When Restaurants Stop Being Worth It

There is an existential crisis in the restaurant industry. Right now.

Forget about Chili's re-re-vamping their menu to try to win back alienated customers. The restaurant industry is now getting squeezed from multiple directions: rising minimum wages, rising rents, rising legal and regulatory costs, and of course rising food costs too.

What's new this time around is the industry finds itself absolutely unable to pass these costs through to consumers in the form of higher prices.

The latest and most shocking admission of this was from the restaurant chain Red Robin [ticker symbol RRGB]. Red Robin's management said this in their most recent quarterly conference call:

"A top area of focus for us has been managing labor costs. The minimum wage and general regulatory environment is growing at an unprecedented rate, especially on the West Coast, where we have our strongest and largest footprint. Hourly wages are up again this year in the mid-single digits, and we know there's no appetite by today's consumer to spend more to cover this. Absorbing these increases with higher pricing is not an alternative for us."

There it is, straight out of the bird's, I mean CEO's, mouth: Not only are food and regulatory costs rising and minimum wage is increasing "at an unprecedented rate," but worst of all, they can't hike prices any more to compensate.

I'll share yet another an example from a local Irish pub we sometimes go to here in suburban New Jersey. This place is a basic, no frills, casual restaurant, a good place, and it now charges $11 for a burger. And an extra buck fifty for a piece of bacon and cheese.

So, imagine the management of this restaurant as they experience the same inevitable cost squeeze that Red Robin and others face. At first, they'll do what they've always done: they respond to their higher costs by passing them along to us. Just hike that burger's price by yet another buck.

That worked in the past, as the consumer didn't mind (or even notice) a burger increasing from $6 to $7 or $7 to $8.

But at some point the consumer notices. And minds. At some point, that burger just stops being worth it. Where that point is, it's hard to know. It depends. But when a basic burger starts to get up into the double digits, at $11-ish, $12-ish, can you hike prices another buck? And, then, a year from now another buck?

Before you know it, a modest dinner of, say, two burgers and two beers, maybe a side order, add in taxes and tip... suddenly, you're looking at a sixty or seventy dollar tab. For burgers and beers.

It ain't worth it. So people stop going out to eat. This is exactly what intelligent consumers do in the face of inflation.

Heck, I can easily feed the two of us for two weeks on $70.

Even Jim Cramer, stock market spaz for the masses, is onto this. Partly it's because he actually owns a restaurant, a Mexican place in Brooklyn. Regarding these trends, he wrote recently:

"It's a nightmare for any restaurateur. And it's just beginning."

A final note, regarding yet more synergies of being an investor and a (frugal) consumer. You'd have seen this theme coming, likely as much as a few years ago, if you were paying attention to the rising cost--and increasingly questionable value--of dining out versus cooking at home.

Red Robin's Third Quarter 2017 conference call transcript

Finally a quick housekeeping note: Next week I'll run Casual Kitchen's top posts of 2017. Stay tuned!!

Read Next: How to Become a Sophisticated Investor: Six Steps

1 comment:

Marcia said...

I think there are many different things to go into this. And not just cost, but also experience.

With stagnant wages and a lot of unemployment - who can afford to eat out? Well, let's look at the various groups.

- Boomers and the elderly can often eat out. Their kids are gone, they've got a pension, or at least a low mortgage - and more disposable income (this obviously does not apply to all).

- Millennials - well, many of them like to eat out but a lot of them are also broke or have huge loans. They tend to eschew chain restaurants though.

- Families - that's me and let me get into that a bit
1. Eating out with kids is a total pain in the ass, pardon my French. Age 2 to 4, it's not worth it AT ALL, in any way shape or form. I went and had kids 6 years apart. So I doubled the length of time. And kid #2 is 5 and is still a PITA. He can't sit still.

2. Eating out is not healthy. Sure, I let my spouse take the kids to McD's or Chik-fil-A a few times a year. But I'm in my late 40's, I can't eat that crap.

In addition to that - I'd rather eat out things that I can't make well at home. I love a good burger. You know? The single thing that I'm MOST likely to go out for is a burger (can't eat wheat anymore though, so I have to do the lettuce wrap thing). If it's a really good burger? I'll totally pay $11 for it. But here's the thing: that's a 2x a year thing for me.

Eating out with wheat sensitivities is also a complete pain, so we tend to eat out less often.

It's a tricky thing, this whole economics of eating out. I'd rather eat at a decent place where people get paid a decent income and the food is good. How many restaurants do we need? How long are we going to FOOL ourselves by saying these jobs are for "teenagers". Because let's face it - most of these jobs don't go to teenagers anymore. Pressure keeps wages down and prices down and quality down.