The restaurant industry is reaching a tipping point – here’s what to do now

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2021 has been the year of the big comeback for restaurants. Consumer spending in restaurants increased by 16%, compared to 2020, when it had fallen by 12%. However, 2022 is another story. With inflation at its highest level in 40 years, businesses and consumers are feeling the pinch.

The average number of items ordered per receipt decreased from 3.8 to 3.5 per receipt. Restaurant traffic, while recovering and up 9% in 2021 compared to 2020, is still 4% below pre-pandemic levels, with smaller chains and independent restaurants down 9% , according to a study by the NPD Group.

Impact of inflation on restaurants

Substantial price increases are pushing consumers to choose options other than eating out or takeout. The tipping point comes when inflation will depress aggregate demand.

The 2022 State of the Restaurant Industry Report from the National Restaurant Association (NRA) concludes that food, labor and occupancy costs will remain high, dampening restaurant profit margins in 2022. Nine in 10 operators report food costs as a percentage of sales are higher than before the pandemic.

Food producer prices have increased by 13% in 2021, while restaurant wages have increased by 10% to retain or attract workers in the midst of a labor shortage. Operators raise salaries and offer bonusescontributing to higher menu prices.

How Restaurants Respond to Inflation

There are different ways restaurants cope with inflation and declining demand from their guests, reduce portion sizes and replace them with cheaper ingredients to streamline their menu items.

QSR channels are pushing their more expensive combo meals. Some operators have significant price increases on their entire menu. Others increase the prices of certain items or introduce incremental increases over time.

Effect of inflation on consumer demand

Inflation decreases customers’ disposable income. 55% of consumers have changed their buying behavior due to price increases, and more than 90% plan to do so in the future, according to research firm Numerator.

Revenue Management Solutions (RMS) says 68% of people think restaurant prices are higher or much higher. And they think they get less value from their restaurant visits because of the higher prices. In response, they treat inflation in different ways.

Reduce discretionary spending

Non-essential expenses like travel and restaurant meals are among the first items to cut. Thirty-six percent of consumers will reduce discretionary spending with slight inflation, increasing to 49% if inflation is significant. Seventy-four percent plan to cut spending at bars and restaurants, making them the top pick for discretionary spending cuts.

To eat less

People are dine out less often. And the RNA reports 51% of adults say they don’t eat out as often as they would like, up 6 percentage points from before the pandemic.

Order less

When eating out, many people reduce the number of items they order to compensate for higher menu prices. According to RMS46% of customers order less in restaurants.

Choose cheaper alternatives

As they look to stretch their budgets, RMS also found that 34% of respondents order less expensive items and 30% choose less expensive restaurants.

Cook more

Cooking at home continues to be a trend, especially as eating out or takeout has become more expensive. RMS reports that approximately three out of five people cook more at home now compared to 2021.

The solution: a well-timed incentive marketing campaign

Amid inflation, restaurateurs must find ways to increase customer frequency without sacrificing their margins. As they cut back on discretionary spending and seek out cheaper alternatives, consumers are still willing to spend on bargains.

There are mega pay dates coming up on July 1, September 2, September 30, December 2, and December 30. These are key dates where paychecks and benefit payments occur simultaneously.

Restaurant marketers can take advantage of this by scheduling their offers on these dates, when people are more likely to indulge in dining out.

Learn more about the consumer mindset and what foodservice brands can do to meet them where they are. Download our Restaurant Report.

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Cecil N. Messick