Some of the large restaurant chains have announced that they have “successfully” raised their prices since December — that is, they raised prices, and customers are still buying. Others, including McDonald’s, have plans to phase in price increases a few items at a time over the course of the year. A few economists and analysts are pointing to these stories and talking about the return of pricing power. Restaurants and retailers will be able to raise prices without driving their customers away this year, they say. But are restaurants actually getting away with price increases? It is too soon to say.
Since 2009, it has been very hard to sell consumers anything at a new higher price. Customers look at the products and their higher prices but mostly don’t buy, retailers have been reporting. When a 15 percent price increase can create a 75 decrease in sales volume, retailers have been extremely reluctant to raise the price of any prominent product. This is what it means to not have pricing power. This is why most restaurants have prices that are the same as they were in 2007, or just 10 percent higher, even though the restaurants’ food costs have gone up more than 20 percent.
With food prices expected to increase another 10 percent this year, especially for high-profile ingredients like meat, bread, cheese, and coffee, restaurants will probably have to raise prices. They can hope that with consumers becoming more optimistic, their customers will just pay the higher prices. My expectation, though, is that restaurant customers will adjust to higher prices by going to those restaurants less often. Higher gasoline prices will also keep customers at home more often. In my opinion, most restaurants will do better to decrease portion sizes again than to try to raise prices.
There is a reason to be skeptical about a report of a successful restaurant menu price increase coming just a few months after the price increase went into effect. Only about 1 in 500 customers will actually walk out of a restaurant because of a 10 percent price increase. Customers may visit the restaurant several more times before they eventually say, “Gee, this place is pretty expensive, isn’t it?” And then, a restaurant that people had visited regularly may become one that they go to only every few years.
When a group of people are picking a restaurant to go to, the slightest disinclination from anyone in the group can be enough to send the group elsewhere. It doesn’t take a complete sentence to rule out a restaurant that’s been suggested. People may not even consciously realize that they’ve stopped going to a restaurant until a year or two has gone by. As one example of this effect, there is a restaurant I went to late in 2009, and I noticed that they had switched to a lower grade of salad dressing and no longer included rolls in the salad bar. I think about the restaurant 18 months later, and I say, “Gee, I never did go back, did I?” When people are loyal customers, though, they may go back to a restaurant several more times before they realize, with some regret, that their favorite restaurant isn’t so great anymore.
People who visit a restaurant once every two months consider themselves regular customers. You can see how there can be such a delayed reaction to changes at a restaurant. If a restaurant raises prices and sees only a slight decline in traffic a month or two later, that is too soon to consider the price increase a success.
Looking at the restaurant business this year, I am more concerned about gasoline prices than food prices. The stiff resistance to gasoline prices that hit around $4.15 per gallon in 2008 may hit quicker this year, perhaps when prices approach $3.80 per gallon, as they surely will before we get to the summer driving season. At some point, the higher gasoline prices will get consumers to stay home much more often, perhaps reducing their retail trips by 10 to 15 percent. Customers won’t even see the prices on the restaurant menu if the price of gasoline keeps them at home. But if they spend an extra $2 in fuel to get to a restaurant only to arrive and find that the restaurant is also charging them $3 more than before, it’s a double whammy that makes each of the price increases more visible than it would be by itself.
There is another point to consider, and that is the switch from credit cards to debit cards for shopping. This has made upscale consumers, who are the ones more likely to go to restaurants, more price-sensitive. One of the strangest trends in retail late in 2010 was the influx of millionaires eating at McDonald’s, which the restaurant chain says accounted for most of its U.S. traffic growth last year. The story, according to CNNMoney, is that wealthy consumers are saving up to buy things like Jimmy Choos. That implies, of course, that they’re not just taking their credit card and going to the mall to go shopping. When you are saving up for something, it makes you more conscious of all prices, including restaurant prices. Even without price increases, I believe this will be the year when the comment, “We should eat at home a little more often,” starts to turn into a reality for many consumers. Restaurants will have to increase some prices, and that may make the change happen a little faster.