With grocery stores passing along commodity price increases faster than foodservice, restaurants stand to capture more holiday business.
For all the perks dining out has over cooking at home, price is typically not one of them. The experience, atmosphere, and food may be superior, but more often than not, it’s also the pricer option. This holiday season, however, restaurants have an advantage on that front, due in large part to commodity price inflation.
“When you think about the supermarket, they're basically passing along what the manufacturers’ prices are, but they know restaurants are buying from food manufacturers at basically the same price, so [supermarkets] have to make their value proposition,” says Michael Swanson, chief agricultural economist with Wells Fargo.
Oftentimes this value proposition comes down to cost. Compared to restaurants, grocery stores have lower overhead because they are, by nature, a less labor-intensive operation. Swanson estimates food represents only about 30 percent or less of the total restaurant bill, whereas it’s the bulk of the price at supermarkets. He further clarifies that for quick service, the percentage might be even higher since the service element is more conservative. It’s the opposite for fine dining, where the cost of ingredients may account for an even smaller proportion of the total cost, in light of the intensive prep and skilled labor required.
Given that food costs only comprise about a third of what consumers pay at restaurants, a slight advantage should have a negligible effect on sales. But Swanson argues that even a small difference could be enough to sway consumers, depending on other factors, such as party size.
“I think it makes sense to people if, one, you have a small gathering with four or fewer people. [You have] to go out and find that turkey and do all that [cooking] and then you typically have quite a bit of food waste because you made too much. … Some people will look at it and say, ‘I’m going to pamper myself, to go out and spend $25 or $35 per person,’” Swanson says. “There's going to be an interesting dynamic. Groups small enough that they can get away from home, they see the advantage. But this year, the penalty for doing so will be very small compared to a couple of years ago.”
Indeed, a new report by Wells Fargo reveals the cost of groceries increased 9.8 percent between November 2021 and 2022, but dining out only rose 5.8 percent in the same period. Several commodities also jumped on the consumer price index (CPI), with eggs up 35.5 percent, butter up 25.8 percent, and flour up 17.1 percent.
Costs for the Thanksgiving pièce de résistance have also risen. Turkey prices are up 23 percent in Q4 compared to the same quarter last year—an increase due largely to an avian influenza that continues to limit supply.
Natural conditions have also compounded inflationary effects on other holiday staples. Dry conditions in the Northeast forced cranberry farms to rely more on irrigation to harvest their crop, thus driving prices up; in the Northwest, a cold spring followed by a rapid warm-up negatively impacted both quality and size of the cranberries. That same weather pattern also affected potatoes and marks the second consecutive year that yields have been smaller.
As Swanson explained earlier, supermarkets and foodservice are buying from the same suppliers, which begs the question why inflation is more acutely felt in the grocery aisle than the restaurant dining room. The reason boils down to how quickly the two sectors raise prices.
“What's interesting is the restaurants will lag behind supermarket inflation, and then they'll stay much stronger for two or three years because supermarket inflation will really drop back down to almost nothing, but the restaurant will take two, three, or four years to pass along that higher cost,” Swanson says, citing data that goes back to 1955.
Historically, price increases at supermarkets are more dramatic but also occur less often; foodservice, on the other hand, will gradually pass along those higher commodity costs to consumers. So, restaurants have a relatively limited window of opportunity to grab market share from grocery stores. In fact, Swanson predicts the restaurants’ upper hand will begin to dwindle shortly after the holiday season.
“It will actually start happening here in the first part of 2023. We'll see that reversion,” he says.
For the time being, limited-service dining offers the best deal this holiday season, given the higher supermarket prices.
“Quick-service restaurants are almost a system; they’re engineered. Like the Wizard of Oz, you know there's somebody behind the curtain who is diligently looking at all the factors, whereas full-service restaurants [take] a more artisanal approach with menu pricing,” Swanson says. Still, he qualifies, full service brings an ambiance and experience more in line with the celebratory nature of the season. “There's a festive aspect of the dine-in. They're going to want to have more service and the sit-down aspect,” he adds.
Even as the new year restores restaurant-grocery dynamic in terms of CPI, any contraction on the foodservice side will be slight compared to the banner growth it’s experienced as of late. Between April 2021 and March 2022, restaurants experienced the “best returns of profitability the industry has seen in 14 years,” Swanson says, meaning the operators who survived the pandemic are thriving, despite ongoing workforce challenges and inflationary pressures. They’ll face new challenges in 2023, but as Swanson points out, that’s the nature of the market, regardless of the sector; conditions are always shifting.
“There's an old joke in the commodities market that the cure for high prices is high prices; the cure for low prices is low prices,” he says. “The essence of being a good manager is dealing with those changes.”