Why a Restaurant Price War is Looming

 

The restaurant industry is no stranger to the ebb and flow of pricing wars, and we are once again on the verge of another significant battle according to Steven Johnson Grocerant Guru® at Tacoma, WA based Foodservice Solutions®.  Over the past two decades, the relationship between food-at-home and food-away-from-home prices has seen substantial shifts, often driven by economic conditions, consumer behavior, and inflation trends. As a Grocerant Guru® with a keen eye on consumer behavior, the signals today are loud and clear: a restaurant price war is looming, and its consequences could reshape the dining landscape.

Consumer Spending Trends on Food: 8 Key Points from the U.S. Census Bureau

1.       Rise in Food-Away-From-Home Prices
Over the last 12 months, limited-service restaurant prices have surged by 4.3%, while full-service restaurants experienced a 3.8% increase. This has been compounded by the fact that food-away-from-home prices overall are 4% higher than the previous year. Historically, such increases have placed restaurants under pressure to maintain traffic, leading to competitive pricing strategies.

2.       Stagnation of Food-At-Home Prices
In contrast, grocery prices have remained relatively stable. Year-over-year, food-at-home prices have only risen by 0.9%, and in August, they were flat. This 310-basis-point gap between restaurant and grocery prices is historically significant. For reference, the 22-year historical average has been a mere 60-basis-point gap. This widening chasm incentivizes consumers to shift more of their food purchases to groceries, eroding restaurant traffic.

3.       The Impact of Economic Downturns
During economic downturns or periods of inflationary pressure, consumers have historically reduced discretionary spending, which includes dining out. The 2008 financial crisis saw a similar pattern, with many consumers turning to groceries to save on costs. This resulted in a period of fierce competition among restaurants to retain customers.

4.       Restaurant Traffic Declines
Recent research from Circana highlights that 86% of eating occasions now occur at home, a reflection of the growing trend of at-home dining. This marks a significant shift from previous decades, where convenience and rising incomes drove food-away-from-home spending. Restaurants are struggling to lure customers back, especially when dining out costs nearly four times as much as eating at home.

5.       Historical Context: Price Gaps and Their Impact
The current gap between restaurant and grocery prices, at 310 basis points, is nearing the 2016 full-year disparity of 390 basis points. In 2016, this gap resulted in the second-lowest same-store sales performance for the restaurant industry, second only to the pandemic. Price wars erupted as operators slashed menu prices and launched aggressive promotions to stay competitive.

6.       The Pandemic's Lingering Effects
The pandemic accelerated the shift toward food-at-home consumption. While restaurants have recovered in some ways, many consumers have become accustomed to cooking at home or relying on grocery meal kits. As a result, even with inflationary pressure easing, restaurants must compete with established at-home dining habits, pushing them toward pricing adjustments to regain lost traffic.

7.       Pressure on Menu Prices
Menu prices continue to outpace the overall Consumer Price Index (CPI), which came in at 2.5% in August. This discrepancy exacerbates the value perception problem that restaurants face. Consumers, particularly from lower-income households, are increasingly sensitive to price hikes, and menu prices rising faster than overall inflation is prompting them to reconsider dining out altogether.

8.       Consumer Behavior Shifts
As noted by David Portalatin of Circana, "Meal patterns have shifted as consumers spend more time at home and adapt to new daily rhythms." This shift reflects a broader change in consumer priorities. Over the past two decades, there have been clear periods where consumers, faced with economic uncertainty, opt for the value and control that grocery shopping provides. These shifts in behavior typically trigger fierce price competition within the restaurant sector.

 

Why a Restaurant Price War is Inevitable

As consumer spending on food-at-home increases and traffic at restaurants declines, operators face a critical decision: to protect margins by maintaining higher prices or to engage in aggressive pricing strategies to lure customers back. Historically, when restaurant prices outpace grocery prices by such a wide margin, the industry sees a race to the bottom, with discounts, promotions, and value-based offerings becoming commonplace.

The following chart illustrates the historical gap between food-at-home and food-away-from-home prices, highlighting key periods of price wars.

 

 Historical Gap Between Food-at-Home and Food-Away-From-Home Prices (2004-2024)

Year	Food-at-Home Price Increase	Food-Away-From-Home Price Increase	Price Gap (Basis Points)
2004	2.0%	2.5%	50
2008	3.5%	4.0%	50
2016	1.3%	5.2%	390
2020	3.7%	3.9%	20
2024	0.9%	4.0%	310

 

Think About This

Restaurants are on the brink of a price war fueled by inflationary pressures, rising operational costs, and changing consumer preferences. The 20-year historical context shows that when the price gap between food-at-home and food-away-from-home widens significantly, the restaurant industry is forced into competitive pricing strategies to maintain traffic. With the current price gap nearing levels seen in 2016, when the restaurant sector experienced one of its worst years, the industry must brace for a fierce battle to retain customers.

As consumers become more cost-conscious and accustomed to at-home dining, restaurants must find new ways to remain competitive, whether through aggressive pricing, value-driven meal options, or enhanced customer experiences. The looming price war may be unavoidable, but those who innovate and adapt quickly will emerge as the winners.

Don’t over reach. Are you ready for some fresh ideations? Do your food marketing ideations look more like yesterday than tomorrow? Interested in learning how Foodservice Solutions® can edify your retail food brand while creating a platform for consumer convenient meal participation, differentiation and individualization?  Email us at: Steve@FoodserviceSolutions.us or visit us on our social media sites by clicking the following links: Facebook,  LinkedIn, or Twitter