Fourth quarter earnings are officially underway and one of the major themes we’ll be keeping an eye on this go-round is traffic. That’s because traffic has become quite challenged in recent months as consumers grow increasingly inflation weary. While menu prices cooled to 5.2% in December — their lowest level since September 2021 — they remain much higher than overall inflation, at 3.9%.
Importantly, they also remain much higher than grocery/supermarket prices, which decreased for the 16th consecutive month in December, to 1.3%. The question now is how much is that nearly 4% gap between restaurant and grocery impacting an intense share of stomach competition? The answer certainly isn’t black-and-white, but here’s what we know now.
The restaurant industry is growing again, as reflected in location data indicating a continued recovery from pandemic retrenchment. Technomic Ignite data shows that there were nearly 632,000 restaurant locations in 2023 — a far cry from the 703,000 in 2019 but trending higher than the past three years.
That’s mostly good news. That said, many restaurants continue to struggle with pandemic-induced debt, so closures abound (or will) as well, which is why the industry only added 116 net locations in 2023.
From a sales lens, things are a bit clearer — restaurants continue to gain share from grocery stores. According to Kalinowski Equity Research, restaurants’ market share was nearly 56% in December, which is about 10 basis points below the all-time monthly record. Comparatively, restaurants’ market share in 2022 was 53%.
“Despite restaurant prices gaining steam at a more meaningful rate than grocery prices for almost a full year now, consumers have — at least through the end of December — not meaningfully shifted food dollars back to grocery stores and supermarkets,” president and CEO Mark Kalinowski wrote.
He expects restaurants to continue gaining market share in the next 12 months, though those gains could be muted by the pricing gap between the two categories. Still, and again, it’s not so simple, which is why we’re keeping an eye on traffic. A recent survey from Revenue Management Solutions finds that one in three customers are limiting their restaurant spending because they believe they’re paying more. This is up by nearly 10% from the previous quarter. RMS VP Richard Delvallée said this is why operators need to tread lightly on any further pricing increases this year.
“The challenge is that restaurant sales are up, but mainly driven by price increases. Grocery inflation was below restaurant inflation, which might explain why overall sales growth was less for (the category),” he said. “But we know from our trends that customers are managing their frequency of visits and how they spend their money, so it may not be the win it appears to be.”
With increasing check management trends and traffic declines, RMS is seeing more restaurant brands use creative solutions to entice customers to spend more per trip, including and especially through their apps. This is a win/win as those apps in turn provide restaurants with data to better help understand what is driving customers in and when, and that becomes a virtuous cycle.
Delvallée said he is optimistic overall about the food-away-from-home environment, but he cautions that brands priced “significantly higher” than the restaurant sector average will see an even more profound negative impact on traffic.
“Restaurants will have fewer pricing opportunities in 2024 based on traffic challenges,” Delvallée said. “If sales determine market share, trends may swing back in favor of grocery in 2024, while restaurant sales growth may slow along with the rate of price increases.”
Contact Alicia Kelso at [email protected]