OPINIONFinancing

As some commodity costs ease, should more restaurants lower prices?

Technomic's Take: Restaurants need to rethink their pricing strategy. While that may not mean lowering menu prices, there is one operator doing just that.
Menu prices Technomic
If customers see the prices of chicken fall in the grocery store, how will they react if they see them rise at restaurants? / Photograph: Shutterstock.

Technomic's Take

A month ago, in this very column, I wrote that “high prices are here to stay.” It wasn’t a terribly bold statement to make considering I have history, economic theory and Technomic research on my side.  Simply put, menu prices rarely fall because the cost of inputs, such as rent, wages and food, rarely fall.  And, if your customers haven’t yet been scared off by higher prices, what operator would say, “I’ve got an idea. Let’s make less money.”

Although inflation overall is increasing more slowly than in 2022, indicating the worst is over, prices are still ticking upward month after month, including at grocery stores and restaurants.

To gauge how this is likely to impact menu prices, Technomic surveyed 350 restaurant operators on their expectations over the next six months.  More than 99% of operators expect their menu prices to increase or stay the same.  Only one lonely casual dining operator said their menu prices would decline in 2023.

While it appears there is a lack of appetite or ability to lower prices, especially in an uncertain environment, I’d like to quote my colleague Rich Shank’s article from September, “now is the time to rethink your pricing strategy.”  He wasn’t kidding the first time, but it’s worth reiterating.

While controlling food costs is still a major challenge for operators, some products have experienced a decline in prices, giving operators room to lower prices on certain menu items.  Take chicken, for example. The drop in the cost is great news for restaurants serving chicken. But, if consumers see the price of chicken drop in the grocery store but not at the restaurant, they may be left with the impression that they’re being ripped off and aren’t valued as customers.  

“You have to provide a really great value,” said Joe Fontana, owner of Fry the Coop, a fast-casual chicken concept with seven locations and counting in the Chicago area. Fry the Coop recently announced that they were lowering prices after taking two increases in the past year.

A restaurant lowering prices? This got my attention both professionally and as an avid consumer of chicken sandwiches.

“We never wanted to raise prices originally, but we noticed the invoices and then noticed the cash flow going to nothing,” said Fontana. “To be crazy busy but losing money is a weird feeling.” After raising prices, Fry the Coop’s traffic declined across locations. Customer reviews universally called the restaurant expensive and overpriced, and Fontana knows that “great companies really listen intently to their customers and use their feedback to get better.”

Fontana and the Fry the Coop team went through purchases and vendor contracts with a “magnifying glass” to eliminate unnecessary expenses on the backend while keeping a laser focus on maintaining quality. They even watched what customers threw in the garbage, and saw they were losing money on the coleslaw and the branded cup.

Fry the Coop did not, however, cut items from their menu. But with the price for a case of chicken tenders more than doubling, they made a tough decision to remove the chicken tender and fries plate from the menu and switch to a la carte only. To break even, the plate would have had to have been priced beyond what consumers think chicken tenders and fries should cost, especially at a fast-casual concept. Even the a la carte price of $12 for three tenders “felt icky” to Fontana, because “it felt like we were not providing a great value,” he said.  

“Great companies really listen intently to their customers and use their feedback to get better.” – Joe Fontana, owner of Fry the Coop.

With the price of chicken falling, coupled with the earlier cost-cutting measures, Fry the Coop is now able to reduce their menu prices as well as bring back the much-beloved chicken tender plate which is surely to resonate with customers. It remains to be seen if lowering prices, uncoupled from deals or loyalty rewards, becomes a trend in boosting value perceptions and customer satisfaction. This will largely depend on whether the producer prices fall – and are stable – in multiple categories.

For operators that haven’t yet gotten relief from rising food costs and have seen a drop in traffic, listening to customer reviews and examining where you can safely cut costs without sacrificing quality remains essential. Operators should have a strategic plan in place with purchase price points where they would feel comfortable lowering menu prices to boost value perceptions and not cutting deeply into margins. Operators should also have a social media plan to get their pricing message out, tell their story, and make their customers feel valued.  

I asked Joe Fontana if he had any final advice for operators navigating this challenging pricing environment. His message resonates as both a pricing strategy and a life strategy. “Don’t forget about value and how important it is to provide a great value,” Fontana said. “Give more than you take, and life will be great.”  Going back to what I said earlier – now is the time.

For more information on pricing and menu research, click here or reach out to Technomic atinfo@technomic.comortechnomic.com. Technomic is a sister company of Restaurant Business

 

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