Restaurant companies have been raising prices at rates far higher than normal for the past several months, often with this caveat: Grocery prices are increasing even more.
Those days may be coming to an end. New federal data released this week show that the “gap” in prices between grocers and restaurants narrowed by 120 basis points last quarter. Grocery prices have peaked. Restaurant prices have not.
Food-away-from-home prices increased 8.6% in October, according to data from the U.S. Bureau of Labor Statistics (BLS). To an extent, that’s something of a false positive, given that the end of free school lunch programs has been inflating that number to an extent.
Yet prices at actual restaurants show little sign of slowing. Prices at both full-service restaurants and limited-service concepts accelerated in October.
For full-service restaurants, prices rose 1.1% in October from September and are up 9% over the past year. For limited-service establishments, prices rose 0.8% from September and 7.1% over the past year.
Food-at-home prices, on the other hand, slowed to a 0.5% increase in October. They are now up 12.4% over the past year.
To be sure, that remains far higher than restaurant menu prices. But it’s now the second straight month that the gap in inflation between the two purveyors of food to consumers has narrowed. And menu prices have been increasing higher than grocery prices for each of the past four months. That gap, in other words, will likely continue to narrow in the coming months.
That would leave the industry without one point that has helped carry operators through this inflationary period.
When inflation rises considerably faster at grocery stores than at restaurants, consumers will shift their spending from eating home-cooked meals to stopping at the drive-thru on their way home from work. And when the situation is reversed, they eat at home more often.
As inflation took off over the past year, that gap hit historic highs. In October last year, the inflation gap between grocers and restaurants was 0.1%. By July and August it was 5.5%. More than a few industry experts and executives pointed at this gap to explain why they’ve been able to raise prices aggressively. And they have: McDonald’s, Burger King, Dutch Bros, Wendy’s and several others have raised prices 10% over the past year.
There isn’t much convincing evidence to suggest that the gap is helping restaurants all that much because traffic has been down even as this gap widened.
As Wendy’s CEO Todd Penegor mentioned this week, consumers are eating more of their meals at home than they did before the pandemic.
Pricing, apparently, is not the primary reason. As Technomic’s Lori Rakoczy mentioned last week, consumers’ lifestyles have changed, which is the biggest reason for their dining decisions, though financial concerns and the cost of restaurant meals are clear factors.
Most likely: Consumers are simply buying cheaper items at grocery stores while shifting spending to cheaper options or just eating out less.
Regardless, the elimination of the grocery-restaurant gap could become a problem for the industry in the coming months, shifting attention away from the high prices people are paying at the supermarket and toward the amount they’re spending at sit-down restaurants.