Dear Restaurants: Making Customers Pay for Your Inefficiencies = Bankruptcy

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The battle over US food dollars has been waged between grocery stores and restaurants for many decades. In March of 2015 restaurant spend surpassed grocery spend for the first time since the two were measured in 1992.

Recently, however, new data has come to light, and I’ll contend this data could undermine the otherwise promising trend for restaurateurs.

Let us turn to an analogy; let us assume that each person must buy one of two choices for transport: a car, costing $10,000, or a motorcycle, costing $5,000. We should assume competition for consumer transport dollars is between these two choices only.

In order for the dollar amount spent on motorcycles to equal the dollar amount spent on cars at these fixed prices, consumers must purchase 2x as many motorcycles as they do cars.

But what happens if motorcycle manufacturers raise their prices? Let us imagine motorcycles now cost the same amount as a car: $10,000. Now for the dollar amount spent on motorcycles to equal to the dollar amount spent on cars, motorcycle manufacturers need only sell the same number of motorcycles as do car manufacturers sell cars.

At some point do you think consumers might notice that the car seems like a much better bargain for their dollar than the motorcycle?

While this example assumes a quick rise in motorcycle prices from $5,000 to $10,000, if the pricing trend happens gradually consumers will be slow to realize their money might go further if they chose to buy a car. The frog jumps out of a boiling pot but stays content if one increases the temperature slowly.

Returning to the restaurant market we’ve now learned that US restaurant counts are falling at a staggering rate.

NPD, which measured commercial restaurants open as of Sept. 30, 2016, counted a total of 620,807 restaurants.

Independent restaurants fell by 4 percent compared with fall 2015, while the number of chain restaurants rose by 1 percent compared with a year earlier.

US restaurant density is at a 10-year low and people like David Bennett have been wise to ask if this may indeed be peak restaurant.

Further, a survey by Reuters/Ipsos reveals that a third of US consumers are eating at restaurants less frequently than even a quarter ago.

One-third of respondents to the Reuters/Ipsos opinion poll of more than 4,200 U.S. adults from Jan. 14 to 25 said they were eating out less often than three months ago. Of those diners, 62 percent said cost was the primary reason.

So here’s our theory:

The fact that total dollars spent on US restaurants surpassed spend at grocers has been driven by the increase in meal costs at restaurants. In other words, restaurants may not have attracted a larger number of consumers but charged them more on each visit.

The gap between grocery food prices and restaurant prices is at an historic high. The consumer price index for food away from home was up 2.4 percent year over year at the end of January compared to a 1.9 percent drop for food at home.

Well the gig is up.

This gradual price increase is now apparent to consumers, and they’re looking at alternatives. Migration of technology into foodservice – against the wills of many merchants – has made eating options copious and pricing transparent. Consumers can now subscribe to meal kit services or order delivery of pre-made meals from grocery stores.

What accounts for the simultaneous price increase at restaurants and price decrease at grocery stores?

One could say regulation.

Minimum wage laws have found few friends in hospitality, but the same laws must surely affect grocery. Perhaps restaurants are disproportionally affected but that wouldn’t cause grocery prices to drop.

We contend the disparity stems from sophistication.

While grocers are using data and algorithms to improve everything from pricing, to labor, to supply chain and marketing, restaurants (and retailers) are otherwise not.

All of these inefficiencies add up and are ultimately passed on to the end consumer. It doesn’t take long before the cost differences are so out of line that consumers spend their money elsewhere.

Brick and mortar merchants need to realize they are competing against technology whether they want to or not. They have a choice: learn technology, change their approach and survive, or find themselves on NPD’s list of latest body counts. I’m afraid a great many merchants would rather do things “their way” to the bitter end.

As one of the billions who necessarily spends money on food, all I can say is good riddance.

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