Many Americans are wondering: Why go out for a burger when you can grill one at home for way cheaper?
Wendy’s warned on Wednesday that the recent alarming slowdown in restaurant sales is being driven by a growing gap between the rising cost of eating out and falling prices at the grocery store.
“It’s gotten a lot cheaper…to get fresh beef at your local butcher and go home and grill it,” Wendy’s executives said during a conference call with analysts.
Higher prices at restaurants is a side effect of higher minimum wages that have gone into effect in many states and also a healthier jobs market that has forced employers to pay their workers more. That’s a good thing for Main Street, but not so for restaurants.
Wendy’s sales in the last three months barely grew at 0.4% and it dimmed its sales outlook for the rest of the year. Even Shake Shack is experiencing a slowdown. The popular burger joint on Wednesday said its same-restaurant sales rose 4.5% last quarter, a fraction of the 13% growth from the year before.
McDonald’s is also talking about the sticker shock trend, blaming it for the fast food chain’s recent stumble. “There’s a value to be had for families” by eating at home, McDonald’s CEO Steve Easterbrook said during a recent call.
So is this just another silly excuse executives roll out when their numbers don’t meet Wall Street’s expectations? Probably not. Broader data tracked by the government revealed a telling trend.
Prices of food consumed at home in June declined 1.3% from the previous year, according to the Bureau of Labor Statistics. That’s the biggest 12-month decline since 2010.
Over the same timeframe, food costs away from home jumped by 2.6%.
“There is deflation in the supermarket, making it cheaper to buy a steak there,” said Hedgeye restaurant analyst Howard Penney.
So what’s driving this divergence? Clearly, it’s not commodity prices. Restaurants and grocery stores alike are enjoying a decline in food costs, thanks to low commodity prices. Prices for meats, poultry, fish and eggs are down for 10 straight months as is the cost of transporting them, given gasoline prices are so low.
But restaurants are having to pay more to keep workers due to the improving jobs market along with higher minimum wages. Restaurants have attempted to pass on these new expenses to customers, who in turn are experiencing sticker shock.
McDonald’s alone jacked up prices 3% last quarter, a significant uptick the company blamed on “rising labor costs.”
In a booming economy, these differences might not matter. But the U.S. continues to experience slow and steady growth and many Americans have yet to be rewarded with big raises.
The key will be whether Wendy’s and other restaurants come up with meals tasty enough that consumers are willing to pay up. Clearly, more work is needed.