By Vaibhav Tandon

Restaurateurs faced severe interruptions during the pandemic, amid social distancing and supply chain disruptions.  While these problems have receded, another has advanced: eateries are facing lower demand due to higher prices. 

Eating out has always cost more than cooking at home, but the price gap between the two has been growing.  Even as grocery inflation ebbed from the double-digit increases observed a couple of years ago, the cost of dining out is still rising briskly.  Food inflation has dropped below 2% in the U.S. and the eurozone, but the cost of meals at restaurants and cafes are increasing at over 4% year over year. 

The central difference between the two channels is the cost of labor, which absorbs (on average) about 30% of a restaurant's revenue. Wages for cooks, servers and clean-up crews are rising strongly and persistently.  Pay in the hospitality sector in the U.K. is growing by around 8% year over year, higher than the national average of 6%.  Food service salaries in the U.S. are rising by 5.1% compared to a 3.9% increase for all employees in the private sector.   

Despite some attempts to automate, restaurants have made little headway in their efforts to insulate themselves against labor costs.  Businesses must either pass on the burden to patrons or take a hit on margins.

Resilient household incomes offer restaurateurs some pricing power in the U.S., but that leverage is dependent on price points.  Top American fast food chains, often synonymous with affordability, are starting to feel the pain as low-income consumers visit less frequently and pare back their orders. According to a survey by Revenue Management Solutions, about half of low-income consumers are making fewer trips to fast-casual and full-service dining establishments.

Meals eaten out account for a little over 5% of the consumer price basket in the U.S. and 11% in the U.K.  As diners escape high restaurant prices by returning to their kitchens, they should help in the fight against inflation.  The menu won’t be as interesting, but it will be affordable.