Restaurant Stocks Are in the Soup. There’s No Quick Fix.

Restaurants like Shake Shack have faced a number of headwinds including inflation. (Jeenah Moon/Bloomberg)

It’s undoubtedly been a tough year for restaurants.

Most of the major players in the industry are in the red so far this year, and companies like Sweetgreen, Shake Shack, Cava Group, Chipotle Mexican Grill, Wendy’s, Bloomin’ Brands, Jack in the Box, and Dine Brands Global are down double digits. Even bigger players like McDonald’s are still shy of the S&P 500 index’s 2025 performance, and it’s a rare few, like Brinker International and Papa John’s International, that are beating the broader market.

The Friday August jobs report didn’t offer much in the way of reassurance. The data from the Bureau of Labor Statistics showed that food services & drinking places added 11,000 jobs to 12.38 million in August, marking the largest increase since May. However the trailing three-month job creation number fell below 30,000, the lowest level in more than half a decade.

That “represents a mounting demand headwind for the restaurant sector,” writes Gordon Haskett analyst Jeff Farmer. With the Federal Reserve widely expected to cut interest rates later this month, the “wildcard is what spending tailwinds could be seen across a ‘Fed loosening’ period,” he notes.

The industry is facing a number of different issues. While some may be quick to point the finger at trendy GLP-1 drugs, that represents a relatively small slice of the pie.

Inflation has been a bigger problem: A shortage of service workers postpandemic forced labor costs higher in recent years, and even in the most recent jobs report, food workers’ year-over-year wage inflation edged up to 3.9%, above the 3.7% U.S. average; raw material costs too have also hurt restaurants as the cost of everything from avocados to eggs and beef climbed.

The upshot is that restaurants are raising prices but not necessarily seeing that translate to fatter profits.

On the flip side, customers have grown increasingly weary of paying higher prices, particularly at fast food places, which can now nearly rival what was the cost of sit-down meal prepandemic. The lasting interest in wellness has also weighed on demand, with the vast majority of Americans reporting that they want to eat healthier, a mission that by nature includes fewer cheeseburgers.

Likewise, July data from the Bureau of Economic Analysis suggests that consumers shifted their discretionary dollars away from restaurants toward goods, noted Citigroup’s Jon Tower in a Thursday note. Some of that may be due to back-to-school shopping, but absolute year-over-year spending at restaurants grew by just 1.3% for the month, the slowest pace since February; restaurants’ real share of discretionary spending (which strips out inflation) contracted by 32 basis points since the prior year.

That said, Tower isn’t overly worried: “While the current macro/tariff environment poses challenges to consumer spending, we do anticipate restaurant discretionary wallet share will improve moving into fall,” he writes.

There’s also variation within the industry. As Raymond James analyst Brian Vaccaro highlighted on Friday, industry sales data for August showed that comparable sales were up 2.3% (similar to July’s 2.4% reading) but that was all due to a 2.5% increase in menu prices; traffic actually dipped 0.2%. However that wasn’t consistent across restaurant types.

Both quick-service (read: fast food) and family restaurants saw negative traffic for the month, falling 0.3% and 1.5%, respectively. Those who did go out to eat saw higher bills however, with quick service average checks up 2.1% and family restaurants up 3.5%. Only casual dining locations record an increase in traffic, to the tune of 2%, as checks rose 2.6%.

That could reflect Americans’ willingness to spend more on a more relaxed sitdown meal when quick-hit alternatives cost nearly as much. But it’s also indicative of the fact that higher-income Americans with six-figure salaries are leading the increase in restaurant spending, while other cohorts are flat, as noted by Jefferies analyst Andy Barish in his recent overview of the sector.

It also puts more pressure on fast food, notes Vaccaro. “All eyes will be on McDonald’s trends over the next few months as it attempts to re-establish its value leadership by relaunching Extra Value Meals in the U.S., which could lead to a further intensification of value wars across the quick-service restaurant segment,” he concludes.

Ultimately, restaurants remain a tough space for investors—and best for those with a strong stomach.

Write to Teresa Rivas at teresa.rivas@barrons.com