The so-called “lipstick effect” is not an alien notion for restaurants. This idea that consumers, strapped during rocky economic periods, will spend on “affordable luxuries” to make up for larger cutbacks. Say a Sunday night out instead of a three-day trip to Disney World.
But how does inflation factor in?
In March, for the first time in 18 months, BLS data showed food-away-from-home pricing outpacing food-at-home on a 12-month basis, at 8.8 versus 8.4 percent. Limited-service menu figures rose 7.9 percent, year-over-year and were up 0.5 percent from February. That marked the biggest spike since early 2022 (an 8 percent leap). Full-service menu prices grew 8 percent over last year and 0.7 percent on a month-to-month view, which was closer to recent trends.
Again, this as the Consumer Price Index for food at home witnessed its smallest year-over-year increase since January 2022. The 8.4 percent result broke a streak of 12 consecutive months of double-digit gains (a peak of 13.5 percent last summer). Grocery prices fell 0.3 percent between February and March—the first month-to-month decline in two-and-half years. More on the results here.
The dressed-down point is restaurant prices have relied, for months now, on feeling like a comparable value play versus consumers’ grocery bills. They’ve fit snuggly into those shoulder occasions between weekly supermarket trips that continue to press consumers’ wallets. That’s a little murkier now.
According to a recent survey from Vericast, 64 percent of consumers said dining out had become too expensive. Yet consumers are not abandoning restaurants. Far from it.
On Friday, preliminary data from the U.S. Census Bureau showed eating and drinking places recorded total sales of 93.1 billion on a seasonally adjusted basis in March. That was 0.1 percent higher than February’s upward-revised sales volume of $92.9 billion, but well below January’s recent high of $94.5 billion.
What’s important to note is the sales gain, despite being mostly tepid, was an outlier among the full retail picture. Consumer spending in non-restaurant retail sectors declined 1.2 percent in March. Gasoline stations (negative 5.5 percent), general merchandise stores (negative 3 percent), electronics and appliance stores (negative 2.1 percent), building supply stores (negative 2.1 percent), clothing stores (negative 1.7 percent), and vehicle dealers (negative 1.6 percent) were all in the red. It brings the view back to the broader concept—consumers are cutting back, but restaurants are proving more durable, explains National Restaurant Association chief economist Bruce Grindy.
Unlike the pandemic, which felt more like a disaster episode than a recessionary one, this observation is more reflective of past realities. Restaurants tend to be closer to recession proof than other fields due to their relatively affordable social nature, or how consumers can reward themselves without breaking the bank. And everyone wakes up needing to eat.
In total for the first quarter, eating and drinking place sales were 4.6 percent above the volume registered in Q4 2022, on a seasonally adjusted basis That’s more than three times stronger than the 1.3 percent increase in non-restaurant retail sales during the same period.
Where it settles within food itself might be the real story to watch near-term. Price gains at grocery stores started to surpass price gains at restaurants in mid-2021, when inflation began to accelerate. The gap had been closing ahead of March’s reversal. The CPI for food at home was up 11.3 percent in January on a 12-month basis, while the CPI for food away from home rose 9.2 percent. A 3.1 percentage-point gap slimmed to 1.8 percent in February (10.2 versus 8.4) percent before crossing in March.
Per Mark Kalinowski, president of Kalinowski Equity Research, March’s 8.8 percent away-from-home jump was the highest year-over-year increase for restaurant pricing in two-plus decades.
He went on to suggest, if commodity-cost pressure ease—as they appear to be doing—restaurants could conduct some “catch-up” pricing. Essentially, this number should “remain quite high by historical standards” for a good long while, perhaps the next three to six months.
In the March pricing cauldron, however, is the fact much of the increase in food-away-from-home prices was surged by the end of free school lunch programs introduced during the pandemic. The CPI for food at employee sites and schools soared 131 percent between March 2022 and March 2023, while the price index for food at elementary and secondary schools rocketed 296 percent.
“As these programs expired, many students went from paying nothing to paying regular prices for school lunches,” Grindy said, noting the impact will continue throughout the year after the base effects of the free school lunch programs run their course. “As a result, this price index rose sharply in recent months, which is putting upward pressure on the overall food-away-from-home index.”
So there’s clear distortion going on. According to the Association, “if we would measure menu price growth based on full service (8 percent) and limited service (7.9 percent) prices, it would be around 8 percent.”
An easier way to look at it is the 8.8 percent increase in overall food away from home was higher than the increase in full-service and limited-service prices, largely due to that 131 percent increase in the price index for food at employee sites and schools.
Simply, the restaurant element of this wide tale isn’t as dramatic as March may have appeared at first glance.
Overall (not just food) consumer prices increased 5 percent between March 2022 and March 2023—the ninth consecutive month of decelerating growth and smallest 12-month increase since May 2021. The core CPI (which excludes food and energy prices) increased 5.6 percent between March 2022 and March 2023, which was a full percentage point below the recent peak of 6.6 percent registered in September 2022.
In terms of dispersion, the West (9.7 percent) and Midwest (9.2 percent) regions registered the strongest menu-price gains between March 2022 and March 2023. Average menu prices in the Northeast (8.2 percent) and South (8.2 percent) regions rose at lower rates during the last 12 months, the Association pointed out.
Something else to watch in the food-away-from-home arena—the price index for food from vending machines and mobile vendors rose 16.2 percent between March 2022 and March 2023—its sixth consecutive month of double-digit gains on a 12-month basis.
Some consumer reactions, and the race to value
Throughout the pandemic, Revenue Management Solutions has polled consumers to gather the pulse of spending habits. In its latest survey—Q1 2023—restaurant guests showed clear cut-back concerns. Notably, the most frugal appeared to be higher-income and family households, who decreased their overall weekly usage at a higher rate, particularly with delivery.
The number of respondents visiting restaurants “more often” slid significantly: fewer than one in four people increased their usage in the past month, with quick service reporting the most dramatic shift.
Weekly visits declined across all revenue centers (delivery, takeout, dine-in, and drive-thru), although delivery was the lowest performing, falling from 57 percent in Q4 to 44 percent.
When asked, “how often do you plan on eating out at restaurants in the future,” less than 20 percent answered “more” or “much more.” Younger cohorts and higher-income households were less likely to use takeout, dine-in, and delivery in the future. Gen X and Boomers suggested they’d use drive-thru less.
- 16 percent intend to use takeout more
- 15 percent will dine in more
- 14 percent will use the drive-thru more
- 13 percent will use delivery more
Unsurprisingly, price increases and inflation were to blame. Three in four respondents said they believe they are paying higher restaurant prices. Just one in three felt they were spending more on restaurants than in the past (hence, the proposed cutbacks). The number of higher-income respondents that reported spending more fell from 73 percent in Q4 to 37 percent—the most dramatic behavior shift recorded. Sixty-one percent were ordering less from restaurants—a leap from 46 percent in Q4—while 40 percent were choosing less expensive options.
In Q1, RMS data showed average price up 13.8 percent. But pricing activity is slowing. The increases last quarter appear due to product mix. Customers are managing costs by skipping add-ons, which are usually much cheaper, RMS said (think drinks and desserts). As a result, when looking at the purchases made in Q1, the averages were higher, thanks to customers keeping more expensive items and skipping the cheaper ones.
And consistent with the recent BLS pricing data, per transaction was down 4.7 percent, RMS data found. Average check was higher than last year, but not in the double digits like in months past (8.5 percent).
Building off that last insight, Vericast’s survey showed a race to deals among today’s restaurant consumer. In January of this year, 50 percent of diners selected restaurants based on receiving a coupon or discount, the data found. Given the right value-based promotions, more than half polled (53 percent) said they would be willing to try a restaurant they have never been to.
Nearly 45 percent of consumers order from restaurants more often when they have print coupons or discounts, according to the same Vericast study, as shared by VP and head of industry of restaurant, Peter Boivin. When they have incentives for fast-food restaurants, 51 percent spend more, using the savings they achieve to upgrade or add items. “Even when customers don’t redeem them, coupons can drive sales,” Boivin said. “Close to 60 percent of consumers say they proceed with orders even if they forget to take them to restaurants or apply to in-app or online purchases. On the flip side, nearly a quarter of consumers won’t order from a restaurant unless they are offered a discount, and 34 percent have recently switched from fast casual to fast food to save money.”
Thirty percent of respondents added that if a restaurant doesn’t reward loyalty with coupons or discounts, they will switch to one that does. Nearly 70 percent reported having at least one loyalty app on their phone, and 35 percent said they check them for promotions before deciding where to dine.
And this goes beyond mobile: “Many [40 percent] prefer to get restaurant incentives in the mail, but they also want them delivered via email, and through restaurant apps, websites, and loyalty cards,” Boivin said. “Direct mail packages, such as Save, are also an important channel, as 68 percent of consumers who browse the circular do so to find restaurants and secure deals that will allow them to spend more when they visit.”
The larger picture
One of the keys to remember in all of this is that consumers appear wary, but they’re not manifesting that behavior in force. In other words, they’re considering dining out less and bothered by pricing, yet still dining out nonetheless.
In William Blair’s recent Dining Download, a quarterly update, the firm found overall restaurant engagement by consumers appears to have remained relatively healthy, with nearly 80 percent of survey respondents saying they eat at restaurants at least a few times a month (similar to a December poll). While monthly spending in the survey was lower in Q1 than the Q4, it appears to reflect normal trends, and overall engagement seems to be holding up well.
Average monthly restaurant spending in March declined nearly 10 percent from the company’s December survey to $188, likely due to seasonality (restaurant volumes typically ease sequentially in the first calendar quarter following increased spending over the holidays) as the percentage of respondents indicating they were spending less versus last year actually eased sequentially to 33 percent (from 36 percent in December).
When asked about why they are eating less at specific restaurant brands, “lack of new menu items” or “inconvenient” topped the list for about 75 percent of restaurants in William Blair’s coverage, while “financial reasons” declined relative to December for all concepts except Portillo’s (flattish) and Outback Steakhouse, which ticked up modestly.
So while some consumers may be getting cautious, there isn’t a rush away from restaurants at this moment, prices or not, although the value proposition needs to be closely guarded. William Blair discovered slightly above-average value scores across its coverage list, led by Potbelly, Kura Sushi, Outback, El Pollo Loco, and Chipotle. Sequentially, Dutch Bros, Dave & Buster’s, and sweetgreen experienced the steepest sequential declines in value proposition.
Off-premises eating in aggregate (which often includes digital engagement, namely for takeout and delivery), William Blair said, remains much more frequent than in-person eating, and its surveyed supported that the pandemic may have structurally changed consumer behavior.
Forty-one percent of respondents said ordering for delivery and/or takeout increased since 2019; only 16 percent said it had decreased. Also, over the last year as of March, more respondents said their frequency of using takeout and/or delivery had increased than decreased, while the opposite was true for in-person eating or drive-thru.
Additionally, there remain many manual interactions (in-person or over-the-phone ordering) even for delivery and takeout, William Blair said, so there is room for more of these interactions to become more digitally enabled over time.
The sequential decline was led by respondents under age 30 and those with household incomes under $50,000, partly offset by increased spending for respondents in the $100,000-$200,000 income bracket. Across our coverage, all brands improved relative to December when respondents were asked if they were eating less often at specific concepts, with the greatest sequential improvement at Starbucks and Chipotle, while the percentage eating more often at specific concepts largely held steady versus December.
Overall, it’s hard to predict what happens next, to make a comical understatement.
According to Circana (formerly IRI and The NPD Group), traffic was up 2 percent in February compared to a year ago. Visits to quick-service restaurants, representing 82 percent of total restaurant industry visits, grew by 3 percent. Full-service visit growth was held back by a 13 percent decline in dinner traffic, the segment’s busiest meal daypart, but the segment increased visits at morning meal and lunch, Circana said. Visits to full-service restaurants declined 2 percent in February compared to a year ago.
Total restaurant traffic at the morning meal, breakfast and A.M. snack, has fully recovered from pandemic losses, however. Morning meal restaurant visits grew by 10 percent in February versus a year ago and are up 2 percent from three years ago. Whereas total restaurant lunch visits were down 1 percent in February compared to a year ago, and dinner traffic was down 3 percent.
“We’re seeing strong customer traffic at breakfast and morning snack, which means consumers are looking for convenience and portable meals and snacks,” said David Portalatin, Circana food industry adviser. “On the other hand, dinner and lunch visit growth has been slower due to home-centric behaviors being stickier at these dayparts. At lunch, consumers have other choices, including bringing items from home or going to a workplace cafeteria, offering subsidized pricing or no-cost options. Additionally, the higher average check for lunch and dinner may make them less appealing to some consumers.”
Convenience remains a leading draw. In February, off-premises traffic represented 72 percent of the total restaurant traffic. Although on-premises visits have increased since the height of the pandemic, dine-in traffic is down double-digits from three years ago.
“The morning meal growth is a clear sign of what consumers are looking for when using foodservice,” Portalatin added. “Moving forward, enticing consumers with convenience, whether portability, ordering ease, or speed, appears to be where the demand currently is in the foodservice industry.”