Menu prices are continuing to climb. When will consumers say ‘enough’?/Photograph: Shutterstock.
In the latest round of earnings calls, there was a lot of conversation around menu pricing.
It has been a tough year of balancing higher food and labor costs. And most public companies discussed their pricing strategies over the past 12 months, and plans for the fourth quarter and beyond.
Year-over-year price increases for restaurants ranged from 6% to 13% in the third quarter, which is far higher than the low-single-digit increases that are typical. Most brands went higher than the average food away from home inflation of 8.6% for the year ending in October.
And yet most companies said they still had room to raise prices even higher.
But talk of consumer pushback is also increasingly creeping in. Brands like Chipotle Mexican Grill noted the loss of lower-income diners, for example, while chains like McDonald’s and Potbelly picked up some of those trading-down customers.
“You’ve got a consumer who’s facing inflation, and they do their own calculus in terms of what they want to enjoy and what they can afford and where they think they’ll get the most value for their money. And we’re pleased to see they’re choosing us and at a rate that’s increasingly more so than our fast-casual competitors,” said Steve Cirulis, Potbelly’s CFO during an earnings call last week, according to a transcript from financial services site Sentieo/AlphaSense.
For some, menu pricing can be a bit of a game of chicken.
Sweetgreen, for example, raised prices 6% in January and then didn’t touch them for the rest of the year—though increases are likely in 2023. Jonathan Neman, Sweetgreen’s co-founder and CEO, sees putting price hikes on hold during 2022 as an opportunity to gain market share.
“As more and more people take price, we do expect the environment for consumers to get more challenging, and we, in a lot of ways, just saw an opportunity,” he said during the third-quarter earnings call. “As our competitors have continued to take price, the relative value we offer, we believe, is improving.”
Sweetgreen does not plan to increase prices in the fourth quarter, but many other chains are planning to or already have. At Red Robin Gourmet Burgers, for example, menu prices were up 7.7% year over year in the third quarter, and another increase of 1.5 percentage points was scheduled to start in November.
Others talked about barbell strategies to hold onto inflation-weary guests while pushing more premium-priced items as margin boosters.
Noting increased price sensitivity among guests, Papa John’s International, for example, pledged to “provide the right promotions to our value-oriented customers without risking the erosion of our brand or pricing integrity on our more premium offerings,” said Rob Lynch, the pizza chain’s president and CEO.
In September, Papa Johns launched a national deal offering two or more items from a limited menu for $6.99 each, resulting in a $14 transaction that has boosted average checks.
Several companies said they expect the pace of food cost inflation to ease next year. As a result, menu prices are not expected to drop, per se, but several chains predicted they will be able to return to more normal pricing cadences, with price hikes once or twice in a year, and likely at lower levels.
For much of the year, restaurant operators have been pointing to the higher inflation rate at grocery stores, but the gap between food away from home and food at home is narrowing.
Even as commodity prices ease, the delicate dance of finding the right price point on menus will no doubt be with restaurants for some time to come.
As Henry Melville Hope, CFO at First Watch, said during their earnings call: “As we think about pricing, timing of pricing, what it will be, what it will be on, where it will be—that science will take place pretty thoughtfully about making sure that we preserve the value proposition with our customer.”
Here’s a look at menu price increases for the year by brand in the third quarter:
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