According to R365’s State of the Restaurant Industry—Mid-Year Report, released last week, higher food and labor costs continue to bedevil operators at the midway point of 2026. And many restaurateurs foresee more pain to come.
The report is based on survey responses from more than 420 operators representing nearly 10,000 locations spanning pizza, quick-service, fast-casual, casual dining, fine dining and coffee shops. The survey was conducted before the latest round of tariffs announced this week by the Trump administration.
Controlling costs remains the “dominant operational challenge” for restaurateurs, the study found. It noted that food costs have continued to climb this year “as tariffs disrupted supply chains and drove up prices across key ingredient categories including proteins, dairy, eggs and produce.”
87% of respondents said their food costs increased in the first half of 2026.
- 51% reported an increase of 1% to 5%
- 37% reported an increase of 6% to 14%
- 11% reported an increase of more than 15%
Additionally, 78% of respondents said they expect food costs to keep rising through the end of 2026.
So how are they addressing the problem? More than half—52%—said they raised menu prices. Compare that to R365’s mid-2024 report when 60% of operators responded to food cost pressure with menu price hikes. That figure rose to 66% at the beginning of 2026 and has pulled back by 14 points since. “Operators are clearly getting smarter and more creative about how they absorb cost pressure rather than passing it directly on to guests,” the report states.
Twenty-two percent said they leaned into more frequent inventory and waste tracking to keep food costs under control, while 20% said they found better pricing or more reliable sourcing through supplier or vendor changes. And 6% chose to adopt a smaller or more limited menu.
Restaurant operators are also cross-utilizing ingredients on multiple menu items to reduce food waste and stabilize their margins.
Then there’s labor, another perennial pain point for restaurateurs. In the R365 study, 77% of respondents said their labor costs went up again in the first half of 2026, compared to 93% who reported the same at the start of the year.
- 65% reported an increase in labor costs of 1% to 5%
- 29% said labor costs rose by 6% to 14%
- 6% reported higher labor costs greater than 15%
“The operational impact of these labor challenges is showing up in visible ways,” the report states. “When we asked operators how their businesses have been affected, the responses painted a picture of an industry stretching to keep up. 64% said they’re operating below full capacity, 17% have limited their operating hours, 12% have moved to a smaller or more limited menu, and 7% have closed on days they would normally be open.”
Sixty-one percent of respondents said they expect labor costs to continue increasing through the end of 2026. That’s well below the 87% who expected ongoing increases at the start of the year.
“That 26-point drop is the single biggest sentiment shift in our entire mid-year survey and suggests that operators are feeling meaningfully more confident about their ability to manage labor costs in the months ahead,” the report notes. “That 61% is also the lowest forward-looking labor cost expectation in our entire three-year dataset, which goes back to mid-2024.”
As their labor costs keep climbing, “forecasting tools that align scheduling with sales patterns have become increasingly valuable” for many restaurateurs. That approach helps operators keep labor costs down during slower sales periods. They’re also focusing more on cross-training so that team members can be shifted between roles without adding to the payroll.
And keeping solid employees on the payroll is another lever. “Restaurants that invest in supportive leadership, skill development and clear paths for advancement tend to see lower turnover, which directly reduces the ongoing costs of hiring and training new staff,” the report states.Asked to rank their single biggest challenge for the remainder of 2026, 30.1% of respondents pointed to recruiting and training staff, while 29.54% chose food costs. For 22.8%, sales volume was the biggest worry, followed by labor costs at 12.7%, disconnected technology at 3.5% and supply chain issues at 1.4%.
And what’s their No. 1 priority for the rest of this year? Not surprisingly, it’s increasing sales for 48.65%, while 20.88% said they’ll focus on enhancing the guest experience and 17.4% will prioritize reducing costs.
The report concludes: “The fact that nearly half of all respondents are still prioritizing sales growth heading into the second half of the year speaks to something important. Cost control has been the dominant conversation for much of 2026, but operators know that cutting alone will not get them where they need to go. Bringing more guests through the door, and giving those guests a reason to come back, are what will ultimately determine how the year ends.”
