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.