Inflation Cools but Restaurant Prices Accelerate

For the month of April ’25, headline CPI inflation came in at 2.3%, down 10 bps vs. the previous month - the lowest inflation level in over 4 years, and was driven heavily by lower energy costs. Similarly, food at home (grocery) price inflation eased to 2.0% from 2.4% in March, but restaurant (FAFH) price inflation continued to inch upward, rising to 3.9% from 3.8% in the prior month.

The FAFH increase was driven by full-service restaurant (FSR) inflation, which rose to 4.3%, a level last seen in January 2024. Limited-service restaurant (LSR) inflation remained stable at 3.4%.

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Consumer confidence in free fall, restaurants bear the brunt?*

*https://www.conference-board.org/topics/consumer-confidence

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The Conference Board’s Consumer Confidence Index® index fell for a fifth consecutive month in April, reaching levels last witnessed around the onset of the COVID-19 pandemic. Concerns about the economy continue to pervade consumer outlook with particularly strong pessimism about the future.

An excerpt from the Conference Board’s consumer confidence monthly survey explains why restaurants are at particular risk of losing even more traffic as we head into the summer:

“Consumers’ overall intentions to purchase more services in the months ahead were down, with almost all services categories affected. While dining out remained number one among spending intentions, the share of consumers planning to spend more on dining out in the months ahead registered one of the largest month-on-month declines on record in April.” 

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Full-service vs. limited-service Segments

As seen before, in tough economic climates, limited-service segments emerge as relative winners vs full service for two key reasons– 

1. While some full-service restaurant occasions are for everyday meal purposes, many full-service occasions are associated with more discretionary purposes (i.e., indulgent or celebratory), particularly as we climb the price ladder.  This makes it challenging for full-service brands to maintain the same steady demand when customers start to pinch their wallets.   Moreover, cooking at home may become more attractive than eating at either a full-service or limited-service establishment, but LSRs, on average, offer more affordable food options vs. FSRs and can thus pull off a better demand curve.
   
   
2. As consumers pull back, we often see them trading down among the restaurant segments. Hence limited-service restaurants get that full-service traffic, which can offset some of the decline that they may face.

Higher price inflation at full-service restaurants is being driven by a higher dependency on labor,  while cost uncertainty due to changing tariff policies are worrying consumers and likely to depress demand.  Menu optimization, price optimization, and promotional strategies need to be ready yet flexible to move quickly as the situation plays out.

Steep Discounts Barbelled with High Prices

A well considered  “value play” can be crucial to winning in the current environment, but discounting your way into negative margins for the sake of traffic can backfire very quickly.

Chili’s playbook of increasing prices aggressively and offering steep promotional deals at the same time to get traffic and offset the discounted spend has shown good results. While it is a shrewd strategy, execution of the value deal can make or break your P&L in both short and long term. Key execution strategies include: 

1. Driving awareness and utilization by featuring popular menu items with loud external (outside the 4 walls) media support.
2. Upselling once the customer steps inside the restaurant to elevate per person margins.
3. Tipping the value perception vs. price equation in favor of the guests so that they convert from a deal hunter to a loyal guest. This is done by delivering the brand promise on all the service points from the each impression (whether in-store or digital) to the next.

Value deals will start a conversation, but that conversation, regardless of the broader economic situation, needs to be compelling to convert a guest into a repeat guest.

Method to Pricing Madness

Your pricing strategy should be guided by the purchase patterns of your customers, which can be best uncovered by examining your transaction level data and competitor data. Using your data, not only can you find out which product is losing mix or which location is outperforming the rest, but it can also reveal the set of products and locations to target for price increases that carry the least risk of traffic loss. Competitor data can help to guide you on what other options your guests have and how to position yourself in the market accordingly. Following Fishbowl’s data centric approach can help deliver incremental profit with little to no effect on traffic. 

To find out more, contact us at https://www.fishbowl.com/consulting-services.

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