Bethany Rivera
    Sales Director, Specialty Business Banking
    PNC Bank


    Gus Faucher
    Senior Vice President, Chief Economist
    The PNC Financial Services Group

    Daymion Phelps
    Vice President of Sales

Webcast Transcript:

Bethany Rivera: Hi, I'm Bethany Rivera, Sales Director for PNC Specialty Business Banking Teams. And I'm delighted to welcome you to our Food, Beverage, and Agribusiness Webinar. In this webinar, we'll be discussing the current economic trends and how those are impacting the food and beverage industries. We're then going to transition into a deeper dive of the restaurant industry and how payment modernization can positively impact the customer experience and inventory management. Following this discussion, we think you'll be able to apply these insights right away to your own food, beverage, or agribusiness, and PNC stands ready to help you. I'd like to now turn it over to the presenters to lead our discussion today, which includes Gus Faucher, Senior Vice President and PNC Chief Economist, and Daymion Phelps, Vice President of Sales, Linga. So, Gus, the floor is yours.

Gus Faucher:Thank you very much. It's a pleasure to be here with everyone today. The US economy is in a state of transition in the spring of 2023. The Federal Reserve cut interest rates sharply when the pandemic came to the United States and the US economy entered a severe recession in early 2020. But more recently, high inflation has led the Federal Reserve to increase interest rates sharply, and in particular, they have been increasing the Fed funds rate, their key short-term policy rate. As a result, both short-term interest rates, the blue line, the yield on a three-month Treasury bill, and long-term interest rates, the orange line, the ten-year.

Treasury note have increased sharply over the past year or two. And this is making it more expensive for households and businesses to borrow and has created greater uncertainty in the US economy. In particular, we can see that investors are nervous in the stock market. The blue bar is the S&P 500, a broad measure of stock prices in the United States, and stock prices are down by about one-third since early 2022. We've also seen an increase in volatility in the stock market. The orange line is the VIX Index, that's a measure of how much stock prices are moving up and down, and that has been much higher in 2022 and 2023 than it was in 2021. This reflects investor unease about the current economic situation, including high inflation, the fallout from the Russian invasion of Ukraine, and the potential for recession.

But at the same time, small business owners are feeling very optimistic. The results on the right are from PNC's latest Small Business Economic Outlook survey and the share of small businesses that are pessimistic about the economic outlook is the lowest it has been in the 20-year history of the survey. Although interest rates are rising and inflation is high, demand for small businesses is strong and they are seeing a bit more slack in the labor market and are finding it easier to hire. And this has contributed to strong small business optimism in early 2023. The labor market is very strong.

Employment fell by 22 million in March and April of 2020, but since then the economy has added back all of those jobs and more, and now employment is well above its pre-pandemic level. This is supporting consumer spending on things like restaurants and food.

And if we look at overall economic activity, these are three measures of economic activity adjusted for inflation, gross domestic product, the output of goods and services in the economy. Gross Domestic income, an alternative measure of the size of the economy that looks at income going to households and businesses. And finally, final sales of domestic product, which is GDP minus the change in inventories. It measures demand in the US economy. I set the values of all of these measures equal to 100 before the pandemic. You can see that economic activity fell by about 10% when the pandemic came to the United States. But as of early 2023, economic activity is now about 5% higher than it was before the pandemic. The US economy is about 5% larger now than it was pre-pandemic and has made up for the losses experienced during the pandemic and even more.

However, the recovery has been uneven across different parts of the economy and this has big implications for food, beverages, and agriculture. All of these measures are indexed for inflation, and I set the peak in the fourth quarter of 2019 equal to 100, right before the pandemic. So, for example, consumer spending on goods, the orange line, this includes both durable goods, big-ticket items like cars and appliances, or non-durable goods meant to last fewer than three years, things like food, clothing, medication, gasoline. That jumps sharply with the pandemic and is now about 15% higher than it was before the pandemic, adjusted for inflation. Consumers in the United States are buying a lot more goods now than they did before the pandemic.

On the other hand, if we look at consumer spending on services, the blue line, this is a very broad category that includes things like housing, education, health care, travel, tourism. So, for example, it includes the restaurant industry. You can see the consumer spending on services fell by about 15% with the pandemic, has come back, but is now just slightly above its pre-pandemic level. What that means is, is that over the next few years, we are going to see consumer spending shift from goods to services as these measures return to their pre-pandemic trends. And so, we will see a decline in consumer spending on goods in the near term and an increase in consumer spending on services in the near term as consumers continue to adjust their spending following the pandemic and the recovery that we have experienced so far.

We have seen a big increase in global supply chain pressures but those are returning to normal. This is the New York Fed's global supply chain pressure index. The long-run value is set equal to zero. You can see that there is a big increase in global supply chain pressures following the pandemic. This measures things like shipping times, shipping delays, purchasing manager surveys, and so forth. But over the past year or so, those global supply chain pressures have faded. And in fact, as of early 2023, they are now back to their long-run level as supply chains have adjusted to the dislocations following the pandemic. And this has big implications for the inflation outlook.

This shows various measures of consumer inflation, a percent change from one year ago. The green line is energy inflation. Energy inflation was a significant problem, particularly following the Russian invasion of Ukraine, which pushed up energy prices. But over the past year, we've seen a significant slowing in energy inflation, and in fact, energy prices in late 2022 and early 2023 are falling on a month-to-month basis. The black line is food and beverage inflation, and you can see that there's been a big increase here in 2021, 2022 as the pandemic disrupted supply chains and consumers shifted their food and beverage consumption away from eating at restaurants and towards eating at home. But we have seen a leveling off in food and beverage inflation over the past year or so. The orange line is core goods inflation. These are goods excluding food and energy goods. This was a significant problem in 2021 as consumer patterns changed. But we've seen a significant slowing in core goods inflation over the past year or so as supply chains have adapted to the changes following the pandemic. What's most worrisome for the Federal Reserve is the blue line, core services inflation. This is services excluding food services like restaurants and also energy services like electric utilities. And this inflation has picked up over the past couple of years and remains high. This includes categories like housing, education, healthcare, spending at restaurants, and so forth. This is a big concern for the Federal Reserve because this type of inflation tends to be sticky from month to month. It's also very dependent on what's going on with wages. And so, this is why we see the Federal Reserve trying to cool off economic growth, cool off the labor market in order to slow overall inflation, and in particular, core services inflation. With the Federal Reserve raising interest rates aggressively, we have seen an inversion in the yield curve. We have seen short-term interest rates move above long-term interest rates. These two lines, you can now see, are below the zero axis on the left-hand side.

And why are we concerned about this? Because when we see the yield curve invert, when we see the field - the Federal Reserve aggressively raising short-term interest rates, and we see long-term interest rates slowing because of concerns about growth and inflation, we typically see recessions in the United States economy. Those gray bars are recessions, and you can see that when the yield curve inverts, we typically see recessions in the US economy about six months or 12 months after that. You can see that in 2022, 2023, we have seen a deep inversion of the yield curve, and this indicates that we will see a recession sometime in the near term in the US economy. However, I do think that any recession that we get later this year or in 2024 will be mild. A big reason why is that consumer balance sheets are still in good shape. The blue line on the left-hand axis is the personal savings rate, that's the share of after-tax income that households are saving. You can see that there was a huge increase in the personal savings rate in 2020 and 2021 when the federal government provided stimulus payments to households and there were limited opportunities for households to spend with consumers not going out to restaurants, not traveling, not going to the movies, things like that. Now, the personal savings rate has fallen since then, but estimates are that there are still about an extra trillion dollars in household savings relative to the pre-pandemic trend.

Similarly, the orange line on the right-hand scale is the financial obligations ratio, that's the share of after-tax income that goes to things like mortgage payments, rents for renters, homeowners insurance, credit card payments, auto loans, and leases, student debt payments and so forth. And that is very, very low right now. It's below its pre-pandemic level and it's much lower than it was heading into the Great Recession in 2007. That means that consumers do have the ability to borrow to support their spending going forward. And that means that even if we do experience a recession later this year, that the hit to consumer spending will be mild.

Another reason we expect the hit to consumer spending to be mild is that businesses will avoid layoffs with the very tight labor market. This is the labor force participation rate, the share of adults, 16 and older, who are either working or looking for work. You can see that it's been declining over the long run because of the retirement of the baby boomers, fell sharply with the pandemic, has come back somewhat, but is still well below its pre-pandemic level. And this helps explain why businesses, in particular restaurants, are having so much difficulty in hiring, because the labor force is structurally tighter now than it was before the pandemic. And what this means is, is that businesses will be reluctant to lay off workers even if we do experience a recession because they're concerned about the ability to find workers once demand starts to pick up. And smaller layoffs mean that - a smaller hit to consumer spending. So the most likely outcome for 2023 is a mild recession later this year, starting sometime in the second half of 2023. I expect real GDP, output of goods and services in the United States, adjusted for inflation, to fall by about 0.5%, or 1%, from the peak to the trough. And then I expect to see a turnaround in early 2024 as the Federal Reserve starts to cut interest rates in response to slower inflation with the recession and a deterioration in the labor market.

The unemployment rate, which was near a 50-year low in early 2023, is expected to increase to somewhere between 5% and 5.5%, peaking in the first half of 2024, and then will start to decline as the economy starts to improve at some point next year. In particular, we do expect that housing and business investment will lead the recession. These are interest-rate-sensitive industries, they are very sensitive to what's going on with interest rates. We're already starting to see a big decline in the housing market with much higher mortgage rates. What this also means is that consumer spending that hit there will be fairly limited. I do expect that consumers will pull back on their spending somewhat, but the hit to consumer spending during this recession will be pretty mild, much smaller than the declines that we expect to see in interest-rate-sensitive industries.

In terms of food, beverage, and agriculture, there have been enormous shifts in the industry over the past few years with the recession. So, for example, the blue line on the left-hand scale, that is real consumer and spending adjusted for inflation, for food and beverages at home. That obviously spiked with the pandemic as people stayed at home much more and stopped going out to restaurants, and then started to come back in 2021 as the economy has opened up. However, with people spending more at restaurants in 2022, we have seen food and beverage spending at home decline. However, I would expect to see a pickup in food and beverage spending at home as the recession hits. Restaurants are a discretionary industry, and therefore as consumers feel more pinched with a recession, they will be eating out less and eating out at home more.

On the other hand, employment in food and beverage manufacturing fell very sharply with the pandemic. That was obviously an industry that had difficulties with safety protocols and so forth. But since then, employment has come back very strongly and is now well above its pre-pandemic level as consumers have been buying more food, particularly at restaurants.

Consumer spending on restaurants, not surprisingly, the blue line on the left-hand scale, that fell very sharply with the pandemic and has come back as consumers have felt more comfortable going out. More recently, with a very strong labor market, with people feeling good about economic conditions, we've seen consumer spending at restaurants continue to increase in 2022 and into 2023. However, employment has not kept up, the orange line on the right-hand scale. It fell very sharply as restaurants closed with the pandemic, came back as restaurants started to reopen. But even as of early 2023, employment at restaurants is still below its pre-pandemic level. And this explains why we see restaurant closures, this explains why we see restaurants reducing their hours, simply because it is more difficult to find workers. They have more opportunities, better-paying opportunities in other industries, and therefore we have not seen a full recovery in restaurant employment as of early 2023.

Inflation trends for food, beverages, and agriculture have been very prominent. The blue line is the producer price index for food manufacturing. These are wholesale prices for food products, the percent change one year ago. That increased very sharply in 2021, in early 2022, with all of the changes in consumer spending. Initially away from restaurants, then back towards restaurants, the changes in spending on food at home, and so forth. So food inflation was running at a double-digit pace in the second half of 2021 and throughout most of 2022, but more recently, we have seen a slowing in wholesale food inflation. That is good news for restaurants, that is good news for food retailers because that is contributing to a little bit of improvement in margins.

Similarly, if you look at the black line, food and beverage spending - consumer spending, you can see that that picked up with higher wholesale food prices, was not quite as strong as wholesale food inflation, accelerated in 2022, is still very high as of 2023, but we are seeing a little bit of cooling in food inflation at the retail level in 2023. The orange line is the average hourly earnings in food services. This is basically wage growth in the restaurant industry, that was extremely strong in late 2021 and early 2022 as restaurants competed for workers in the very, very tight labor market. However, there is some good news there for restaurants. We have seen a slowing in wage inflation for restaurant workers, still high at about 6% or so year over year as of late 2022 and early 2023. But as job growth has cooled off somewhat, as we've seen a bit of slowing in overall wage growth, we have seen some slowing in wage inflation in the restaurant industry.

And then finally the green line is the consumer price index for - basically for restaurant spending. You can see that that only increased gradually in 2021-2022 even as wage inflation in restaurants was very high, even as food costs inflation for restaurants was very, very high, and is now cooling off somewhat. But the good news is that the restaurant margins are improving as we have seen restaurant wage growth slow over the past year or so. And as we see food inflation for restaurants slowing somewhat. So restaurants are seeing an improvement in margins in late 2022 and early 2023, as we some of - see some of these pandemic effects sort themselves out.

Thank you very much for your time. You can find our materials at You can follow me on Twitter at GusFaucherPNC. And with that, let me pass it over to Daymion.

Daymion Phelps: Thank you, Gus. I appreciate it, and I appreciate the opportunity to present today. As Bethany mentioned, I'm Daymion Phelps here with Linga. As Gus mentioned, the hospitality, and restaurant industry in particular, leads the headlines with labor market considerations and overall conversations around food costs, inflation, and supply chain. So next up, I will take us through some of those challenges in even more detail. We'll look closely at how those challenges are defined and measured and how they impact restaurant operators. Then we'll talk about the opportunities that these same challenges have presented for us in 2023 and beyond.

Let's get started. All businesses are faced with obstacles and restaurant operators are no strangers to overcoming seemingly insurmountable odds that are stacked against them. Even the top challenges, or, as the National Restaurant Association terms, what's keeping restaurant operators up at night, are not entirely new to this industry. They've always been present. Think of them as the natural costs inherent in running a restaurant operation, if you will. But now they truly dominate the business outlook.

Those particular challenges are rising food costs and a shortage of labor. And these metrics are in complete opposition to how we would prefer they trend. They're rising where we might like to see them fall and constricting where we would rather they balloon. Looking closely, we see that food costs are up, the cost of labor is to higher, including not just salaries, but wages and benefits, while restaurants are also facing a shortage of labor. We'll talk more about how restaurants are overcoming these challenges, but as expected, we see restaurant operators taking drastic, and at times, creative measures to solve for these issues.

Let's look closer at food costs and labor individually. The last two years represented the most sustained period of food cost growth in nearly five decades. Even as consumers, we spent time lamenting the rising price of eggs. Food costs have risen for consumers and restaurant operators alike. Rising costs, not enough supply, and too much demand have contributed to overall supply chain woes. As patrons of the wholesale food supply, restaurants feel this completely. Although some prices for food commodities have leveled in recent months, others have trended even higher. So each and every restaurant has a very unique strain placed upon them depending upon their individual menu mix. And we all know and have felt the rising prices of meat and dairy just as consumers.

But interestingly enough, did you know, it's fresh vegetables, and while they have not risen to the producer price percentage increase for eggs at nearly 223%, vegetables have jumped 28% in price over the last 12 months. Case in point, we saw the unassuming lettuce get hit by California's dry weather and insect-borne viruses last year, which meant a steep rise in the price of a wholesale box of romaine. We also saw produce costs soar and the price of tomatoes went up, along with a very, very humble potato.

Let's take a look at what all this means for restaurants' finances. Again, it's important to remember, though, as we discuss food and labor costs, that restaurants are not like other businesses. I'll say it again. Most restaurants operate on very small margins. Again, the National Restaurant Association shares the following calculation. It says that from every sales dollar, $0.33 goes to food costs, another $0.33 to labor, and the remaining $0.29 to other costs, leaving a pre-tax margin of $0.05. Thus two-line items, food cost of food and beverage sales, salaries, wages, and benefits is a second line item, are the most significant expenses in a restaurant. Thus, a rise in these expenses leaves next to nothing for the other standard expenses, including occupancy, utilities, and supplies, which correspondingly are also on the rise.

Again, according to the National Restaurant Association, 83% of operators say operating costs were higher in December 2021 than in December 2020. Smaller profits, as we know, make it more difficult to pay off debt or catch up on other expenses. And 62% of operators say they accumulated additional debt over the last two years and more than half, or 57% exactly, say their restaurant fell behind on expenses.

Let's look at how restaurants are responding to this. Restaurants are facing these realities in 2023 head-on as expected. And they've adapted to these new market realities with some natural or what we might consider logical responses to these issues, including raising menu prices and limiting operating hours. But finally, we see another natural response through postponing plan development, including new locations, or simply growth in store and location count.

At the top of this data, however, are those soaring expenses, which primarily include food costs and labor. Let's take a closer look at these next. In short, restaurant operators have been left with job openings that are difficult to fill. Gus discussed this as well. As consumers, we have seen, felt, and heard about the major shifts away from service work over the last few years. The casual dining sector specifically has the majority of job openings. This matches to historic data, which has held that, for restaurants in particular, the hardest jobs to fill are cooks, servers, and line cooks. Notice cooks are at the top. Back-of-house and kitchen jobs have not only been notoriously difficult to fill, but added to that is the fact that over the last few years, these workers have, in short, found new jobs and kept them.

So as the labor pool has become more and more shallow, restaurant owners are again taking, first, the seemingly logical measures to recruit, hire, and retain talent. This includes primarily raising wages and also reducing operating hours, which impacts not only operational costs but also helps gain attraction from a larger workforce.

Finally, when faced with these critical challenges that we've discussed, restaurants are more and more turning to technology. In particular, their self-service technology which provides a natural solution to labor issues. But this turn to self-service technology is really part of a greater overall call to technology. This call to technology is particularly interesting as restaurants are not only looking to invest in new tech, but they're also asking for more from their current technology and really leveraging tools they may already have in place. On the investment side of this, we have restaurant automation solutions in the form of point of sale, or POS, and increasingly a turn to kiosks. Kiosks in particular, or what was once known as customer-activated technology, is not inherently new. We're just asking for these systems to deliver more functionality than they have in the past.

Payments as well have continued to evolve and the payment technology solutions have had to flex for most restaurants and their consumers over the past few years to make the process of taking money as easy, fast, safe, and secure as possible. Digitization, too, has required that restaurant operations consider their workflows from the menu to ordering to payment. This was originally spurred on by the practicality of the pandemic, how do we avoid handling paper menus, but has turned into much more than that.

Finally, we're asking for more out of our existing software systems as restaurant owners and operators. We're increasingly emphasizing what was once maybe thought of as second-tier features like inventory control programs and labor and payroll software systems. And technology has delivered. We see evidence of the adoption of these technologies too by some well-recognized restaurant and hospitality organizations. Included here are some leaders in the QSR space. Order Efficiency, again, bred from necessity, has helped to bring mobile technology to new heights. Mobility in particular was historically relegated to merely line busting. But there's actually so much more we can expect from this tech. Digital menus too not only answer our practical needs over the last few years but they drove efficiencies in ways that will continue to live on in 2023 and beyond and improve operations.

Food cost and inventory control modules have been part of restaurant automation software for years, but often the lesser implemented piece or module. This is understandably so, as quite frankly, food costing takes work. But now we're seeing a keen eye placed on these programs, and as a result, they're getting not only well-deserved recognition and use, but they are also well-leveraged to monitor and control costs. It's in the same spirit that restaurant owners are adopting scheduling and payroll systems as well. These solutions help with the entire employee management workflow from onboarding to overall retention.

Let's look at the current combination of restaurant technology, or where restaurant operators look for technical solutions to operational problems today in 2023. Point of sale, or more closely defined as overall restaurant automation, is of course, at the top, followed by areas including mobile payments and third-party delivery employee scheduling. Not shown here but following these majority components are other ancillary programs.

I think what's most interesting here, though, is how third-party delivery has joined some of the top ranks in restaurant technology. For restaurants, delivery is nothing new. We've seen, pizza in particular, excel in that space for years. Delivery beyond traditional delivery concepts, again, think Pizza, however, has been gaining speed over the years and was really ushered into the spotlight lately as it went from not just a consumer preference but a necessary capability of restaurants. Recently, it's the third-party delivery services who really responded to this call for almost universal delivery. So restaurants were quick to adopt and use these services to enable a delivery program for their customers.

But as in many cases with convenience and seeming ease of implementation comes a high cost. And so many of these services are estimated to take an average of 30% of an order's payment for themselves. As we discussed earlier, restaurants simply don't have a significant profit margin on their food sales, and what's there is shrinking. That makes it really hard to make a profit on online orders that are placed on delivery apps. Let's consider this as we move to our next piece.

As we dig in, we see the adoption of these technologies differ by restaurant size. And we also see that point of sale has continued to evolve and splinter into distinct digital ordering and payment systems. Furthermore, we see a gulf in the adoption of these digital tools between restaurants with over 500,000 GMV versus those with less.

Notice here, mobile payments is at the top, followed by mobile ordering, then restaurant handheld devices. I should note that restaurant handheld devices can include a full suite of applications that includes ordering, generating purchase orders, receiving against those same orders, and physical inventory, or what's sometimes called stock count.

But next up are those digital menus. And finally, we see restaurants looking beyond the third-party delivery services that we discussed in the previous slide to what's called first-party delivery and restaurant-owned online ordering. That means that restaurants, and it's no surprise, have taken the call to action upon themselves with first-party delivery, which is, in short, keeping delivery in-house. They're often offering online ordering as a feature of the restaurant's own website, and in some cases, delivered via a restaurant's own custom mobile application. This, of course, has an operations lift for the restaurant and corresponding cost of its own but does not have the inherent skim off the top, if you will, that we discussed earlier in the form of third-party delivery service fees.

As the point of sale is the primary source of investment, we find that buyers are taking a keen eye to features that are inherent in point of sale, with the top consideration being the integration with other systems. Integrations are key as a restaurant operator manages their business extensions or just simply looks for efficiencies and integrations like accounting that allows for them to, say, import a GL from the point of sale to the accounting program without doing manual dual entry of both. And I think this emphasis on integrations really echoes the sentiment I made earlier about investment and optimization of technology. We're seeing that followed by cloud-based systems. This is a seemingly standard request from newer, more recent point-of-sale platforms. But the point of sale is still sharing an environment, if you will, with legacy-based server systems.

Next up is artificial intelligence, and this can really augment so many components of restaurant operations. From kiosks and drive-throughs to ordering and delivery, AI specifically can really drive operational efficiencies, help ensure quality, and speed of service. And in fact, while we're on the subject of AI, I was actually challenged to find an area of restaurant operations that couldn't help. From customer service tasks to managerial tasks, including employee scheduling, AI can play a critical role.

Beyond investment, however, restaurant operators are also doing their best to optimize what's already in place. And again to drive optimization, we're looking for more from our current solutions. That means using more components of the software we already own or adding modules to that same software in order to drive efficiencies.

Restaurant operators are also embracing mobility and spending more time and research and consideration before making a change, extremely contemplative. While we've covered some high points of optimization, let's look next at where restaurants are making investments.

The labor shortage has really driven the adoption of self-ordering and kiosk deployment. Self-order kiosks are really the best restaurant multitaskers and represent a key investment avenue for restaurants. They not only help manage labor issues, but they increase the speed of service and average check size. Kiosks have come a long way from the cold devices of the past, if you will. We know that these units inherently speed service and reduce wait times in line. Today, not only are customers more and more comfortable with the technology, the technology has become even closer to the customer. Kiosks have really gone from a simple unattended automation booth to a clever, friendly device that prompts through a complete order, including automating our precious loyalty, engagement, and points and rewards, as well as providing a truly frictionless payment process.

And while we're talking about payments, let's take a closer look at those investments. Contactless payments have been evolving for years. And in short, a contactless payment means the payment does not require any physical, as the name implies, contact between the buyer's credit card or mobile device phone, and the point of sale. Contactless ordering, however, which has been in more recent demand, enables customers to place their order as well as pay for that order without having to be in proximity to other customers and without having to be at the point of sale. Both payments and ordering require mobile rails from restaurant operators in order to work.<./p>

Contactless ordering, though, goes well beyond a payments protocol. This is a more recent evolution of ordering and payments and often begins when a customer stands a QR code from the table or storefront. Often, right from the QR code, they're taken to a digital menu, and from there, a customer can place their order and enter their card data for processing. So not only is there a payment processing component in this flow, but simultaneously a back-of-house workflow is automatically kicked off with the order routing to the kitchen staff. And then finally, notification of a completed order to the customer for pickup or delivery. The visual here, though, shows just how important both are to the system of payments. While we see a high degree of contactless payment options, we see that customers are still looking for more from this technology.

Let's move into other areas of optimization. Earlier we discussed adding new functionality or modules and features to the existing restaurant point of sale. Inventory management is a really smart area that restaurant operators are looking at to build efficiencies and realize savings. As supply chain challenges have continued, restaurants are really adopting by reviewing suppliers and adjusting their inventory management processes. For many, this means using inventory management software. A focused inventory management system translates to lower food costs, by way of less food waste and spoilage, and can also act as a natural deterrent to internal theft.

Most inventory management software programs can either integrate with a restaurant's point of sale to track inventory in real-time, or in a lot of cases, inventory capabilities are built right into some point-of-sale systems. Inventory management packages can forecast inventory needs, provide reorder alerts, and create purchase orders, offering up a full replacement to manual work. Some systems can even connect to food service vendors for automated cost updates and feature recipe costing capabilities that can inform menu and pricing decisions to help improve profit margins.

It's interesting to note, while we're on the subject of food costing here, that there are also restaurants incorporating really creative solutions in the kitchen, including shifting food prep to their suppliers to save on labor costs, or deploying food prep automation in the kitchen. Several chains as well have also trimmed their menus to focus on their core items while others are using pre-made foods where they may have not used them before. Inventory management has certainly moved to the forefront.

Finally, we're seeing recent optimization of another existing feature or software module, and that's employee scheduling. Really, another great example of operators extending their current technology or adding modules to an existing point-of-sale system. Employee scheduling systems can not only replace the manual work of planning schedules and pay, but they can also free operators to focus on other income-generating efforts. Finally, they allow the restaurant to dedicate more time and effort into onboarding and training for the critical hiring and retention efforts.

Many restaurants already have their employees clock or log in and out for work on the point of sale system itself. And with historical data, point-of-sale systems often can provide a schedule template based on time of year, staff availability, and restaurant-specific policies concerning overtime, all while eliminating paper and manual processes. With the point-of-sale system already logging these employee hours, it often takes a simple click just to move that data from the point of sale into a payroll processing system. Another great example of optimizing current investments in technology. And with that, I'd like to say thank you. I appreciate the time here today. And back to you, Bethany.

Bethany Rivera: All right. Thank you, Daymion and Gus, for the wonderful presentations and just terrific insights on both the economy and the restaurant industry and the challenges that they're facing. We've had several questions come in through the chat so I thought we'd transition to that part of our presentation, and start with you, Gus. Gus, the tight labor market, rising interest rates, and significant inflation are serious headwinds for any economy. You mentioned on one of your slides that detailed business fixed investments have been increasing since 2020. Is this the right time for me to make additional investments in my business?

Gus Faucher: It's an interesting situation. As Daymion pointed out, the restaurant labor market in particular is very tight, but that's true across the economy. And if you can't increase output by hiring more workers, one thing you can do is you can make your existing workforce more efficient by investing in new equipment, new technologies that allow for productivity improvements. That being said, obviously, we are in an environment of higher interest rates. We expect to see a recession later this year. So that may make some businesses a little bit more cautious. But I think over the longer run that tight labor market is expected to persist and that would call for further investments to make workforces more productive over the longer run.


Bethany Rivera: Okay. Yeah, that makes a ton of sense. So, Daymion, here's one for you, which do you think is going to prevail when it comes to restaurant technology, and this would be past 2023, so in the future, do you think it will be an investment in restaurants or - in restaurant technology or optimization of restaurants? What do you think?

Daymion Phelps: Yes, we talked about both, and I think they're both very interesting and, really, are very telling around our time. And this is a difficult one. But I think that after optimization, there will be an investment because, quite frankly, you can only optimize to a certain point where you might realize that you've not - you're not getting what you need. The software tools just simply aren't there despite optimization. So I think optimization is fantastic, I think it's been waiting in the wings. These augmented programs or ancillary pieces of software have been waiting to be used to the degree that they are now, and so I think it's fantastic. But I do think we'll see a period of optimization potentially followed by investment.

Bethany Rivera: Okay. Sounds like technology is going to win the day there. And then here's another one for you. Do you think point-of-sale companies that are embedding functionality in their systems today to help with labor and employee scheduling, do you think those will become embedded or are they going to be ancillary tech pieces, like standalone?

Daymion Phelps: I think we're going to see both, and I think that as we see more usage of them in this optimization, we're going to see more demands placed upon them. I do think that as restaurants - restaurant operators look at their individual restaurants' technology stack and they see a lot of disparate systems, they are, of course, going to make a call to streamline those, to put those all under one roof and one provider. So I think there will be some consolidation, but it's always a attitude, and I think, an aptitude from our providers of best of breed. So how are we doing the best job that we can through each particular module? And that's really up to the restaurant operator to decide who's going to provide that for them.

Bethany Rivera: Yeah, good point. Okay, let's see. Gus, I think this one's for you. Given the tight labor market, this question said, I was surprised to see on the - on your final slide that there was such a downward trend in the average hourly earnings in food service. Do you have any more detail on what factors are driving those trends?

Gus Faucher: Yeah. So, so one thing that I would point out, although wage growth in the restaurant industry has slowed, it is still quite strong and still above the average for all industries. But what I think we see is a couple of factors. One is that demand is slowing in other industries and wage growth is slowing in other industries as the labor market has cooled off somewhat. So that's contributing to a bit slower wage growth in the restaurant industry. And then also we do see restaurants adapting, we do see them adopting new technologies, new techniques, and so forth that perhaps are reducing the need for labor in the industry. So, the demand for labor in the restaurant industry isn't quite as strong as it was a year or two ago.

So, I still want to point out that wage growth is strong, not quite as strong, but I think some of that is due to the overall increasing slack and the overall labor market, but also restaurants becoming more efficient and perhaps figuring out ways to get more from their existing workforces. And that's reducing some of the labor demand in the industry.

Bethany Rivera: Okay, Well, that's interesting. So here's maybe kind of a related question. Earlier in your presentation, you had a slide that illustrated how investors are nervous. But then in the next slide, it showed that small businesses are optimistic. So again, why would these groups have such different viewpoints?

Gus Faucher: A couple of things. One is that I do think that investors in particular are concerned about the high-interest rate environment that may be less of a concern for small businesses. So that may be a factor. Another thing to point out is that some of the uncertainty has been tied to the ongoing issues in the financial system that we've seen in recent weeks. The small business survey was taken before some of those problems. So that may be a reflection there. But also, I think that small businesses, they have been through a lot over the past few years with the pandemic, with the recovery, with the tight labor market, and so forth.

But I think what small businesses are seeing in the spring of 2023 is that demand growth is still strong, that consumers are still spending, we've seen big increases in consumer spending in recent months, and they are getting a bit of relief on the labor market. The labor market isn't quite as tight now as it was a year-six months ago. And so, I think given all of that, I think that small businesses are continuing to see strong demand, that they expect that that's going to persist with perhaps a little bit of improvement in margins from a little bit more slack in the labor market. And so that's contributing to the very strong optimism that small businesses are reporting in early 2023.

Bethany Rivera: Yeah, and that's great news considering what small businesses have been through. So, I think we have time for one more question. Daymion, in your opinion, what's next for mobile technology in hospitality? Tell us the future.

Daymion Phelps: Oh, mobile's always been exciting. I really love that mobile has been - I think Mobile's been waiting to show up like it has over the past few years. It's really been this technology that everybody's put on their list as they want to enhance and advance. And then, of course, as natural as human beings can be, we - now that we were forced to do this over the past few years, we've done it. So I really love the way mobile has showed up. And mobile has required that a lot of restaurant operators change their infrastructure to support it. And so it wasn't that folks weren't excited about mobile in their capabilities, it's quite frankly that they had to make some real modifications and potential upgrades in the overall support system that those mobile rails run on, if you will. And so I think that now that's been done, restaurants can really see mobile operate in multiple ways.

As I mentioned in the presentation, I remember years ago when we just looked at this mobile device as a simple line buster, or how do we go out and take payment from folks who may be standing in line or consumers in a store or a restaurant? How do we make that easier? And that was really the only thing we expected of it. But now we really want the same functionality from a fixed device to a mobile device. So I think those lines will continue to be straightened as we look at fixed to mobile and we're expecting the same kind of performance from them. We also want our mobile devices to have a form factor that supports what we want them to do too.

So I love the way that software, hardware, and payments are all working in sync to make that happen from a customer-facing payment side. I also mentioned handhelds which can often fall into the mobile category too, and that really gives you the freedom to do your work away from where the work may be potentially happening. What I mean by that is to transact away from the cash rep, to receive an order outside the back office. That's what mobile really makes happen and I think that is exciting and will continue to be.

Bethany Rivera: Okay, terrific. Well, Gus, Daymion, thank you so much for your presentation today and for all these terrific insights that you've shared. I hope that our audience got a lot out of this presentation, and we certainly thank you for joining. I would like to remind you that it's important to revisit these areas of importance, including engaging key partners such as your financial services firm and investment providers, obviously, tax and accounting advisors, consultants in your legal counsel where appropriate.

So, PNC produces several webinars like this. If you're interested in seeing what other content we have out there, please visit And for additional resources on the food, beverage, and agribusiness industries, also please visit, or you can schedule an appointment today at Again, thank you, Gus and Daymion, and our audience, for joining us. And enjoy the rest of your day. Take care.