This post is part of the On the Margin blog.
As we wrote late last week, the restaurant industry is clearly losing sales as grocers lower prices and restaurant operators keep raising them.
The industry in many ways is stuck with a higher-priced environment. They’re stuck with this in part because of their business model, and because of things out of the companies’ control. But some of it is self-inflicted.
Labor costs. We’ve covered this at length in recent months. The industry is raising prices in large part as a response to rising minimum wage and demand for labor in many markets. Dunkin’ Brands Group Inc. CEO Nigel Travis said his company’s franchisees are raising prices largely to meet higher labor costs.
Grocers have plenty of employees, too, but not at the rate of restaurants. And so as food costs have eased, they’ve been able to lower prices.
Remodel demands. It’s not just about labor costs. Many concepts, both franchised and company owned, are remodeling older units. It costs money to remodel locations.
And while many remodels theoretically can generate more traffic that can pay for their costs, that’s not always the case. So franchisees in particular might be more inclined to raise prices.
Lease costs. Restaurants are in growth mode. Many more concepts these days are leasing spaces, often in strip malls and in lifestyle centers. This is driving up lease rates. Operators, of course, have to pay for these higher priced leases. And so they in turn raise menu prices.
Margin management. Many operators insist on making the same margins they always have, and automatically raise prices to match cost demands. “Managing to margins” can be problematic in an industry dependent upon fickle consumers who are frequently value driven.
Investor pressure. This might be last on my list, but it’s probably the most important. Publicly traded chains in particular are under immense pressure to maintain margins and same-store sales. So they raise prices. And they frequently do so aggressively. At some point, this has an impact on traffic.
Price matters. The economy is in better shape than many people think it is — higher retail sales continue to prove that — yet consumers notice when prices rise in one place and not in the next. As grocers have lowered prices aggressively over the past year, the industry has lost traffic. Those declines are coming at quick-service restaurants, casual dining and, indeed, fast-casual chains.
It might be some for some concepts and operators to think about how much pricing power they really have.