Cost-passing is backfiring for full-service restaurant owners

Customers are no longer willing to foot the bill for rising food costs, so restaurateurs need a new way to cover those increases.

November 14, 2023
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Cost-passing is backfiring for full-service restaurant owners
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Cost-passing is backfiring for full-service restaurant owners

Restaurant prices have hit a breaking point. 

Inflation has run rampant over the past two years and the increased cost of running a business has put immense pressure on restaurant owners to raise their menu prices. For a while, customers — many of whom were eager to get back out in the world after months of solitude in quarantine — were willing to absorb those price increases.

But according to new data from Upside, this trend began to reverse towards the end of 2022. 

Now, customers are pushing back against the higher costs of dining out — in September 2023, for example, full-service restaurants saw a 4.3% reduction in foot traffic compared to the same time period last year. 

By continuing to raise prices to offset their rising costs, restaurateurs run the risk of pushing their customers away for good. Rather than passing off those costs to diners, restaurant owners have to figure out how to cover those costs in a customer-friendly way.

Grocers have chosen a different path

In the fall and winter of 2022, prices in the restaurant and grocery industries rose practically in lockstep; month-over-month, trends for the two industries followed very similar trajectories. But in January 2023, grocery stores had a disastrous month, with a drop of nearly 2% in year-over-year spending per visit. In response to that decrease, grocers have held in-store prices relatively constant for much of 2023 — and in fact, for much of the summer, prices actually decreased from their winter highs.

Restaurants, meanwhile, haven’t let off the gas. The trend lines for percent change in prices in the grocery and restaurant verticals have diverged, and restaurant owners are still raising their prices. As of October 2023, they sit nearly 5% higher than they were at the same time one year before.

While consumers weren’t deterred by earlier price increases, the sustained bumps of 2023 have changed the habits of many diners across the country. In response to these persistent increases in restaurant prices, Upside has found that customers are now spending less when they dine out. 

Budget-conscious diners have scaled back spending

Using Upside’s first-party data to track spending patterns, we see that restaurant patrons began spending less per visit year-over-year starting in July, and that trend hasn’t slowed down. From July to September 2023, customers spent less per visit year-over-year. As recently as March 2023, diners spent nearly 6% more per restaurant visit year-over-year, so these figures show a sudden and dramatic downturn. And when diners do go out, they’re looking to save whenever they can. Recent data from research firm Circana shows that for the first time, the percentage of customers benefiting from deals during restaurant visits has returned to pre-pandemic levels.

Paradoxical trends in spend-per-visit

We see something interesting when we take a look at spending per visit at each restaurant, rather than for each diner. 

The blue line in the chart (the same one appears below) shows that the average customer is spending less per restaurant visit compared to last year. But the green line below, which plots the year-over-year changes in the receipts that a restaurant collects on average, shows that restaurants are actually earning increased spend per visit from their customers compared to 2022. In September 2023, for example, the average receipt per restaurant was about 2% higher than it was a year prior.

So on average, customers are spending less, but restaurants are still making more? How can this be?

There’s a term for this kind of statistical phenomenon: Simpson’s paradox. And the reason for this discrepancy comes down to restaurant choice. 

  • Customers looking for value have driven down the check size for the average diner. Since meals are more expensive across the board this year, customers have decided to dine out at full-service restaurants (FSRs) less often. Instead, they’re opting for cheaper meals from quick-service restaurants (QSRs), so the customer’s average receipt has gone down. 
  • Price increases across the board have led to more expensive checks on average for restaurants. There are still some customers who haven't been driven away by price increases and prefer FSRs. These customers are paying larger bills at FSRs, which helps to keep the average receipt per restaurant high. 

Of course, it’s critical to remember that higher restaurant revenue does not mean higher profit. 

Let’s dive deeper. 

Customers traded full-service for quick-service

According to a previously reported survey from April 2023, restaurant customers said they were more likely to go out to eat less often than they were to trade down to fast food or QSRs. But now, we find the opposite to be true — consumers are exploring different types of restaurants as they try to scale back their spending.

Upside’s data shows that QSRs have maintained year-over-year increases in foot traffic in 2023.  On the other hand, FSRs have experienced decreased year-over-year foot traffic consistently since April, culminating in three consecutive months of about a 4% year-over-year drop. 

In September, those respective increases and decreases in foot traffic translated to $154 more each day for the average QSR, while the average FSR brought in $111 less each day compared to a year ago.

What’s an owner to do?

Customers are spending less as food costs remain high, so what can full-service owners do to mitigate their losses?

Until now, the natural inclination has been to raise prices. But this data shows that FSRs could benefit from freezing prices. (And before you close your browser in disgust, hear us out.) Consumers are clearly feeling the pinch in their budgets, and further increases in prices will just drive cost-conscious diners away even faster. Consider the case of grocery stores: following that difficult January, grocers have held prices relatively steady. And while grocers are also facing challenging times, they haven’t experienced a steady decline in spending per visit like restaurants have. 

Of course, business owners have to cover their rising costs somehow — if they’re not going to cover them by passing the burden onto consumers, they need to create new revenue streams to offset those cost increases. One way retailers can create those revenue streams is by optimizing capacity utilization. Every minute a table sits empty is an opportunity to fill it with new revenue at no additional cost. Capacity utilization is the measurement of transactions during a specific time frame compared to potential transactions with fully-optimized resources. Tracking and investing in using your resources to their fullest extent makes for an efficient business.

On the other hand, QSRs are in a stronger position at the moment. What can they do to maintain the momentum?

QSR owners should recognize that there’s a large group of diners who are passing up FSRs and are ready to make a switch to more cost-effective meals. Seek out those diners looking for value and make it clear that you meet their needs while delivering on quality. Additionally, QSRs need to focus on building habits among this new customer base. Give those customers a reason to keep coming back as they form new dining habits.  

Incomplete pass

The summer months are generally the busiest time of year for restaurants, and as we move into the colder (read: slower) months of fall and winter, it will be paramount for restaurant owners to get back on the same page with consumers. Price increases have turned customers away, and the onus is on restaurants to win back diners’ trust. 

Cost-passing is backfiring for full-service restaurant owners

Dr. Thomas Weinandy

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Dr. Weinandy is a Research Economist at Upside, providing valuable insights into consumer spending behavior and macroeconomic trends for the fuel, grocery, and restaurant industries. With a Ph.D. in Applied Economics, his academic research is in digital economics and brick-and-mortar retail. He is currently writing a book on leveraging AI for business intelligence.

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