The Retired Investor: Eating Out Not What It Used to Be

Many Americans are getting a bad case of sticker shock when their check arrives at their favorite restaurants. Higher costs for labor, food, and a variety of other inputs are conspiring to make dining out a luxury item that fewer can afford.

 

Lest you think that these sky-high prices are confined to the white tablecloth crowd, guess again. I'm talking about everywhere. Prices in fast food chains, your neighborhood bar and grill, the home-style diner on the corner, and even your local Chinese takeout joint are jacking up prices.

 

By the beginning of this year, the costs of eating out rose more than 30 percent since 2019, according to the Labor Department. I think that is low. My favorite burger chain has increased prices so much that today the average burger costs more than $16 (with fries and a soda, we are talking more than $20).

 

In many cases, restaurants have no choice. Wages for everyone from waiters to busboys, cooks, and dish washers are going up along with the minimum wage. This year, the minimum wage was raised again in 22 states. In addition, restaurants in some areas have been forced to offer or expand fringe benefits to keep staff from quitting.

 

And yet, the restaurant business overall is expected to break $1.1 trillion in 2024, which is a 5 percent jump from 2023 and a new sales record. Employment in the sector is now back to its pre-pandemic level as well. The clear winners of this surge have been the fast-food and takeaway chains.

 

The independent restaurants, especially those with full-service operations, have not fared nearly as well. Caught between escalating costs and increasing resistance by diners to higher check prices, the independents are caught between a rock and a hard place with nowhere to go.

 

As if prices aren't high enough, a new technology-fueled wrinkle will soon be introduced to a restaurant or two near you. It is called "dynamic pricing." Thanks to software innovations, restaurants can move prices up and down based on demand and staffing. This will allow companies to change prices weekly or monthly depending on what they perceive are periods of surging demand.

 

It is a concept that most of us have had some experience with in the past. We all know that airfares increase during the holidays. A summer rental on the beach is more expensive in July than in November. Hotels charge more on the weekends and taxis more at rush hour. Eating and drinking establishments have long used the concept to draw in customers, for example, featuring "happy hours" or "early bird specials" where drinks and/or food are cheaper. However, now companies are using the reverse and charging higher prices during periods when demand surges.

 

Earlier this month, Wendy's CEO Kirk Tanner mentioned that the burger chain was testing dynamic pricing using algorithms, machine learning, and AI. The comment hit the national news wires and the backlash from fast-food fans was fast and furious. The furor resulted in a company statement denying it was going to raise prices, but instead use digital menus to change offerings during the day and offer discounts at slower times.

 

However, dozens of restaurants have already implemented surge pricing, according to the New York Post. And more will certainly be trying out the concept. By some estimates, restaurant chains could easily see prices during the lunch rush, for example, increase by 10-20 percent. The key is in how it is implemented. Focusing on the times of day when prices are lower seems crucial, rather than when they are higher. Somehow that is considered more palatable to consumers. Good luck with that. 

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.