More hardship ahead for Canada’s restaurant sector, warns global credit rating agency

More than half of Canadian restaurants are operating at loss or barely breaking even

Published Jan 17, 2024 • 3 minute read

Canadian Federation of Independent Business warns that one of every five Canadian restaurants faces the risk of closure. Photo by Azin Ghaffari/Postmedia

Canada’s restaurant sector could be in for a rough ride this year as belt-tightening consumers and a looming deadline for the repayment of pandemic loans take their toll, says a global credit rating agency.

“The effects of aggressive interest rate increases have not yet been fully felt by consumers directly nor by the economy as a whole,” DBRS Morningstar said in its 2024 Restaurant Outlook, released Jan. 17.

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The agency said it foresees a potential improvement in operating conditions in late 2024, but that’s contingent on how disinflation and interest rate shifts influence consumer behaviour. Regardless, ongoing pressures and the accumulated effects of multiple challenging years are projected to persist, and will affect the credit-risk profiles of restaurants throughout 2024.

“The restaurant industry has had to endure significant hardships over the past few years. Acknowledging some geographic nuances, restaurant traffic generally only recovered toward pre-pandemic levels in 2022,” the agency said, adding that macroeconomic challenges since then have gained momentum.

“Consumers’ purchasing power was squeezed during (2023), leading to considerable changes in their behaviour as consumers tried to stretch their wallet. These changes naturally also extended to the restaurant industry.”

Despite pent-up demand, consumers globally reduced dining out in 2023, with restaurant traffic decreasing by low single digits on a year-over-year monthly basis.

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According to DBRS Morningstar, 53 per cent of restaurants in Canada are now operating at a loss or barely breaking even, compared to the pre-pandemic rate of 10 per cent. There was also an almost 40 per cent year-over-year increase in bankruptcies within the Canadian accommodation and food services industry for the 12 months ending Nov. 30, 2023.

Adding to the challenges, the repayment deadline for Canada Emergency Business Account (CEBA) loans is Jan. 18. The Canadian Federation of Independent Business (CFIB) predicts that hundreds of thousands of small businesses may see a 50 per cent increase in their pandemic debt due to an inability to make the repayment.

In recent months, the restaurant industry and small-business groups have requested a deadline extension from the federal government, but their pleas have gone unanswered.

“The Canadian Federation of Independent Business is very disappointed that the federal government has ignored the pleas of tens of thousands of small business owners to give them more time to repay their Canada Emergency Business Account loans in order to keep the forgivable portion,” CFIB said in a Jan. 17 news release.

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As per the loan terms, business owners must repay up to $40,000 on their loans or seek refinancing from the original issuing bank by Jan. 18, 2024, to qualify for the forgivable portion of up to $20,000. Missing this deadline could result in businesses seeing their CEBA debt increase from $40,000 to $60,000.

“Ottawa failed to address the most critical issue on outstanding CEBA loans — the loss of the forgivable portion,” CFIB president Dan Kelly said in the release. “I believe the government will regret the decision to not grant more time as small businesses fail and default on their entire loan. For many businesses, CEBA will be the straw that breaks the camel’s back.”

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Kelly warns that one of every five Canadian restaurants faces the risk of closure.

On a positive note, DBRS Morningstar is cautiously optimistic that those that weather the immediate challenges will see revenue growth in 2024.

“This is based on our assumption that menu prices are likely to see at least some further, albeit moderating, growth, while also considering the full-year effects of last year’s increases,” its outlook said.

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