After celebrating the end of COVID restrictions with an epic restaurant tab, diners are now hitting the brakes on eating out.
Many U.S. households, especially lower- and middle-income ones, are cutting back on restaurant spending as inflation pressures their budgets. Feeling the same pinch, restaurants from Chipotle Mexican Grill Inc. to Cracker Barrel Old Country Store Inc. have increased prices to keep up. This will likely translate into lower traffic and stagnating sales in coming months.
A September survey from research firm Datassential Inc. found half of consumers had recently cut back on restaurant meals due to high inflation. It was the No. 1 expenditure respondents opted to trim, followed by apparel and travel. About 30% of those surveyed said they plan to dine out less or stop visiting restaurants entirely in the coming months.
“Anytime we see a reduction in buying power — and that can happen through inflation too — people will likely substitute towards food at home,” said Jayson Lusk, head of the Department of Agricultural Economics at Purdue University.
Investors are clearly concerned: Of 32 companies on the Russell 3000’s index for restaurants and bars, only two are up this year in the stock market. The index is down 16% in 2022 through Thursday’s close.
A slowdown in restaurant traffic would also be an ominous sign for the broader U.S. economy. The resilience of consumer spending has largely rested on persistent outlays for services such as eating out and travel. In contrast, inflation-adjusted spending on goods has declined for two straight months.
Of course, eating is getting pricier no matter where people dine. Restaurant prices, while climbing, haven’t risen as fast as at the supermarket. Inflation for food away from home surged 8.5% in September from a year ago, versus 13% for grocery stores.
Earnings next week from Chipotle and McDonald’s Corp. will be closely watched for insights into consumer demand. Spending at restaurants is likely starting to decline, according to Bloomberg Intelligence analyst Michael Halen.
“Consumers are going to continue to pull back,” Halen said. “In the summer, a lot of the retail names were talking about how the middle-income consumers were the ones to kind of pull back their spending. I would not be surprised to see that bleed into restaurants in the third and fourth quarter.”
A slowdown is already evident at Mezze Bistro and Bar, an upscale eatery in Williamstown, Massachusetts, that serves fare such as Scottish salmon and eggplant caponata. Co-owner Bo Peabody said that diners are opting for less-expensive options, and they’re also starting to notice menu price increases.
“We’re just starting to see people say, ‘Maybe I’ll choose the $35 bottle of wine instead of the $40 bottle of wine,” he said in an interview. “That will likely continue.”
Peabody, who is also the co-founder of Seated, a restaurant reservation app that offers rewards on meals, says the service’s average order was $88 in September, down from $91 last year at the same time. He’s also predicting a dropoff in diner visits for the coming months.
“I would be shocked if we don’t see some reduction in frequency. I’m preparing the team for it,” he said. “I’m worried about the industry.”
A closely-watched survey of services painted a similar picture. One respondent in the lodging and food-services industry said that a traditional dip in restaurant sales during the August-to-October period “seems to be more severe compared to before the pandemic,” with inflation and uncertainty being listed as the likely causes.
While the Commerce Department reported the total value of September retail sales at restaurants and bars rose by 0.5% from the prior month, the data isn’t adjusted for price changes. After adjusting for menu increases, the National Restaurant Association found sales declined, marking the third such drop in four months.
As inflation erodes spending power, the economic outlook is also increasingly grim. Many economists now expect a recession next year and higher unemployment. If this happens, Lusk predicts Americans will replace some restaurant spending with groceries, while also shifting to cheaper dining options like fast food.
Olive Garden owner Darden Restaurants Inc. sales missed Wall Street’s expectations in the quarter ended Aug. 28. The company, which has raised its prices, blamed inflation for lower spending, especially among those who earn less than $50,000 a year.
September saw a higher number of consumers who slashed spending versus August, according to Cowen. Dining out and social events were the top expenditures being cut or expected to be cut. This outpaced other categories such as travel or groceries, according to the financial-service company’s monthly survey of 2,500 U.S. consumers.
“When you have a very significant inflation, consumers may actually switch to cooking at home and preparing food at home, and that’s just the risk,” Domino’s Pizza Inc. Chief Financial Officer Sandeep Reddy said during a conference call on Oct. 13. “We are in unprecedented inflationary times.”
