Peter says…
Sorry to be a little misty-eyed, Nancy, but this time it’s not merely a function of being in your presence. Conditions being what they are in the restaurant business, I couldn’t resist pulling out the scrapbook for a flashback to the days when dining out wasn’t reserved for Elon Musk and a few emirs. Given where menu prices are, it’s a matter of time until drive-thrus are reconfigured to accommodate private jets and stretch limos.
We’re talking about a long time ago, like early 2022. A singular strength of the U.S. restaurant industry has been its affordability. It was a treat within reach of most, as this son of a blue-collar worker can attest. That’s what enabled dining out to become part of the social fabric.
Because of inflation, now you may have to choose between taking a vacation or indulging in anything more ambitious than a Friday night fish fry.
A colleague gave Chipotle’s new bowls concept a try as soon as the venture opened. She had high praise for her salmon dish from Farmesa, which she ordered with purple sweet potato chips and avocado hummus. The price: $35. For a takeout meal.
A personal woe has been seeing my local pizzeria raise its price from about $21 per pie mid-pandemic to a staggering $36 today, although that does include the mandatory $5 tip for the delivery driver.
It’s not as if restaurants are price-gouging. They point out that food costs are climbing higher than one of Musk’s SpaceX rockets, and not all of the spike is being passed along. Depending on what analysis you read, operators are eating more than a percentage point of the surge, worried as they are about scaring away customers.
It’s not as if menu prices are the only ones shooting heavenward. At some point, consumers will need to forgo some galloping expenses so they can cover others, like utility charges. Operators don’t want to bump restaurant visits to the top of the Skip It list.
All kidding aside, I worry that the restaurant industry is already hitting the red zone with its pricing. And there’s ample pressure to maintain the climb. Commodity costs are moderating, but labor expenses are on a Saturn 5 trajectory, minus the atmospheric re-entry stage.
No wonder inflation has supplanted the labor shortage as restaurateurs’ Number One worry. More than 9 of the 10 operators who were surveyed by the National Restaurant Association for its 2023 State of the Industry Report said galloping costs were a significant concern.
Not surprising, nearly the same proportion (87% vs. 91%) said they’ve already hiked menu prices to cope. And 38% said they’ve postponed development because the juice ain’t worth the squeeze with costs at their current levels.
As a movie buff, Nancy, you’ve likely seen your share of cinematic ends to life as we’ve known it. Is this it for the modern restaurant industry? Is it Mad Max time?
Maybe we can discuss it over lunch. Your treat, if you happen to know a pushover of a loan officer.
Nancy says…
Wait a minute, did you just say “the juice ain’t worth the squeeze?” I know you’re a native New Yorker and all, Peter, but this sounds like we’re auditioning for roles in The Sopranos.
Colorful phraseology aside, however, I get your drift and feel your pain. I’ve also been on the receiving end of sticker shock during recent restaurant visits, where I’ve found myself checking the tab twice if not thrice in surprise and disbelief.
As to whether our sharedreaction to menu-price escalation augurs an inflation-driven apocalypse, or Mad-Max time as you call it, I cannot say. In fact, no financial analyst, government agency or industry pundit seems able to predict post-pandemic consumer behavior with any accuracy, despite lots of high-profile attempts to do so.
The folks at the Fed obviously can’t get a handle on what’s happening, as the Associated Press recently noted that “the labor market continues to defy Federal Reserve attempts to cool hirings,” which has led to successive, unsuccessful interest-rate hikes in an effort to throw cold water on inflation.
The situation closer to home is similarly befuddled, as RB reported in mid-March that restaurant menu-price increases have been outpacing inflation at supermarkets and other grocery stores for the past several months. This disparity traditionally leads consumers to put the kibosh on restaurant expenditures, and while some certainly have, many more continue to party like it’s 1999.
As operators jockey to keep their cash registers ringing amid the uncertainty, they have adopted a variety of remarkable, out-of-the-box menu pricing strategies and operational tactics.
Some chains are stepping up their upsell initiatives. El Pollo Loco, for example, has developed a special “add-on” panel for menu boards that will encourage some diners to trade up, while also allowing penny-pinchers to remain in their financial comfort zone.
On the full-service side, Darden Restaurants recently reported that quarterly sales and traffic outperformed the broader industry, which executives ascribed to their policy of deliberately pricing below inflation.
Then there’s Noodles & Co., which has announced plans to introduce digital menu boards that will allow for dynamic pricing, which is more typical of airlines and ride-share services and which aims to drive traffic at slower times by lowering prices.
In an equally unconventional changeup, some operators are cutting prices. On March 23, an email from the founders of Urban Plates, the from-scratch, farm-to-table kitchen operation, announced in capital letters “a price DECREASE starting immediately” that reflects the cost moderation of some key raw ingredients and an overriding desire to make its dishes affordable and accessible.
In addition to this innovative maneuvering on the pricing side, other chains are rejiggering their operations, often incorporating technology to realize efficiencies that save time and money, while enhancing the patron experience. Jack in the Box, for example, has invested aggressively in smart equipment and employee training; the result is a reported 12.6% sales increase at company stores last quarter.
So, I think we need to call a timeout here, Peter. Don’t all these strenuous efforts by entities from the federal government to marketing gurus across industries to restaurant operators suggest that something’s up with the consumers who are the target of their machinations? Isn’t the basic question what do consumers really want anyway?
One answer appears to be the notion of self-care, one of the squishiest and apparently stickiest concepts to arise from the economic ashes of the past three years.
It’s invoked to explain everything from the so-called “lipstick effect” that has seen consumers ramping up purchases of higher-end cosmetics and skincare products, to the unlikely success of Crocs, the brand of resolutely clunky clogs.
Revenues of the footwear concern have skyrocketed 90% to more than $5 billion in the past three years. One devotee of the brand asserted recently to The New York Times that “my Crocs are my self-care and I’m not going to give up my therapy because the economy is going to crap.”
Another example of the latter, the self-care, not the crap: On a recent Saturday afternoon around 4 p.m., I stopped in a local outpost of one of the new-age cookie chains. It was a mob scene that included families with kids waiting on a long line to pay $5 apiece for a warm, gooey chocolate chip treat. That same five bucks will buy you a whole package of cookies off the supermarket shelf and leave you with some change to boot.
The bottom line is that the pandemic clearly forced a reset of consumer values, as they’ve trashed the outdated playbook that most institutions and industries still employ. Whether these shifts are permanent remains to be seen, but the past 12 months suggest that it behooves smart operators to get a firm fix on their patrons’ changing value expectations in order to keep dining-out business positioned within the earth’s gravitational pull.
Sweet & Sour is a monthly Restaurant Business feature where two longtime observers of the industry consider the implications of a restaurant trend that’s gotten under their skin. Because of the language, parental controls are advised.