As we look back at 2022, the global economy faced the looming threat of a recession, geopolitical tension, persisting supply chain challenges, and inflation levels not seen in over two decades. Despite the COVID-related restrictions easing throughout 2022, restaurant guest traffic and prime costs continued to challenge the industry, with QSR and fast casual sub-sectors getting hit the hardest, while Specialty Casual, Polished and Fine Dining were able to thrive, given pricing headroom and alcohol sales.
Notwithstanding these challenges, throughout 2022, the pace of price increases at grocery stores continued to outstrip price increases at restaurants, boosting the relative affordability of dining out. Year-end census surveys indicated that consumer spending decreased across all categories except for eating and drinking establishments—evidence that the future is bright for the sector as current headwinds subside.
Restaurant M&A declined by more than 50% in 2022 from the prior three-year average (including 2020, the height of the COVID-19 pandemic). A confluence of factors contributed to the M&A slowdown, including (i) consumer recession fears (ii) prime cost and occupancy headwinds (iii) widening buyer/seller valuation gaps and (iv) tightened debt financing markets.
Looking ahead to 2023, we expect M&A activity to begin reverting to historical averages, though it is likely there will be a fair number of distressed and special situations deals as prolonged inflation, declining traffic and a challenging operating environment have weighed heavily on certain pockets of the restaurant sector. Further, we expect the credit markets to improve as we move through 2023, increasing the availability of capital with improved terms to finance M&A transactions.
As of the date of this report, the median LTM EV/EBITDA multiple for public equities across the U.S. restaurant sector was 13.3x, down marginally from the prior year (15.4x). U.S. restaurant equities declined ~18% in 2022, marginally outperforming the S&P 500, which declined ~20%.
This report aims to synthesize the spectrum of macro and sector-specific data into meaningful trends and insights, focusing on key themes, issues and go-forward opportunities. We hope you continue to find this report (and future editions) to be a useful source of information.