I was having a conversation with a friend the other day about the price of food. She noticed the food prices fluctuate in grocery stores frequently, and she didn’t understand why we don’t observe the same price fluctuation in restaurants. Even when there’s a prolonged period of deflation, as we are seeing in the overall food market. It is difficult for restaurants to jump up and down like this. It’s a complex issue. As consumers, we are good at going to the grocery store, comparing prices, and making a purchase based, in part, on factors of cost. The difference between retail and restaurant shopping is the two different business models—which both happen to be centered around buying and consuming food.

At the grocery market, there is a whole science built around shelf arrangement and end-cap management, all designed to highlight and encourage your purchasing decisions. Additionally, markets regularly employ a tactic called “loss leaders.” A loss leader is a pricing strategy where an item is sold at or below cost to stimulate other, more profitable sales. How are you able to buy a turkey at $.79 a pound during Thanksgiving? Because all of the money is made on the stuffing, gravy, and cranberries. There’s usually a minimum purchase required to get the $.79 a pound deal. They are willing to lose money on the turkey, or at least break even, in exchange for the rest of the items you need for the dinner. There is a loss leader tactic employed at most food based holidays. Ham at Easter, BBQ in the summer, and so on. The profit for the grocery store lies in all of the other items combined. The business model for the grocery store is much more fluid, and is ingredient based shopping.  This lends itself to following the commodity market more easily.

Restaurants generally don’t have that luxury. You aren’t ingredient shopping, you are buying a plate of something that’s prepared to order. We shop for flavors and experience at a restaurant, not ingredients. The menu cost of your plate has to carry the weight of the business’s profit. Not the individual items. There’s no loss leader on the plate. Also, as restaurants generally are in fierce competition with one another for your patronage, it’s riskier for a restaurant to embark on price adjustments on a regular basis. In this business model, consumers want consistency above all. As an example: for about four years after the ’08 crash there was an aggressive period of food inflation. Restaurants really resisted raising their menu pricing to match the increasing cost of food. Nobody wanted to break that $9 to $10 barrier for a burger.  As a whole, everybody resisted that for a long time. What’s the price of a burger now? A good $12 burger is a bargain nowadays. Additionally, the price of your favorite dish on the menu goes to the other direct costs of doing business. Aside from atmosphere and service, there is myriad of things such as soap in the bathroom, plastic wrap, dishwasher chemicals, grease and trash disposal, paper towels, and even the frill picks in the sandwich. Nobody goes to a restaurant for frill picks. These ingredients add to the experience, but they are not consciously part of the experience. Also, none of those things are delivered to the restaurant for free. So, while there may be some deflation in the cost of food, it’s likely not happening in these other products. Add in increased wages and regulations, healthcare, taxes (all of these, always go up never down) . . . plus, the aforementioned resistance to raise prices in a competitive market. You see why it’s hard for a restaurant to drop prices in a deflationary period. Not to mention the effort alone of recalculating every menu item recipe, every time there’s a price change of the products they purchase. And then, the reprinting of the menus themselves . . .

In any case, if you looked at food prices overall, just like the stock market, you would see that over time food pricing, like everything else, is on an upward slant. As a consultant, my opinion is restaurants get cornered behind the menu pricing curve on this point alone, the advantage of flexibility to react clearly goes to retail. However, when it comes to an experience that has the opportunity to create a memory, nothing can beat that great dining experience.

Food for thought.

As for me, I’m watching that uptick in temperatures and daylight hours . . . can anyone say cabin fever? Hurry up spring!

Chris Patterson is the Director of Business Solutions at Food Services of America.  He is a 30 year veteran of the hospitality and restaurant industry and has conducted more than 700 trainings, seminars, and consulting sessions with Inland Northwest operators.