. National Foodservice Operators Study, which surveyed 230 restaurant and foodservice operators responsible for or directly involved in purchasing decisions, finds that restaurant professionals are concerned about:

• Rising food and labor costs, and increasing competition: Restaurant operators said the most significant barriers to growth over the next three years were rising food costs from suppliers (40%) and rising labor costs (38%). Twenty-three percent see increasing competition as a growth threat.
• A growing price gap between restaurants and groceries: Restaurant and foodservice costs increased 2.7% last year, driven by the price of labor, while groceries and other food retailers experience deflation. Retailers are passing lower food prices along to consumers, while restaurants must increase menu prices to cover labor. The result? A widening gap between the cost of eating out and the cost of eating in.
• Groceries selling prepared foods, and eating into restaurant profits. The line between foodservice and retail is blurring: Almost 80% of foodservice professionals say retail prepared foods will be a threat to their business within the next three years. And more than 70% say prepared foods are a threat today.
• An emerging threat from online food sellers: Online grocery/meal providers and online ordering services are another emerging competitive threat. More than half of foodservice professionals say these online entrants will be a threat to their business within the next three years. Amazon Fresh and Grubhub/Seamless are especially strong contenders, they say.

To respond, restaurant and foodservice professionals are considering these moves:

• Standing out with healthier ingredients: Almost half (44%) of foodservice professionals say they view healthy and nutritious foods as a way to boost revenue, and 36% said the same of locally sourced ingredients.
• Creating digital services: Over the next three years, foodservice professionals expect about a 10% increase in online ordering, and about a quarter of them plan to enhance their delivery services to counter competition from online food sellers.
• Buying pre-prepared foods from suppliers: Nearly half (44%) of the restaurant and foodservice professionals who buy pre-prepared foods from suppliers do so because it helps them save on labor costs, and 38% say buying pre-prepared foods is cheaper.

Survey respondents are neutral-to-positive on how the current political landscape will affect the industry. While most think the election of Donald Trump will have little effect on their businesses, nearly a third believe it will have a positive effect, citing potential lower taxes and fewer regulations.

"The foodservice industry is healthy, but professionals are watchful," says Rob Wilson, an L.E.K. managing director and an author of the study. "They recognize that a strong competitive response will be needed to sustain current rates of growth."