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Higher labor costs keep restaurant menu prices soaring

Restaurant prices are up 11% since 2015 and 3.2% over the past year, making up much of the industry’s growth, says RB’s The Bottom Line.
McDonald’s sign
Photograph by Jonathan Maze

the bottom line

Restaurants face a lot of cost pressures, which has kept them raising prices despite concerns over traffic and mounting competition from grocers and convenience stores.

In August, prices of food away from home rose 3.2% year over year. By comparison, food at home prices are up 0.5%, according to the most recent federal data.

That continues a pattern that has been commonplace for the past four years. Grocers have kept prices steady, while restaurants have raised them. Since August 2015, in fact, restaurant prices are up 11%.

By comparison, grocery prices are actually down 0.5%.

The price increases have accounted for a sizable portion of the industry’s growth, but particularly this year. According to federal retail sales data, restaurant sales are up 3.9% in 2019. That means 82% of the industry’s total sales so far in 2019 have come from operators increasing their prices, rather than from new locations or customers coming in more often.

The price increases this year are outpacing wage increases (up 2.9% over the past year) and overall inflation (up 1.7%).  

None of this will come as a surprise to any observer of this space: Chains have been pushing higher-priced items all year, while increasing their menu prices, even as traffic has stumbled.

The biggest example comes in the fast-food space, where McDonald’s, Burger King and Wendy’s have all struggled with traffic declines even as their own same-store sales have been positive.

McDonald’s same-store sales rose 5.7% in the second quarter, and its traffic still declined during the period. That’s a remarkable accomplishment.

According to the August Black Box Intelligence index, same-store sales fell 0.7% in August. Traffic was down 3.9%. Both numbers were improvements over July’s figures.

It’s fair to wonder whether these price increases are keeping customers away, or at least diminishing the frequency with which they dine out. Customers notice price increases and adjust accordingly.

This is especially true when consumers’ other source of food, grocers and other retailers, have been keeping prices steady. A $100 restaurant meal in 2015 now costs $111. But that $100 grocery bill from 2015 is actually slightly lower.

Restaurants really have little choice in the matter. Labor costs as a percentage of sales have continued to rise even with same-store sales, thanks both to competition for labor in many markets and higher minimum wages in many others.

Restaurants have a higher demand for labor than do either grocers or c-stores and thus have been required to keep prices higher to maintain their profitability. In addition, current trends like delivery also eat into operators’ profits. Real estate and construction costs are also rising.

While operators risk losing some traffic by raising prices, the other choice is in fact worse: Keeping price increases to a minimum in a high-cost environment can have disastrous consequences.

The store closures at Steak ‘n Shake are a perfect example. The chain insisted on keeping its value offers front and center for years, opting instead for cost cuts to continue the chain’s profitability.

Those sales are now falling, and the company has temporarily closed one-sixth of its units to keep from losing more money.

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