- Restaurants are competing to keep prices as low as possible and offering more deals, even as labour costs rise.
- “We’re beating each other’s brains out,” Denny’s CEO John Miller said of the restaurant industry’s attempts to undercut rivals’ prices.
- Low grocery prices are contributing to restaurants’ drive to keep prices cheap.
With rising minimum wages, running a restaurant is getting more expensive.
Yet, new deals and efforts to keep prices as low as possible persist – and the grocery industry is at least partially to blame.
“We’re beating each other’s brains out,” Denny’s CEO John Miller told Business Insider of the restaurant industry’s attempts to undercut competitors’ prices.
Restaurant chains may be undercutting rivals, but the real culprit behind the battle-to-the-bottom approach to prices is the grocery industry, according to Miller.
In 2018, the cost of food away from home increased 2.8%, while the cost of food at home grew just 0.6%, according to data from the US Bureau of Labour Statistics. The price gap between dining out and eating at home has shrunk since hitting a post-recession peak in 2016. However, the ongoing gap and the power of the grocery industry continues to force chains to slash prices – or at least avoid raising them as much as they otherwise would.
Dining out is getting more expensive primarily due to increased labour costs. With rising minimum wages and low unemployment, restaurants need to spend more to hire and retain employees.
Rising wages are not necessarily a bad thing for the restaurant industry, as they tend to result in customers having more money to spend.
Theoretically, this would be an easy time to raise prices to keep up with rising wages. And, many chains are considering just that, with chains including Texas Roadhouse and Habit Burger mentioning recent or upcoming price increases at the ICR Conference in Orlando this week. Chipotle has hired a consultant to analyse menu prices.
“We’re behind on raising prices,” CFO Jack Hartung told Business Insider. “I think we want to say we’re always behind. What that means is we’re making Chipotle accessible to everybody.”
However, restaurants are reluctant to substantially increase prices to the levels that would result in the same profitability figures enjoyed in years past. Extremely price-conscious shoppers, which, Miller estimates, make up about 20% of customers, will always pick the cheaper food option – even if that means shopping for groceries more instead of eating out.
As a result, chains are trying to keep prices as low as possible. And, when one chain slashes prices, other chains need to follow suit or risk getting left behind. Customers can increasingly afford to pay full price as wages rise, Miller says, but with a plethora of deals, they don’t have to. So, they don’t.
“When my competitor’s got a dollar quarter-pounder, how dumb do I look paying $US9 at Chilli’s?” Miller said.
Grocery chains are eager to take advantage of the situation with new offerings that rival the convenience of the restaurant industry.
Chains like Kroger, Aldi, and Whole Foods are making major investments in delivery. Walmart, Tesco, and Albertsons are experimenting with meal kits. Kroger is expanding a restaurant concept called Kitchen 1883.
“As long as groceries are adding ‘grocerants’ and $US5 roasted chickens … we’re careful,” Miller said.
Despite these issues, things are looking up for restaurants.
Two years ago, eating at home used to save customers significantly more than it does now, and Miller believes the situation will continue to balance itself in the next few years. The health of the restaurant industry, as measured by the National Restaurant Association’s Restaurant Performance Index, is improving as same-stores sales and customer traffic grow.
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