Photo: RetailWire
Will high food costs cost restaurants business?
Grocery prices have been increasing steadily in the U.S. for a number of months, but at restaurants food is getting more expensive at an even faster rate than on grocery shelves.
While “food at home” prices are up 2.5 percent in October, according to a USDA study, “food away from home” prices are up 3.6 percent, PYMNTS reports. The disparity is expected to grow even more — grocery prices are predicted to increase an additional 1.5 percent to 2.5 percent next year, while restaurant prices rise between three percent and four percent. The higher rate of price increase has led to speculation that customers will soon be choosing grocery stores as the economical option over going out to eat.
The give and take of market share between restaurants and grocers has been a recurring theme since the beginning of the pandemic.
In March of 2020, the introduction of rigid social distancing guidelines throughout the U.S. forced many restaurants to close on-premises dining entirely. Some were able to sustain themselves through outdoor dining and pickup/delivery options. Some turned to selling commodities normally used as ingredients for delivery or pickup, to meet the needs of customers having difficulties finding products in the grocery store due to disruptions in the food supply chain.
By early 2021, more than 110,000 eating and drinking establishments were reported to have closed, either temporarily or permanently, in the U.S., according to Fortune.
Some sources are pointing to a restaurant rebound of sorts with fewer business closures. In New York City, only 21 restaurants closed permanently in Q3 of 2021 compared to the 82 that closed in Q3 of 2020, according to the New York Post. Restaurateurs are also picking up new leases throughout the city.
At the time when restaurants were unable to do business early in the pandemic, grocers experienced an unprecedented influx of shoppers. Not only did customers have limited options for getting food elsewhere, but the panic buying and hoarding of staples grew rampant. Grocers also experienced an unprecedented demand for pickup and delivery services.
- As Restaurant Prices Rise, Consumers May Give Grocery Stores a Second Look – PYMNTS
- Grocery prices are rising: Expect these 5 foods to cost more this summer – Today
- Will selling groceries help restaurants ride out COVID-19? – RetailWire
- More than 110,000 eating and drinking establishments closed in 2020 – Fortune
- Chew on this: NYC’s bars and restaurants are making a comeback – New York Post
Discussion Questions
DISCUSSION QUESTIONS: How important are price considerations for consumers choosing whether to dine at home or at a restaurant? Do you see a further shift toward grocery and away from restaurants taking place over the next year?
Poll
Loading …BrainTrust
Jennifer Bartashus
Senior Analyst, Bloomberg Intelligence
Peter Charness
Retail Strategy - UST Global
Inflation happens. Food costs rise. Labor costs rise. Prices rise. It’s the “circle of retail life.” That goes for restaurants, too. The pandemic got consumers to do more “at home” activities, and that includes eating. People still want to go out, but rising prices aren’t going to be what keeps them from doing so. It’s the habits that consumers have developed over the past 18 months that are driving the decision to eat at home or dine out.
Many, if not most, Americans live on a budget. Of this group, many again will cut back on dining out, or will dine out in downscale restaurants. Consequently there will be a temporary (at least) shift to purchasing more groceries for dining at home and away from restaurants. As history tells us, once this inflation settles or disappears altogether, there will be a shift in the opposite direction. This is typically cyclical.
Of course price is important, and will have some impact on customer decisions. Restaurants sell more than just food though, they sell experiences. People want to get out and they expect higher prices. It may reduce frequency in some cases, but overall I don’t expect to see much of a decline.
With kids under 12 potentially getting vaccines starting next week, there is a large group of families who are looking to dine out once their kids are vaccinated — no matter the cost. Inflation will likely continue, and dining habits have shifted because of the pandemic. Eating out may cost more, but it’s easier. With families reintegrating into frequently going out and adjusting to “post” pandemic life/closer to what they were used to before the pandemic, I’m bullish that the price of eating out won’t be much of a consideration.
We are in an era where people are increasingly seeking value for their money. This doesn’t strictly mean only cheap deals and low prices. Instead quality, service and convenience are attributes that help drive value. For restaurants, it can’t be only about raising prices without ensuring there is still value customers will appreciate. Otherwise you end up with customers questioning why they are paying $13-15 for a plate of cheese fries or a quesadilla when it would cost a fraction of that to make at home. So restaurants can and should raise prices strategically, but make sure that the rest of the experience stays in tandem – otherwise customers will stray.
First: inflationary price predictions are predicated on models some of which, particularly the federal government’s, are based upon questionable data and politics. There’s a good likelihood that price increases will be significantly higher than stated.
For this discussion, it’s not a one-to-one comparison. When going out there additional hidden costs, such as the cost of transportation and sometimes parking. Fuel prices are going up and shortages may make them jump quickly. Less economic power may cause hesitancy when diners consider that gratuities will rise as well.
As each compounding factor gets considered, there is a good likelihood that more people will eat at home more often.
Consumers have been pining for restaurants, prepared food and socialization for months. A 3.6 percent increase in cost will not dampen that mood.
As inflationary effects apply pressure on pricing (upward), consumers will become even more cost conscious and decide to eat out fewer times than their normal average. It’s bread and butter economics.
Restaurant dining isn’t just a one-for-one replacement for at-home food consumption, however; it’s partially entertainment, partially travel, heck even mental health. If I can stream a movie at home, perhaps that $80 outing can be redirected to picking up something delicious. If Hawaii is closed down, then perhaps pay a visit to the local poke place. I bet there’s a direct relationship between movie popcorn sales vs. microwave popcorn, though!
I agree that it’s not one-for-one because, I too, believe in the “experiential” aspect of dining out. BUT … with gas up over $1.50/gallon, grocery prices up, restaurant prices up, general merchandise prices up, home heating prices up … that bites into disposable income quickly and will give serious pause to the frequency of dining out.
While I don’t believe in being cavalier about price either in retail or food service, I still believe restaurants will be a bit more resilient than grocery stores when it comes to price absorption. Household income and savings are at record levels. Pandemic fatigue has driven up demand for dining out. We may see some shift down in terms of selected restaurants, but overall demand should not be negatively affected by menu price increases.
There’s an evolving new model for restaurants, that includes a significant take-out business (call that online) and will remain a bigger feature in the restaurant dynamic. Ghost kitchens offer a lower cost method of servicing this market, which makes higher food costs less of a worry as part of the margin equation. Restaurant online business currently suffers margin erosion by excessive delivery partner costs … hopefully these decrease as competition for that service increases. Over time, higher food costs shouldn’t be a serious issue.
Price matters … to a point: a 3.6% rise not so much (and the ~1% differential even less so). Honestly, there’s so much turmoil in the restaurant sector right now — still — these kind of numbers are just going to get lost in the background. A far more meaningful change will or at least can occur if the unsettled conditions translate into long-term wage gains and make (this part at least of) retail more competitive … that thing that everyone seems to want (until they actually have to pay for it).
Most will not sacrifice a night or two weekly. I think it is a little escapism from all the news we swallow everyday. Maybe not as robust as the food industry would like to hear, but robust in comparison to other retail establishments.