Restaurateurs have been forced several times to become increasingly nimble while adapting their menu pricing strategy within a rapidly changing economic landscape over the past two plus years. What does the economic outlook hold for the future, and how should operators prepare now to respond?
The industry is well past the initial shock and recovery of the Covid-19 pandemic and some of its associated disruptions, although many of those disruptions and their side effects continue to remain relevant today. Supply chain disruption, staffing challenges (both in terms of talent acquisition, retention), and input cost escalation (food, labor, energy, etc.) have deeply affected restaurant business models as well as the value perceptions and behaviors of consumers.
From a demand perspective, pent up appetites, high savings rates, government stimuli, increased employment, and rising wages (albeit below inflation levels) have generally sustained U.S. consumer demand and restaurant spending, although unequally across geography and service segments.
Recently, U.S. inflation rates, while high in historical terms, appear to have leveled off in many sectors. Restaurateurs have mostly been able to sustain 7%-8% (on average) compounded year over year price growth to partially offset cost pressures, while demand has remained relatively steady. While the range of increases and associated reaction from consumers varies markedly across regions, segments, and specific brands, from a broad industry perspective, consumer price sensitivity (measured as the relative change in traffic in comparison to change in price has generally remained “low” to “moderate” since the recovery stabilized.)
As we consider menu pricing strategies, there are influences emerging that suggest that consumer price sensitivity is likely to accelerate in the coming year, driven substantially by efforts to curb inflation, and subsequent declines in GDP growth rates. Our expectation is that recession is more likely than not, and that restaurateurs should prepare now for that likelihood.
Why? Consumer spending is likely to soften as government sponsored stimuli continue to wane, excess personal savings are depleted, unemployment turns upward, the capacity to absorb credit narrows, housing costs escalate, perceived wealth and wellbeing degenerate, and on the whole, household budgets are stressed further. Our monitoring of the changes in trends across these economic measures indicates this is already occurring, and that the tipping point is near.
Receding inflation on the whole may provide some relief to consumers and business. Nonetheless, some input costs will remain pressured and supplies disrupted. Areas of concern include a potential decline in production capacity, continued animal diseases, poor crop yields due to severe weather events, and ongoing geo-political disruption, and the ripple effects of the rising cost of capital.
As a result, we believe the number of price sensitive consumers is likely to grow. Many consumers, however will remain resilient. How to respond from a price and promotion perspective will require a strategic and targeted prescription based on your consumer profiles. Value based promotions are already becoming more prominent in the QSR sector, but promotions and price increases that leverage those consumers that are not price sensitive should also be a part of a balanced strategy.
To learn how Fishbowl can help devise a pricing strategy for your brand, contact:
Ted Babcock, SVP, Fishbowl Consulting Services
ted@fishbowl.com
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