2021 was the year of the comeback for restaurants. Consumer spending at restaurants increased by 16%, compared to 2020, when it fell by 12%. However, 2022 is a different story. With inflation at a 40-year high, 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 by 9%, according to a study by The NPD Group.
Impact of inflation on restaurants
Substantial price hikes are causing consumers to choose other options aside from eating out or taking out. The tipping point is coming where inflation will depress overall demand.
The 2022 State of the Restaurant Industry report of the National Restaurant Association (NRA) concludes that food, labor and occupancy costs will continue to remain high, blunting restaurant profit margins in 2022. Nine in 10 operators report food costs as a percentage of sales are higher than before the pandemic.
Producer prices for food increased by 13% in 2021, while restaurant wages grew 10% to keep or attract workers amid a labor shortage. Operators are raising pay and offering bonuses, contributing to higher menu prices.
How restaurants respond to inflation
There are different ways restaurants deal with inflation and the dampening demand from their guests, from scaling back portion sizes and substituting with cheaper ingredients to streamlining their menu items.
QSR chains are pushing their more expensive combo meals. Some operators have significant price hikes across their entire menu. Others are increasing prices on select items or introducing incremental increases over time.
Effect of inflation on consumer demand
Inflation decreases customers’ disposable income. Fifty-five percent of consumers have changed their shopping behavior due to price increases, and over 90% plan to do so moving forward, according to research company Numerator.
Revenue Management Solutions (RMS) says 68% of people feel restaurant prices are higher or much higher. And they think they are getting less value from their restaurant visits because of higher prices. In response, they are dealing with inflation in different ways.
Cutting discretionary spending
Non-essential expenditures like travel and dining out are some of the first items to be cut. Thirty-six percent of consumers will cut back on discretionary spending with slight inflation, jumping to 49% if inflation is significant. Seventy-four percent plan to decrease spending at bars and restaurants, making them the top choice for discretionary spending cuts.
Eating out less
When they eat out, many people cut back on the number of items they order to offset higher menu prices. According to RMS, 46% of diners are ordering less from restaurants.
Choosing cheaper alternatives
As they look to stretch their budgets, RMS also found that 34% of respondents are ordering less expensive items, and 30% are choosing less expensive restaurants.
Cooking at home continues to be a trend, especially as eating out or taking out has become more expensive. RMS reports that around three in five people are cooking more at home now compared to 2021.
The Solution: A well-timed incentive marketing campaign
Amid inflation, restaurant operators need to find ways to increase customer frequency without sacrificing their margins. As they cut back on discretionary expenditures and look for cheaper alternatives, consumers are still willing to spend on good deals.
There are upcoming mega pay dates on July 1, September 2, September 30, December 2 and December 30. These are key dates when paychecks and benefit payments happen simultaneously.
Restaurant marketers can take advantage of this by timing their offers during these dates when people are more likely to treat themselves by eating out.
Learn more about the mindset of consumers and what restaurant brands can do to meet them where they are. Download our Restaurant Report.