Eating out is taking a bigger bite out of American wallets, with small restaurants and national chains alike passing along the rising costs of basic commodities and labor.
Chipotle Mexican Grill recently boosted prices of as much as 4% across its menu to help offset higher labor and other costs, a spokesperson confirmed to CBS MoneyWatch. The chain last month hiked its average hourly pay to $15 for its 100,000 workers in 2,800 restaurants.
“There are some inflation pressures that we’re all feeling, the whole industry is feeling, even outside our industry is feeling — right now it’s on labor,” Chipotle Chief Financial Officer Jack Hartung told participants in a conference call this month hosted by investment Baird. “If you lose the staffing game in this business, it’s not going to end well.”
Rising menu costs are reflected in government data showing inflation increasing at its fastest clip since 2008, with demand moving sharply higher as consumers resume dining, shopping and traveling.
Consumer prices rose 0.6% in May, pushing the annual inflation rate to 5% over the last 12 months, the Labor Department said this month. Separate government data show that wholesale costs for meat and poultry are up more than 20% since the start of the year, while U.S. producer prices for processed poultry in May hit a record high.
Food prices for food away from home climbed 4% in May compared to a year ago, with limited-service meals up 6.1% over that time period, according to labor data. Full-service meals climbed 4.1% over the last 12 months — the largest 12-month increase since the period ending October of 2008.
Although prices have turned up more sharply than expected, price increases will ultimately abate, U.S. Federal Reserve Chair Jerome Powell told a congressional hearing on Tuesday that he expects the rise to be temporary.
Gregory Daco, chief U.S. economist at Oxford Economics, also does not expect the ongoing jump in prices and wages to last. While the Fed is “more tolerant of inflation to generate a broad labor market recovery, it won’t tolerate runaway inflation,” he wrote in a report.
But other economists are less confident that inflation will abate anytime soon.
“Those that think that the excessive rise in inflation is just a temporary thing seem to be relying on used car prices and lumber, missing what is going on everywhere else where everyday there seems to be more stories about price increases,” Peter Boockvar, chief investment officer at the Bleakley Adivsory Group, told investors in a note.
“Judicious pricing on the menu”
Demand at limited-service restaurants surged during the pandemic as Americans turned to delivery, drive-thru and takeout for meals outside the home. The appetite for quick-service items left fast-food operators freer to hike prices without worrying about losing business, particularly given that many people had more disposable cash and fewer venues at which to spend it.
McDonald’s signaled its willingness to cover higher labor costs with “judicious pricing on the menu,” CEO Chris Kempczinski told investors in a fourth-quarter earnings call earlier this year. The burger chain last month raised hourly wages at company-owned stores by about 10%.
The tight labor market also had Darden Restaurants, which operates chains including Olive Garden, saying in March that it would pay workers a minimum of $12 an hour, including tips, by 2023.
In another pricing shift, chains including KFC and Wendy’s are also rolling back discounted “value” meals and instead promoting costlier options to boost sales and offset increasing food costs as Americans return to pre-pandemic habits.
Long a standard in the world of fast food, so-called combo meals — offering a protein, fries and a drink for five bucks or less — still exist, but are now less of a focus for chains that continued selling drive-thru and take-out food even as other restaurants closed due to COVID-19. As the economy reopens, burger-and-chicken eateries are promoting more expensive fare, trying to stay ahead of rising food costs.
Fast-food chains launched fewer new combo meals during the past 18 months, according to Chicago research firm Datassential, which tracks restaurant deals. A sampling of 51 quick-service chains found they launched 38 “combo/value meals” through May, a decrease from 66 launched over the same period last year and 57% fewer than the 152 value meals launched in 2018, the company found.
Nearly half of visits to fast-food restaurants in May involved people with annual earnings of between $25,000 and $100,000, according to the NPD Group. Those with household incomes of $100,000 or more represented roughly 39% of fast-food stops, while Americans earning less than $25,000 accounted for roughly 12%.
Wendy’s already offers value items such as its “four for $4” program and “5 Biggie Bag”. Still, the chain’s focus is shifting to higher-priced additions that say “it’s worth what you pay,” CEO Todd Penegor said in a May earnings call with analysts. “We’re trading folks up into our best, highest quality food items, and we’ll continue to do that,” he said.
Yum Brands-owned KFC pulled the plug on marketing its $5 combo meal last year and now advertises its family meal deals that can run as much as $30, a spokesperson confirmed.
“At the onset of the pandemic, KFC customers began reducing trips out of the home and looking to purchase group meals versus individual meals. In response to this, KFC shifted to focus on group meal options, marketing the $20 Family Fill Up value offer and introducing a $30 Fill Up, which included a bucket of our signature Kentucky Fried Chicken and a bucket of Extra Crispy chicken tenders intended for a second meal at home, providing more value for the customers and the added benefit of reducing trips out of the home,” she stated in an email.
“More recently, KFC has been promoting its new KFC Chicken Sandwich at $3.99. We are not currently marketing $5 Fill Ups,” the spokesperson added.
Federal stimulus payments helped drive traffic to Domino’s Pizza outlets in the first three months of the year, prompting the chain to suspend its half-price pizza promotions for online orders.
“Due to the positive sales impacts from the stimulus, we elected not to run any of our aggressive Boost Week promotions during the quarter,” Ritch Allison, the chain’s CEO, said in an April 29 earnings call.