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Now is the time to rethink your pricing strategy

Menu inflation

Restaurants may need to hold the line on prices as consumers shift to value. / Photo: Shutterstock.

Technomic take

Editor’s note: RB is launching a new regular column this week called Technomic’s Take, in which experts from our sister company provide key insight using their own research.

The number one question we get in our research practice today is focused on the menu price and inflation environment. Restaurant prices continue to soar and have risen north of 8% over the past year. The price of goods has increased. Make us work. So, it is not surprising.

But one aspect that we often don’t pay attention to is the infinite and that is uncertainty. Our customers’ concerns are often fueled by the perceived cost increases they are experiencing. Their responses are often driven by the uncertainty they face. What will happen next in this strange world? How will my customers react to price changes when they see my new menu price? Will my chicken tenders arrive on the truck tomorrow? What about my packaging?

This uncertainty, along with a measurable increase in costs (labour, land and commodity prices) has led to aggressive price actions in the last several quarters across all sectors of the economy. Results are good for many restaurants in 2021 but unfavorable thereafter. Today, restaurants are in a precarious position, as the latest price moves come at a time when the traffic gains of 2021 are behind us.

Restaurants, on average, have reached a tipping point in terms of how far they can take their prices. In industry presentations, we are sharing the results of our previous research on consumer price sensitivity and how it compares to the average entry price across the industry. For example, the average entrée price at a QSR is currently eight cents above the tipping point where consumers find that a dinner entrée is becoming expensive. Same is the case in other sections.

The net result is an erosion of the traffic gains made last year. By this time last year, we had regained all but .2% of pre-pandemic traffic (YTD) to large restaurant chains. At the same time, however, price measures at restaurants broke the long-term seasonal trend in the average check; Spikes in consumers’ average checks occurred each June and December, with seasonal dips in between.

According to the Technomic Ignite Company Visits and Sales Tracker, the drop-off was not due to the pricing actions we took last year, and that pattern repeated this year. The net result is traffic erosion across top restaurant chains. This erosion, no coincidence, began this March and continued throughout the year with the lowest year-over-year traffic numbers coming in July (-4.4%, our latest estimate on record).

Year-to-date, traffic is down 1.4% compared to 2019, but we’ve pulled around last year despite customers ordering meals and passion. This excitement has subsided. A major concern of consumers is inflation.

Now may be the time to take a break and carefully assess how to proceed. Measure your competitive position, not just in terms of price, but how your customers value your brand compared to your competitors. Measure your customers’ ability and willingness to swallow further price moves and assess the risks each price move poses to your competitive position.

The answers to these puzzles allow some restaurants to discover that there is still room to move prices. But many may find important reasons to consider alternative ways of increasing revenue beyond their pricing structure. For those restaurants, investing in innovations that drive higher checks without affecting core menu pricing is highly recommended. Either way, this is the type of information that can help restaurants move forward with a little more certainty in the current environment.

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