In February, Brinker International CEO Wyman Roberts suggested Chili’s could benefit from fine-dining customers stepping down to casual brands amid the inflationary environment.
Rivers thinks the theory has potential, but nobody truly knows yet. It reminds him of the Great Recession when high-end restaurants were compromised by stock market declines. When the upper class went through that financial turmoil, they stepped down and helped trigger the rise of fast casuals.
But COVID tells a different story, Rivers says. The middle class is most affected, and that’s 4 River Smokehouse’s target demographic.
“That's what I'm a little bit more concerned about because if the stock market continues to perform well, but inflation goes up, the rich are just going to get richer and it's the middle class and the lower class that get compromised in that situation,” Rivers says. “So I'm not so sure that the fine diner is going to shift down unless they have some type of event that compromises their income.”
With costs of goods serving as the prevailing issue, Rivers says locking into food contracts becomes a balancing act. It’s a seller’s market, so restaurants have to be willing to accept high hedges, or the premium companies put on top of contract prices to make sure they’re covered.
Rivers has given his procurement team the green light to lock into high-end proteins for more than six months to a year if the hedge pricing is reasonable. In some cases, the restaurant can acquire large amounts of product and freeze it, like pork, but it can’t do the same with brisket.
“When the sellers know that their costs are going to go up and the sell price is going to go up, that hedge that sits on top of it gets really, really difficult to lock in,” Rivers says. “There's a lot of inherent challenges. You can't just wake up and say, OK, let's go contract everything and lock it in and we'll be safe. I wish it was that easy. But unfortunately, it's not.”
The biggest quick-service restaurants have been impacted just as much. For example, Domino’s is raising its 12-year-old $5.99 Mix and Match promotion to $6.99 for delivery customers because of the channel’s costs. The pizza chain also made its $7.99 carryout deal online only to push customers to digital, which comes with 25 percent higher average ticket and less labor. Additionally, Little Caesars increased the price of its classic Hot-N-Ready pizza from $5 to $5.55, with 33 percent more pepperoni.
Others have chosen a similar route to 4 Rivers Smokehouse, and done their best to maintain value. That includes Del Taco's “20 under $2” value menu, which the fast casual calls the largest value menu of any QSR+ brand.
Rivers is confident there will be a reckoning among customers when it comes to inflationary pricing. It’s just a matter of when.
“Every time you raise that price you get closer and closer and ultimately you lose more customers,” Rivers says. “You can justify it and you can compare against competition. But if they're increasing pricing the same rate you are, it's two peas in a pod calling each other green. I can do this because my competition is doing it. But at the end of the day, that’s not the deciding point. It’s how much of a threshold can your customer truly bear?”