Inflation Making Dining Out the Value Option
A new report from Bank of America Merrill Lynch concludes that that eating out is becoming increasingly cheaper, on a "relative" basis, than buying groceries to eat at home.
The "relative" part comes because restaurants are said to do a better job reducing time pressures for consumers. But the major emphasis of the report was that restaurants are doing a better job overcoming food inflation due to better labor efficiencies.
Among the key reasons the report states restaurants are becoming a better value versus grocers:
- Grocers feeling price inflation prices rising faster than restaurants: The investment firm notes that, according to the Bureau of Labor Statistics, prices for the supermarket channel are advancing over six percent per year, roughly two-and-a-half times the rate of seen at restaurants. Grocers are said to be more sensitive to raw commodity prices than restaurants because "spare capacity, particularly in the labor market, will constrain inflation."
- Restaurants can better manage wage pressures: Restaurants have a "stronger labor component," and with the youth unemployment rate at 24 percent, restaurants have the flexibility to pay workers less to deal with inflation. The report adds: "Moreover, for many workers in the restaurant industry customer tips comprise a major portion of earnings."
- Opportunity cost to households favors eating out: The report states, "In this weak economic environment, if afforded an extra hour of time, a household will be more likely to work in that hour than spend that time going to the grocery store and preparing food. Again, this implies a relative shift, substituting away from grocery stores into restaurants."
The report concludes that consumers will continue to shift more of their spending dollars to restaurants over supermarkets.
"In this environment of household balance sheet repair and high unemployment, frugality is in vogue," the report states. "This implies consumers will shift the composition of spending to cheaper options. Because they are able to offset higher food costs through a lower labor cost structure, restaurants have been better positioned to provide customers with bargains and consumers have substituted, at the margin. With wage growth contained and absent a big drop in raw food prices, we see this substitution dynamic continuing."
The Fiscal Times did its own survey to see which explore whether restaurants or supermarkets are more expensive — even excluding the added time value in avoiding shopping for ingredients and cooking. Basing its grocery prices on Fresh Direct, it found that a typical meal was notably less expensive at OutBack Steakhouse and Olive Garden, slightly less expensive at P.F. Chang’s, and slightly more expensive at Red Lobster and The Cheesecake Factory.
Discussion Questions
Discussion questions: Are restaurants becoming an increasingly better value option for consumers than grocers in the inflationary climate? Do you agree that restaurants are in a better position to offset inflationary pressures? How should grocers respond?
Funny this should come up today. I had friends visiting from out of town and bought some take-out bagels and associated accoutrements from the local deli. This bill was ridiculously high from my point of view. But when checking other delis in the same area, it turned out the price was about right. $8 a pound for cole slaw? And it’s right? Yikes.
As far as I can see, the local supermarket is still the far better deal.
Well, one of the major assumptions is that households would rather work an extra hour and just pay to eat out, but that assumes that the household is actually able to turn that extra hour into work that pays, and I think that’s a big assumption.
Personally, I haven’t noticed that it’s cheaper to eat out. Breakfast for my family of four at McDonald’s runs $25, and with travel to and from takes no less time than cooking the same thing at home — for about $5 worth of ingredients.
I can buy that inflationary pressure is felt more quickly in grocery than in restaurants, and that restaurants are able to keep a tighter lid on labor costs. But to say that it has swung the cost/benefit analysis over to favor eating out? That’s a stretch to me.
Some interesting logic from the folks that brought us the collapse of the financial markets. I haven’t heard anyone say let’s go out to eat to save money on groceries. Yes, grabbing a meal on the run may save time, but it rarely saves money or calories.
I’m not sure the conclusion (it’s cheaper to eat out than to eat at home) is valid. But the restaurant business has been surprisingly resilient over the last year or so. This suggests that there is enough disposable income out there to drive the dining business (and the travel business, too)…perhaps consumers want to spend their disposable income more on “experience” and less on “things” than in the past. And there is no question that consumers are becoming more attuned to coupon sites and “deals of the day” for restaurants, making this a better-than-expected value.
Restaurants are offering a better perceived value option than grocers in the inflationary climate. Why? According to Webster’s Dictionary, “Value” means “Importance” and eating out and being involved with contemporaries in public places seems to make one feel more important than shopping in a grocery store.
Restaurants are also better positioned re inflationary pressures. They stick with repetitive purchases of finite items. Grocers deal daily with thousands of commodity and processed items.
Grocers should seek ways to project the human values, together with their economic results, in eating at home with family and friends. (See Paula’s experience.) They should also make price comparisons with today’s restaurant eat-outs, including tips.
The world continues to change its eating locations for several reasons other than pure cost. The family kitchen needs some new dynamic PR and the grocers need to be pro-active in that warfare.
This is very interesting as I explore the options for my personal household. Cutting to the chase, grocers should notice the entree and side dish products offered at Trader Joe’s. It’s hard to beat $5.99 for an entree that feeds two (big eaters). Especially in Manhattan where prices can be very high the restaurant that serves a good meal at a reasonable price provides a place to decompress and enjoy the convenience it provides. Diners as well as specialty restaurants offer favorable alternatives to grocery shopping, storing, preparing, cooking, setting the table, cleaning the dishes, etc. I marvel at the choices I have. I don’t know if restaurants are offsetting inflationary pressures or have less relative overhead than the grocery stores.
This is an interesting take on eating habits during a suffering economy. I think that, indeed, in terms of time and inflation, it makes sense that consumers would choose to head to a restaurant for convenience, and perhaps to save some money.
But retailers and marketers can respond to combat this. Introduce more cost-saving programs, with product discounts and in-store promotions. Retailers could look into manufacturing private labels to offer a low-price option.
From a macro level, there are many nontraditional marketing tactics, like social media for instance, that offer free (you just pay for the expert’s time) media to blast your marketing message. In this case, you’re garnering more consumers in a medium that doesn’t cost millions for 30 seconds of time, like on TV.
Just some food for thought. Bottom line: there is opportunity here for marketers and retailers, just waiting to be captured.
I get that there could be a better relative value shift at restaurants for the reasons cited and that cooking some of the dinner options for a small family versus at restaurant scale could even be more expensive on a direct comparison. However, I don’t think there’s a big need for retailers to panic. The options that consumers choose at home don’t often compare directly to the options they choose at a restaurant and for these the home choice is still more cost effective, more healthy (if wanted) and in most cases more convenient.
We all understand the cost of groceries today is at an all time high. We continue to hear it is because of the cost of fuel for transportation and increased labor rates. Not that this is not the same for restaurants. It has to be. But you have a lot of convincing left before I agree it is less expensive to eat at a restaurant. Maybe on some nights when there are excellent specials. But on a regular basis? I doubt it.
The fastest way to get a conversation going at a holiday party is to comment on the surreal prices at grocery stores. Hamburger costs the same as steak? Cereal for $4.50 a box? “Cheater packs” of ice cream that will feed one person? My mother recently commented that going to the store is like going to the Smithsonian — you can admire the items but you can’t take them home.
Broad topic; I suppose that eating out can be a better value than buying groceries for preparation at home, however, it depends so much on the consumer, the size of the household, and of course, the restaurants used or chosen. Time has value and with most households having two people employed all day long, prepared foods and restaurants offer a convenience that is hard to beat.
I don’t agree with this in the long run. Unless you’re talking Taco bell or fast food, any decent restaurant is about twice the cost of eating the same thing at home. Time is the main reason people are dining out this time of year, and also the convenience due to the holiday stress. After the first of the year the grocers will start looking a lot better to the folks as bills, and real estate taxes start coming in.
This seems to be much ado about nothing. The numbers tell a different story than the rhetoric. According to Merrill Lynch, from early 2008 to late 2011, growth in share of consumption was:
Grocery: +.3%
Restaurants: +.2%
Not much different. Similarly, from early 2008 to late 2011 inflation averaged
Groceries: 2.7%
Restaurants: 2.4%
Not much different. Why all the excitement today?
Costs to eat food at home have fluctuated wildly over the past 4 years, from 8% to -3%. Growth in restaurant consumption has also been volatile, increasing in 2008, decreasing in 2009, and increasing again in 2010 and 2011.
Today we happen to see the high end of grocery inflation (6%) and high end of restaurant consumption share (4.2%). Projecting those values forward looks interesting indeed, but does not reflect the 4-year trend.
Note that the annual increase in value redeemed via coupons has somewhat offset grocery inflation, rising about 4-6% or so annually, according to NCH. It’s not clear if that fact is reflected in the data.
“Cheaper” and “relative” are always subjective. Take for example the recent similar “Two for $20” options offered by many of the chains and advertised regularly in all forms of media. Add to that two $2.99 soft drinks, and then add a 15% tip. You are now sitting at about $30 for a “cheap” dinner for two.
Is that “cheaper” than eating at home? It depends on how you figure it. That is to say, if you had to buy each of the ingredients and prepare it yourself; maybe. But, could two do better eating at home and still have a good meal? Yes.
However, here’s the question. Is it a “value” one way or the other. That’s where subjective comes in.
I see both young people and people my own age choosing eating in much more often. I see meal making as part of a ‘social’ event more and more. It’s part of a daily event, or even a date event. While table time or sitting down for a meal might be different, it’s becoming more of a connection time both for family and for young people. That’s where the “value” comes in. “Value” has many more characteristics than just being “cheaper.”
Perhaps this is true because the “starting position” was skewed towards higher labor costs and lower food costs in restaurants (though I find that hard to believe). But I don’t see how this can be true in the long run. As food costs rise in both supermarkets and restaurants, restaurants will need to raise prices as well. Perhaps they can delay a bit, versus CPG manufacturers and grocers, but the fundamental economics haven’t changed. It has to work its way through to consumers in the end.
Right, so “spare capacity, particularly in the labor market” (i.e. making people work harder) plus the ability to pay less by using young people and enabling customers to work an extra hour means restaurants offer better value than supermarkets which may, possibly, maybe, perhaps, encourage people to occasionally cook and eat healthy food (and spend time caring for their families rather than buying in someone else’s efforts). As a bonus, they can feel they are being “frugal” and therefore “in vogue.” This study, like so many others, equates “cheap” with “value” but also strikes me as placing value on some of the wrong things.
As consumers face cost pressures of inflation, increases in gas prices, “too little check” at the end of the month, one of the first things to trim is dining out.
Restaurateurs have steps they can take to protect food costs, to be certain. However, food costs are 30% – 36% of total costs within most restaurants (a bit lower for pizza and certain ethnic establishments — Chinese and Mexican, as an example). They have costly boxes/rents, equipment packages, and the need to keep labor costs under control.
If grocers or restaurants are to capture share of stomach, best that they do it on quality and service issues. Don’t fight this one on price. The margins just are not there in a world of rising commodity pricing.
Value is the operative word and convenience is often what busy people value most — how else to explain home improvement retailers expanding their household cleaning product sections and Toys “R” Us selling diapers? Wouldn’t Walmart own the price advantage?
To me, this isn’t that different from the conversations around bricks/clicks/mobile/social. It isn’t a zero sum game with clear winners and losers. It is about covering off on touch points. That’s why so many restaurant brands have awakened to the benefits of selling their goodies in grocery stores.
There seems to be some confusion what the claim here is: it certainly ISN’T that eating out is cheaper than at home, but rather that the disparity is closing…hence eating out used to be — say – 5x as much, now it’s only 4x. The usefulness of this is, of course, what you make of it.
This is a great topic to produce a lot of participation. The only way that I see the “value” increasing for restaurant food versus home cooking is if you calculate a high value on your personal shopping and preparation time. Of course it is easier and faster to eat out, but a better value? Not according to my math.
Actually I stand corrected: the claim IS that restaurants can be cheaper; but it seems to be based on an “unscientific” survey that — in addition to (apparently) ignoring the tax and tip on the restaurant prices — used nonsense prices: $2+ for a serving of rice or carrots at home (it looks like they simply bought a 10-20 serving bag and claimed equivalence)…Max is right, it really is the same geniuses at work.
Grocers don’t even need to respond to this inaccurate point of view. Bottom line, my lovely wife cooked some pesto pasta for the four of us last night. The whole wheat pasta cost $1.40, and the spices and olive oil used couldn’t have cost another dollar in total. She made a veggie and some rolls and total bill was less than $5.00… for four hungry adults. Get serious, home meals taste better, are more convenient, and they cost less.
Seems to me the discussion misses a critical point — Price/Value seems to assume that restaurant food is of comparable quality to a balanced, home-cooked meal. Restaurant food is typically “rich and heavily salted and buttered” and good for a “treat” but not healthful on a daily basis. Just try eating out every day and I’d suggest all of us would be “Super-Sized” in no time…and if one eats some meals at home, then the time savings and cost of grocery shopping are minimal for one or two incremental meals. So where are the savings? And for sure no matter the “out of pocket expense,” the full cost, including future diet plans and healthcare costs would far exceed any ephemeral savings in time or money. My humble opinion — and I realize this is not the direct point of the article but eating out every meal or simply more frequently is not a good plan.
No. Restaurants will never be a value option vs. eating at home. Even if the numbers compared are from QSR “gut feeder” restaurants, numbers alone don’t determine the “better” dinning option.
Grocers with Delis are in a ideal position to capitalize on dinning spending. The problem is that not all grocers have full functioning delis and the ones capable have not done a good job promoting their capabilities.
I agree with panelists that restaurants are becoming more sensitive to pricing concerns, and many are offering “value” menus that are closing the gap. One observation is that the cost of fresh prepared foods from the deli section can carry a premium price; some entrees are in the $5 – $8 range, which can quickly approach some of the basic restaurant offerings. The other consideration is that restaurant meals will include cost of beverages, side, etc., and a tip quickly adding up to a higher total cost.
I would think dining out is a great value, plus there is less waste as restaurants probably do a better job of controlling resources, energy usage, reducing waste, etc. Grocers should respond with more and better quality heat and serve value meals.
Restaurants, since they have the ability to control the wage component of their business model, can manage their costs better than grocers, which really have only one “button to push.” But the changing product mix at grocery stores help to address that issue.
As grocers offer more and more prepared foods, the margin in grocery stores has begun to creep up. The best response to a rising commodity environment is added value — both in the products (as in prepared foods) and in services (such as take-home and delivery meals).