Restaurants have been raising prices at record levels recently. In December, fast-food concepts raised menu prices 8%. Full-service restaurants raised them 6.6%. The total food-away-from-home index, up 6%, was the highest in 40 years—and even that undersold the total index given the impact from school lunch programs.
Operators have done this for two reasons: Their own costs are soaring, which is true, and consumers appear willing to pay these prices.
It may not be for long. New data from Black Box Intelligence suggests consumers are increasingly concerned about the value they’re getting at restaurants.
According to the data firm, online restaurant reviews are increasingly less positive about the perceived value of their recent restaurant visits. There were fewer mentions in reviews of full-service restaurants of “specials” and more negative mentions connected with value—such as the experience was “not worth it.”
There were fewer mentions of “reasonable prices” at casual dining restaurants and more negativity around value at limited-service restaurants—with more comments on “high prices” and the experience not being worth it.
To be sure, these are online reviews and are not necessarily indicative of consumers’ overall views. The Black Box index did show the lowest sales and traffic levels in the first week of January since late February—nearly a year. But there were other factors behind those numbers, notably the weather was bad and people stayed out of restaurants because they feared getting sick.
But consumers are increasingly concerned about the state of inflation.
Preliminary data from the University of Michigan, for instance, shows a considerable drop in consumer sentiment this month. Consumer sentiment dropped 2.5% in January from December, and 12.9% year-over-year.
Consumer sentiment, in fact, has shifted in the past six months from a more optimistic first half of 2021—a shift that the university attributed in part to the impact of the delta and the omicron variants of the coronavirus but also to increasing concerns about inflation.
On balance, consumers continue to eat out at restaurants because the prices for everything else are going up, too, particularly food they buy at the grocery store. The prices for food at home in December rose 6.5% year-over-year—more or less equaling the price increases at restaurants.
Generally, when prices at restaurants and grocers are both increasing, restaurants don’t lose customers from price increases because consumers don’t have a choice. And it’s worth reminding that in many respects the economy is going quite well.
For instance, according to the New York Fed, Americans’ expectations for their household incomes in the coming year increased 0.2 percentage points in December—the highest rate of increase on record. Consumers expect to have jobs and higher incomes. And the confidence is most pronounced among lower-income consumers that pay a higher percentage of their incomes on restaurants.
All that said, consumers have been spending at restaurants over the past year. If consumers get a sense that their visit isn’t worth it, they may be more likely to eat at home. Or they may shift how they spend at restaurants, perhaps getting lower-cost food or cutting out higher-priced visits, notably the use of third-party delivery.
It’s not yet certain whether restaurants face a loss of pricing power this year. But it’s important for operators to pay close attention to their own consumers’ sentiment on their prices. They’re beginning to see just how much those restaurant visits are costing them.