Restaurants Continue to Struggle to Fill Tables

High prices a factor

Author: Andria Cheng

August 23, 2017

The long slump facing the restaurant industry is showing no sign of easing. High menu prices are a key factor that's keeping diners away.

Customer visits to US restaurants and other food service outlets remained in the negative column in the quarter ended June, marking the sixth straight quarter the sector hasn’t seen any traffic growth. That's the longest slide the industry has faced since the recession of 2008 and 2009, according to market research firm NPD Group. One of the key contributors to the decline: higher menu prices, which stand in contrast to falling food prices at grocery stores. NPD data shows the average restaurant check rose 2.6% in the second quarter, which it said is the largest increase in several years.

While full-service restaurants have seen waning demand ever since the recession, things started slowing down even more in early 2016 when increased healthcare costs kicked in, hurting consumers’ discretionary spending, said Bonnie Riggs, NPD’s restaurant industry analyst, in an interview. Making things worse for consumers, restaurant operators have raised menu prices 2% to 3% quarter after quarter to offset higher healthcare and labor costs they pay for employees.

Higher menu prices “really have had an impact on consumers,” Riggs said. “it’s no longer a good value. (Consumers) said it’s cheaper to eat at home.”

In an NPD survey of 9,100 consumers last year, 30% said they’ve cut back on visiting restaurants, Riggs said. Three of the top six reasons for the reductions were related to price.

The food price index gap between that of restaurants and eating at home is at its biggest in “a long while,” she said.

There’s a good reason behind the recent divergence of restaurant prices going up versus grocery prices going down: restaurant prices reflect mostly labor and rental costs with “only a small portion” going toward food, according to the US Department of Agriculture.

“Decreasing farm-level and wholesale food prices have had less of an impact on restaurant menu prices,” said the USDA in a Food Price Outlook piece in July.

But that’s not the whole picture. The US has more restaurants than there’s demand for them, Riggs said. That’s led to a spate of store closings and 2016 bankruptcy filings from chains including Cosi to HomeTown Buffet parent. DineEquity, which recently reported US same-store first-half sales drops at both its IHOP and Applebee’s chains, said it plans to shut more IHOP and Applebee’s stores than it previously planned.

“We are going to see more restaurant closings until demand equals supply,” Riggs said. “It’s a battle for market share.”

Indeed, one in five US adults say they don't eat meals out at all, according to a June survey by Bankrate. Another 20% say they eat out just once per week.  And those responses include both dine-in and takeout meals.

Data from restaurant-industry market research firm TDn2K showed that through July, the sector hasn’t seen one month of positive same-store sales since February 2016 while comparable store traffic continued a streak of negative pattern also since February 2016.

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Pricing and overexpansion aside, shifting consumer habits and industry changes also have contributed to the downbeat sector trend. Consumer demand is increasingly driven by convenience, leading to restaurants making gains with delivered food.

Meanwhile, restaurants are facing increased competition from non-traditional rivals such as convenience stores and supermarkets, which are offering more ready-to-eat meals. Meal kits services also have emerged as a viable alternative to restaurant meals.

Those things aside, the industry also has shot itself in the foot by focusing mostly on the millennial consumers and ignoring other key customer demographics. While millennials represent about a quarter of restaurants’ sales and traffic each, Gen X’s share is just a bit shy of that at well over one-fifth for both sales and traffic. Meanwhile, baby boomers actually beat millennials and represent 29% of restaurant sales and 26% of traffic, Riggs said.

“There’s been so much focus on marketing initiatives placed on millennials,” she said. “Some of the other groups are overlooked.”