Prices for food at home, as well as food away from home, will continue to inch upward through 2014 and 2015, but the spread between the inflation expected in those two retail segments is likely to favor restaurants, a new report found.

Sara Senatore, Bernstein Research senior analyst for restaurants, wrote in a research note that foodservice brands’ value proposition relative to grocery stores likely would improve modestly, and that the biggest winners could be restaurant brands with appeal to higher-end customers.

“We believe the relative inflation should be most beneficial to chains specializing in high-value, highly inflationary products like steak,” she wrote, citing Darden Restaurants’ LongHorn Steakhouse brand and Texas Roadhouse as likely beneficiaries.

“While greater price sensitivity among lower-income consumers might benefit restaurants exposed to that market,” she continued, “any increase in food-at-home prices also leaves less income to be spent on discretionary outlays like restaurant meals, suggesting that food-at-home inflation is more unambiguously positive for restaurants with more affluent customers like fast casuals Chipotle Mexican Grill and Panera, and coffee specialists like Starbucks.”

Senatore and fellow Bernstein Research analysts estimated that inflation for food from the grocery store would accelerate to 3.5 percent through the second half of 2014, compared with the 2.5-percent increase in inflation the analysts expected for food from restaurants. Over the next 12 months, they expected food-at-home inflation to average 3 percent and food-away-from-home inflation to average 2.7 percent.

“This will likely be a new period when the gap between food-away-from-home inflation and food-at-home inflation swings into negative territory again, indicating that the relative price of dining out versus dining in is becoming increasingly cheaper,” Senatore wrote. “We expect this dynamic to last for most of the next 12 months.”

The relative pace of inflation influences how consumers trade between food at home and food away from home, Senatore said.

“While the absolute level of pricing is substantially lower for food at home, consumers will — on the margin — make trade-offs between cooking at home and eating out as relative pricing shifts,” she wrote. “Accounting for the cost of the time spent preparing a meal at home narrows the gap substantially and helps explain why seemingly modest changes in pricing can change how the ‘share of stomach’ is allocated.”

Nearly all the restaurant brands that Bernstein covers have reported levels of menu price increases for 2014 that fall around or below the 2.7-percent inflation Bernstein estimates for food away from home. Those increases include 3 percent for McDonald’s and Yum! Brands Inc., 2 percent for Wendy’s, 1.7 percent for Panera Bread and 1 percent for Starbucks.

Senatore also noted projected price increases of 2.7 percent at LongHorn Steakhouse and 1.7 percent at Olive Garden for Darden Restaurants, while Brinker International has reported price increases of 1.5 percent at Maggiano’s Little Italy and 1.2 percent at Chili’s.

“This suggests that for these branded chain concepts, their value proposition will improve versus food at home to an even greater extent than the overall restaurant industry,” Senatore wrote. “For some companies like Panera, a more moderate pace of pricing is necessary to restore their brand-specific issues on price-value. But for the others, we believe that slower-than-industry pricing will help reinforce their advantage over many of the independent operators that populate the still-fragmented restaurant industry.”

The only chain in Bernstein’s coverage roster reportedly taking a price increase larger than the firm’s 2.7-percent estimate for total food-away-from-home inflation is Chipotle Mexican Grill, which said it would raise prices about 6 percent this year. Senatore noted that Chipotle customers likely would accept this rate of increase without much resistance.

“It has been nearly three years since the brand last raised prices,” she wrote, “and given the improvements in food quality and guest experience over that period of time, we are confident that Chipotle’s perceived value proposition is strong enough to navigate a 6-percent price increase.”

Contact Mark Brandau at [email protected].
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