Prior to the current spate of inflation that began in 2021, I am hard pressed to remember the last time that restaurant menu inflation was outside of the range of 2 to 3 percent. For many people on both sides of the restaurant counter, this is unprecedented territory.
Looking at the broader economy through the lens of the Consumer Price Index (CPI), the starting point for today’s inflationary tale is abundantly clear. In April of 2021, the CPI was +4.2 percent. In other words, prices were 4.2 percent above where they were in April of 2020. (This is worthy of clarification, since some people confuse the monthly CPI report as being a statement of how much prices have risen during a given month, as opposed to where prices were at the same time the year prior.) Given that the CPI was a modest +1.4 percent for January of 2021, a year-over-year lift of 280 basis points in just three months is significant. After a rise in May that brought the CPI to an even 5 percent, followed by a 40bp increase in June, the rate of inflation held relatively steady from July through September at about +5.4 percent.
October of 2021 saw the beginning of a steady increase in the CPI. Six months later in March of 2022, the CPI reached +8.5 percent. The depth of the problem increased in April, when the CPI started compounding on top of the acceleration that began the year prior. Come June of 2022, we had a CPI of +9.1 percent on top of the +5.4 percent from the previous June. By that time, the consumer was in the danger zone of price increases outpacing the wage increases that had come about during the pandemic, in part from government subsidies, but also from employers elevating wages in a dynamic economic environment.
There is some better news of late. Since June of 2022, the rate of inflation has moderated. By February of 2023, the CPI was +6 percent, however, this is on top of the +7.9 percent the year prior. Unless we begin to see a more significant deceleration in the monthly CPI, we are looking at the prospect of a two-year increase of approximately 14 percent for the better part of the next six months.
Inflation for food at home and away from home has been even greater than the broader CPI. As of February (the most current data at the time of my writing this), overall food inflation was +9.5 percent compared to the overall CPI of +6 percent. This comes on top of food inflation of +7.9 percent in February of 2022 and +3.6 percent in February of 2021. The compounded impact is well above the general CPI, which ran at +1.7 percent and +7.9 percent for 2021 and 2022, respectively. The consumer wallet is obviously stressed.
What does this mean for restaurants? In February, prices at grocery stores (i.e., meals at home) were a more significant +10.2 percent versus the year prior, while food away from home increased 8.4 percent. A gap like this can lead to traffic and spending favoring the lower segment, and the comparable sales the restaurant industry has logged since the start of the year reflect that dynamic. According to data from Black Box Intelligence, industry comp sales in January and February were the best since February of 2022. Comparable traffic had improved as well, with both months registering positive results, which broke a ten-month stretch of negative transactions. Interestingly, comp transactions for the QSR segment were softer than for the overall industry. While also positive in January and February, QSR had a 16-month stretch of negative traffic prior to the start of 2023.
Has our industry been in such a situation before? To find a time even remotely like today, we must go all the way back to March of 1981, when food inflation stood at 10 percent; it marked the final month of a seven-month stretch with food inflation slightly above 10 percent.
Recounting the tale of inflation is easy. Casting a brand strategy that navigates these waters is where difficulty resides. I know it is stating the obvious but suffice it to say that the brands that craft the best approach will likely edge out their rivals in the relentless battle for share of calories; a battle waged as much against grocers and convenience stores as it is the competitors in their respective segment of the restaurant industry. I spend more time considering the value proposition and affordability compared to a grocer than I do a fine-dining restaurant.
If the overall restaurant industry is seen as a better, more affordable option than the alternatives for at-home food, there is the potential for a figurative tide that lifts all restaurant boats. If we can emerge from this inflationary period in a relative position of strength, it may set the stage for stronger traffic in the months and years ahead.
Don Fox is Chairman of Firehouse Subs, where he supports President Mike Hancock and the rest of the brand. A restaurant industry veteran of 50 years, Fox has spent two decades at Firehouse Subs, including serving as president and CEO from 2009 to 2023. Under his leadership, the restaurant brand grew to more than 1,245 restaurants in 46 states, Puerto Rico and Canada, and is recognized as one of the best franchises in the country. Prior to his time at Firehouse Subs, Fox worked for sister brand Burger King for 23 years. Fox sits on various boards in the business and non-profit communities, including Firehouse Subs Public Safety Foundation and National Restaurant Association. Named Operator of the Year by Nation’s Restaurant News in 2011, Fox joined a long list of restaurant luminaries. He was also ranked No. 1 on FastCasual.com’s 2013 Top 100 Movers & Shakers list, receiving the prestigious Silver Plate award from the International Food Manufacturers Association.