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.
- Food for thought – Bank of America Merrill Lynch
- Eating out is now cheaper than cooking at home thanks to growing price inflation – Examiner
- Why It’s Cheaper to Dine Out Than Eat In – Fiscal Times
- Commodity Inflation And Spare Capacity: Food For Thought – Zero Edge
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?