Restaurant chains generally have been reporting more positive news on sales, including McDonald’s, which this week reported a 6% increase in April same-store sales, because of more sales of new products and price increases as a result of higher commodity costs. Customers are noticing, with 62% saying they think restaurant prices have gone up, according to a Technomic survey. In addition, 32% said portions have gotten smaller, a shift perceived to be coming from a desire to cut costs rather than a push to help consumers adopt healthier eating habits.
The higher prices might be real, for two reasons. First and most obvious, more chains are following the lead of McDonald’s and raising prices to make up for at least some of their higher costs for ingredients. Second, the end of the recession found many chains mired deep in discounting and promotional mode, and many are still working to wean customers off downturn-era bargains and get them back to paying full price.
That weaning was beginning to happen when consumers got hit with higher prices at the pump and the grocery, and the inflationary double whammy might be enough to send many back to their cautious ways for a while, said NPD Group’s Bonnie Riggs. In a recently released report, NPD identifies two types of post-recession consumers: controlled spenders and optimists. Of survey respondents, 76% fell into the first category. Optimists are more likely to be employed, and about one-third of them make more than $100,000 a year. Meanwhile, 33% of controlled spenders are unemployed, and 42% of them are in a household making $45,000 or less annually. A large segment of them thinks the economy won’t fully recover for three to five more years, Riggs said in an interview.
What do the findings mean for restaurants working to move away from the recession-era focus on promotional pricing?
Riggs: That’s a really tough one for them. First of all, when we’re talking about controlled spenders, they say it isn’t necessarily that they’ll be looking for cheapest deals, but they’ll be watching how they spend their money and the value they get. When they spend it, it better be worth their while. They’ll be willing to spend, but they’re going to watch it. That’s why fast casual did well during the recession; they offered fresh ingredients and quality, good-tasting food at reasonable prices, and they had to deliver on that expectation. More of them will be looking for good service, more polite service. [Restaurants will] have to really meet that value expectation.
Now, on trying to move away from steep discounting, we were beginning to do that. We were seeing that deal-related business trending down in the [last] quarter, while nondeal-related trended up. People have probably grown a little bit tired of really having to go for the heavy discounts. In another study I did, we asked them, ‘When things are better, what will you do?’ and more of them said they wouldn’t be looking for coupons or leaving off appetizers or side items. We were starting to see a move away from that. The problem is now we’re seeing high gas prices. When it hit $3, we pulled back, then that became the norm. Now, the new threshold is $4, and we’re past that. Coupled with that, we have high food inflation, which we didn’t have last time, and there’s only so much in that wallet. I’m afraid of what that means – people might start retrenching again.
What does this mean for restaurants coping with higher commodity-food prices?
Riggs: Operators know they can not pass on an across the board price increase, but they will try to do it in different ways. They may do it on selected items, like beef. Consumers are well aware of food inflation at the grocery store, so they’re realizing that there will have to be some price increases, but it can’t be across the board and we’ll have to give them added value in some way.
Does the mood of the optimists mean good news for fine dining?
Riggs: I don’t think either one is good news for fine dining. I believe the days of the $250-per-person dinners are few and far between; that’s why we’ve been talking a lot about the casualization of fine dining, downsizing to smaller portions, fixed-price menus. A lot of the fine diners are discounting, like Ruth’s Chris [Steak House] and Morton’s [The Steakhouse] — they’re offering up hefty discounts on their meals. I’ve never ever seen that before in other recessions.
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