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The Restaurant Association's Hospitality Report 2014 said national industry sales grew 9.8% to $7.6 billion in the year ended March.
While hospitality operators were ''cautiously optimistic'' about the rest of 2014, many were hesitant to announce a return to the profitability of pre-recession times.
''It is clear there continue to be many challenges to remaining profitable in hospitality,'' association chief executive Marisa Bidois said.
The report also showed the cost of labour was the major challenge, with 51% of those surveyed by the association expressing their concern. Last year, 55% of those surveyed were worried about labour costs.
The lack of skilled employees concerned 41%. Competition from other businesses remained a steady concern on 34%, as did food costs on 29%, operating costs on 21% and government legislation and compliance moving up, with 18% of those surveyed being concerned.
Ms Bidois said wages continued to rise beyond customers' expectations of price rises, a challenge and balancing act all business owners face.
''At the same time, the industry's No 3 challenge is a lack of skilled employees, which can place upward pressure on remuneration. That's why building and maintaining sales volume is the second most pressing challenge,'' she said.
Labour costs worried 70% of those surveyed in the Queenstown-Southern Lakes district, 56% of the rest of the South Island and 54% in Canterbury. Competition from other businesses also rated highly in the Queenstown-Southern Lakes district, the report showed.
Ms Bidois said the fight for the consumer's discretionary dollar was particularly intense in the major city centres, which had seen an influx of new businesses over the past two years, with no sign of abatement.
One restaurateur from Auckland was quoted as saying there was an oversupply of restaurants to population.
''They will not all survive and everyone - landlords, suppliers, even the IRD - will end up out of pocket if this happens,'' the restaurateur said.
Ms Bidois said many operators advocated a cap on the number of businesses operating in a particular area and that might be an outcome of the new alcohol laws which allowed councils, and the community, to have a greater input into the number of liquor licences granted.
Ms Bidois said the hospitality industry continued to rate a lack of skilled employees as one of the key challenges facing hospitality operators. In particular, it continued to be prohibitively difficult to recruit for skilled senior positions such as cafe and restaurant managers and senior chefs. The manager position had now been removed from Immigration New Zealand's short-term skill shortage list but a review of the chef role at the end of last year found enough evidence of that position for it to remain on the long-term skill shortage list.
Nearly three-quarters of businesses consulted by the association had recruited someone for a senior chef role in the past year and 65% had recruited someone for a junior chef role.
For those businesses which had employed a senior chef over the past year, more than half of successful candidates for the role were immigrant workers in New Zealand on a work visa.
''We also found 96% of these businesses who were recruiting for chefs found an unacceptable level of difficulty - extremely difficult or difficult - in recruiting for these positions. Sixty percent said it was `extremely difficult' finding a suitable candidate.
''This indicates the problem has worsened over the past three years as a survey in 2010 found 86% were having difficulty in recruiting for these roles.''
An alarming number of key staff also appeared to be leaving the industry permanently, with 47% of employers noting one of the key recurring reasons staff left their business was to go overseas. Thirty-one percent indicated employees were leaving the industry completely, Ms Bidois said.
The expectations were for another good 12 months ahead, although at a slightly reduced rate of growth.
''While consumer confidence is rebounding we know there are interest rate rises on the horizon and house prices and household debt remain of concern to many New Zealanders.
''We're forecasting growth of 4% and total revenue for the sector of nearly $8 billion. We also expect the Auckland and Christchurch hospitality markets to dominate the sector's employment growth which next year will see more than 111,000 hospitality employees working in more than 15,000 outlets.''