Fitch Ratings downgraded its outlook for the U.S. restaurant sector to negative from neutral, citing severe threats from tariffs and immigration policy. These pressures are squeezing restaurant operators’ margins against already anemic consumer demand and rising costs, creating a challenging environment that is threatening profitability and growth.
Rising tariffs fuel rising costs up and down supply chains
Tariffs imposed on imported foodstuffs from major trade partners such as Canada, Mexico, the EU, and China have increased the cost of food, equipment, and other inputs for restaurants. Full-service restaurants with high reliance on imported ingredients and complex supply chains are most vulnerable to these cost pressures, Fitch says.
The Trump administration’s ad hoc approach to changing trade policy is ambiguous and impedes the ability of restaurants to plan and maintain costs within checks. As inputs are driven up by rising tariffs, restaurants are not able to pass on the cost to consumers because restaurants are price-sensitive. Labor expenses form a large portion of the restaurant industry and account for about one-third of the costs. Fitch acknowledges that immigration quotas and bulk deportations reduce labor supply, primarily the lower-end, high-labor occupation prevalent in the business.
The fall in foreign workers has the potential to lower the supply of workers, elevate production lags, and enhance the level of wage inflation. All these have the tendency to hinder the growth in revenue, lower profitability, and lower the return on investment by restaurant operators. The tight labor market also inhibits restaurants from reshuffling the staff, in response to fluctuating demand.
Consumer price sensitivity curbs pricing power
With regard to mounting costs, consumers are very sensitive to food-away-from-home expense increases. Fitch sees a small moderation in frequency of eating out, driven by cautious consumer optimism and inflationary pressures.
Average spend per visit could be neutral but overall customer traffic will decline, further constraining restaurant revenues. Full-service restaurants are most vulnerable, with consumers likely reducing to lower-cost options or reducing frequency of discretionary dining occasions.
Impact on industry performance and outlook
The synergistic effect of tariffs and immigration-driven labor constraint has contributed to lackluster profitability among large U.S. restaurant chains, including industry leaders Chipotle and McDonald’s. The downgrade by Fitch to declining outlook reflects those pressures as well as expectations of low-single-digit 2025 food-away-from-home spending decline reversing earlier projections of flat or modest growth. Fitch has also reported that immigration deportations and restrictions could lead to worker shortages and production delays alongside increased wages.
These pressures will tend to squeeze margins and strain cash flows, depriving restaurants of the ability to invest in growth or innovation. Fitch warns that these pressures can lead to lower credit ratings and higher financing costs for established operators already running thin in an unreliable and competitive industry.
Wider economic background and future threats
Fitch also characterizes such restaurant industry risks in terms of broader economic trends. Tariffs-inflation and immigration restriction will collectively inhibit labor-force growth and economic growth, respectively, and indirectly support aggregate inflationary pressures.
Such macroeconomic setting supports restaurants’ exposures, lean margins, and heavy reliance on discretionary consumer spending. In the absence of policy stimulus or trade tensions sapping, the industry can look for enduring headwinds to persist.
Managing a complicated risk environment
American restaurants risk losing out from being placed between a rock and a hard place, facing increasing costs in the form of tariffs and staff shortages due to immigration policy and facing risk-averse consumers unwilling to pay premiums. Fitch Ratings’ downgrade comments on operators needing to react by adapting through cost restraint, operational improvement, and strategic pricing.
This too is with policymakers to de-escalate these risks by re-tuning immigration and trade policies that are pushing labor supply and the price of inputs. Meanwhile, the restaurant sector will have to weather more uncertainty and tougher realities ahead.
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