One thing has become abundantly clear as restaurants have reported earnings over the past two weeks: Pricing is up and traffic is not.
A few have boasted higher traffic levels, notably McDonald’s. But for the most part, operators continued their post-pandemic reliance on higher prices and fewer discounts while accepting that they are simply not going to get as many customers as they did the quarter before.
One potential explanation: People are simply eating more of their meals at home. They ate more at home when the pandemic started. And they’ve continued eating more at home as inflation sapped the power of their paychecks.
“I think it really has to do with the state of the consumer,” Wendy’s CEO Todd Penegor said. “We’ve seen the consumer be a little more strapped. You continue to see food-at-home meals being about 85% of the consumer’s basket when it comes to meals. That’s up from 82% pre-pandemic.
“It shifted to more meals at home during the pandemic. It’s kind of stuck there as the consumer’s been a little more strapped.”
The result, Penegor said, is “a little less frequency across the industry at the moment, which is putting a little bit of pressure on traffic.”
The idea that consumers are eating more of their meals at home when pricing for said at-home meals is rising even more than menu prices seems counterintuitive. But retail grocery consumers can more easily shift their spending at the grocery store, purchasing less expensive cuts of meat, for instance. Or they can visit cheaper retailers. The West Coast discounter Grocery Outlet just generated 15.4% same-store sales growth last quarter, per our sister publication Winsight Grocery Business.
Similarly, there has been some talk of trade-down in the restaurant business. “There are some trade-downs,” Penegor said. “If you look at the total industry, you’re seeing some trade-down from mid-scale casual into fast casual into QSR, which is a positive.”
True. But we see generally little evidence of traffic growth even in those sectors that should get a benefit of trade-down, outside of chains like McDonald’s and Starbucks.
Restaurant prices may well be turning customers off. Most fast-food brands this earnings season confessed to pricing in the 10% range. “A lot of us have taken 8% to 10% pricing,” Papa John’s CEO Rob Lynch said. One thing worth noting: Starbucks was one of the chains that did not price that aggressively and its traffic rose 1%. Customers also ordered more expensive beverages.
There is also this curious element of the market: Customers are eagerly spending for third-party delivery, where the cost of an individual meal is even more elevated, but they are apparently turning away from pizza delivery, a better overall value. That’s likely due to higher-end delivery consumers being in perfectly fine financial shape while the pizza delivery customer is strapped.
There is some potential benefit in an environment in which restaurants serve fewer customers who are willing to spend more per visit. The industry spent too long focused too much on generating traffic, which has led to operational compromises and a labor environment that churns quickly through employees. It’s easier and more profitable to serve fewer customers.
But, as one operator told me this week, “franchisees would love one customer who pays $1 million.” At some point, a restaurant, or an industry, should get more customers in the door.
The challenge is in doing so without hammering profitability. As Burger King operator Carrols Restaurant Group noted this week, costs are likely to remain elevated well into next year. That solution may be in changing the way operators discount. Carrols is working on more targeted local offers, apparently with some success. McDonald’s has been shifting most of its discounts either to regional offers or targeted mobile app deals.
Regardless, operators should consider looking at ways to at least stop losing customers.