Now is the time to rethink your pricing strategy

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

Technomic's Take

Editor’s note: RB this week is debuting a new, regular column 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 menu pricing and the inflationary environment. Restaurant prices continue to soar and are up north of 8% over the past year. Costs of goods are up. Work us up. So, this is not surprising.

But one factor we often don’t pay attention to is up immeasurably and that is uncertainty. Our customers’ concerns are often fueled by the known cost increases they are experiencing. Their responses are frequently driven by the uncertainty they face. What’s going to happen next in this weird world? How will my customers respond to price changes when they see my new menu pricing? Will my chicken tenders arrive on the truck tomorrow? What about my packaging?

This uncertainty, coupled with measurable increases in costs (labor, land, and cost of goods) has led to aggressive pricing actions over the past several quarters across all sectors of the economy. The results felt great for many restaurants in 2021 but have since turned unfavorable. Today, restaurants are in a precarious position, because the latest pricing actions have come at a time when the traffic gains of 2021 are behind us.

Restaurants, on average, have reached the tipping point in terms of how much further they can take their prices. In industry presentations, we have been sharing the results of our past research on consumer price sensitivity and how it compares to the average entry price across the industry. For example, the average entrée price at QSRs is currently eight cents higher than the tipping point at which customers find a dinner entrée is getting expensive. The same is true in other segments.

The net result has been 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, pricing actions at restaurants broke a long-term seasonal trend in the average check; where spikes in the average check of customers occur every June and December, with seasonal declines in between.

Last year that drop-off did not occur because of the pricing actions we have taken, and that pattern repeated itself again this year, according to the Technomic Ignite Company Visit and Sales Tracker. The net result has been traffic erosion across the top restaurant chains. This erosion began, not coincidentally, this March and has continued throughout the year with the lowest year-over-year traffic number coming in July (-4.4%, our latest estimate on record).

Year-to-date, traffic is down 1.4% compared to 2019, whereas last year we had nearly pulled even as consumers dined out and ordered in with enthusiasm. This enthusiasm has waned. The consumer’s top concern is inflation.

Now may be the time to take a break and assess how to move forward carefully. Measure your competitive position, not just in terms of price, but in how your brand is valued by your customers compared to your competitors. Measure your customers’ ability and willingness to swallow further pricing actions and assess the risks each pricing action poses to your competitive position.

The answers to these riddles will allow some restaurants to find there is still room to move prices. But many others may find major reasons to consider alternative ways of raising revenues beyond their pricing architecture. For those restaurants, investing in innovations that drive higher checks without impacting core menu pricing is highly recommended. Either way, this is the type of information that will help restaurants move forward with a little more certainty in the current environment.

Members help make our journalism possible. Become a Restaurant Business member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.

.

Leave a Reply

Your email address will not be published.

Back to top button
AGADIR-GROUP