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

Foodservice Operator Optimal Rent Percentage for Profitability

 

Steven Johnson the Grocerant Guru® at Tacoma, WA based Foodservice Solutions®, has seen the foodservice landscape evolve over decades, and one constant remains: the delicate balance between rent costs and profitability. There is one fact no one can deny, if your rent is to high you won’t make any money!

For restaurants and convenience stores, understanding and maintaining the optimal rent percentage is crucial for long-term success. Let’s delve into the historical data to examine what this percentage looks like and explore three examples that highlight its impact on profitability.

The Golden Rule: Rent as a Percentage of Sales

Historically, the industry has set a general benchmark where rent should account for 6-10% of gross sales for restaurants and convenience stores to remain profitable. This range provides a buffer for operators to manage other operational costs, such as labor, food costs, and utilities, while still achieving a healthy profit margin. Deviating too far from this range can place undue stress on the business, leading to reduced profitability or, worse, closure.

1. Restaurant Example: Darden Restaurants

Darden Restaurants, the parent company of Olive Garden and Longhorn Steakhouse, has long been an industry leader in managing operational costs, including rent. Historically, Darden has maintained its rent expenses at around 6-7% of its gross sales. During the 2008 financial crisis, when many restaurants struggled, Darden's adherence to this optimal rent percentage allowed it to weather the storm. Their disciplined approach to site selection and rent negotiations ensured that even during downturns, the company could remain profitable, while competitors with higher rent percentages were forced to close underperforming locations.

2. Convenience Store Example: 7-Eleven

7-Eleven, a global retail juggernaut, is another prime example of the importance of maintaining an optimal rent percentage. Historically, 7-Eleven has kept its rent at around 5-6% of gross sales. This strategy has been instrumental in the company’s ability to expand aggressively, particularly in urban areas where rent costs are typically higher. By sticking to this percentage, 7-Eleven has been able to control costs and maintain profitability even as it continues to grow its footprint. Their focus on high-traffic locations with strong sales potential ensures that rent costs remain within the optimal range, safeguarding their bottom line.

3. Restaurant Example: Starbucks

Starbucks provides an interesting case study in the impact of rent on profitability. During its rapid expansion phase in the early 2000s, Starbucks aimed to secure prime locations, often paying premium rents that exceeded the industry norm of 6-10%. At its peak, some Starbucks locations were paying up to 12-14% of gross sales in rent. While this initially fueled growth, it also led to profitability challenges, particularly in less profitable or oversaturated markets. The company had to close hundreds of underperforming stores in 2008-2009, a move largely attributed to unsustainable rent costs. This experience underscored the importance of keeping rent within the optimal range to ensure long-term profitability.

The Takeaway: Rent Discipline Equals Profit Stability

For both restaurants and convenience stores, the historical evidence is clear: maintaining rent expenses within 6-10% of gross sales is critical for sustaining profitability. This percentage range allows operators to absorb fluctuations in other operational costs without jeopardizing their financial health. While there are always exceptions to the rule, such as strategic locations where higher rent may be justified by exceptional sales potential, the general guideline remains a vital tool for ensuring long-term success.

As the foodservice industry continues to evolve, particularly in the face of rising real estate costs and changing consumer behaviors, operators must remain vigilant in managing their rent expenses. Those who do, like Darden Restaurants and 7-Eleven, will continue to thrive, while those who don’t risk the fate of early Starbucks—a cautionary tale of expansion at the expense of profitability.

In today’s competitive market, understanding and adhering to the optimal rent percentage isn’t just a best practice; it’s a necessity for any foodservice operator aiming for sustained success.

Looking for success clues of your own? Foodservice Solutions® specializes in outsourced food marketing and business development ideations. We can help you identify, quantify and qualify additional food retail segment opportunities, technology, or a new menu product segment.  Foodservice Solutions® of Tacoma WA is the global leader in the Grocerant niche visit us on our social media sites by clicking one of the following links: Facebook,  LinkedIn, or Twitter

Grocery Shoppers Want Meals, Not Menus

 

At the intersection of the question of "What's for dinner?"  and where do I get it, has become a daily challenge for millions of consumers. Steven Johnson Grocerant Guru® at Tacoma, WA based Foodservice Solutions® wants to share some new insights from a recent Deloitte report, as this question is a significant pain point for 53% of consumers, reflecting a broader shift in grocery shopping habits.

Shoppers no longer seek just ingredients or a vast menu of options—they want complete, convenient, and fresh meals ready to go. The grocery industry is at a critical juncture, and those who can successfully pivot to meet these evolving needs will find themselves on the path to growth.

The Convenience Factor: A Shift in Consumer Priorities

The Deloitte report, titled "A Fresh (Food) Take on Grocery Convenience," highlights that 52% of consumers value convenience more now than ever before. This shift is particularly pronounced among younger generations, with 61% of Gen Z and 57% of Millennials emphasizing the importance of convenience in their shopping decisions. This trend is reshaping the grocery landscape, where traditional grocers face competition not just from online grocery stores and third-party apps, but also from restaurants and dollar stores.

The key takeaway here is clear: consumers are prioritizing convenience, often over the quality or freshness of food. A staggering 82% of shoppers said that convenience guides their fresh food purchases. This preference is driving the need for grocers to rethink their strategies, particularly as 67% of consumers admit to choosing convenience over health or freshness on busy days.

Fresh Food: The Cornerstone of Grocery Growth

While convenience is paramount, fresh food remains a critical factor in consumer decision-making. Deloitte’s findings reveal that 90% of U.S. consumers believe fresh food contributes to their happiness, and two-thirds are willing to pay a premium—22% more on average—for fresh options over canned, frozen, or other alternatives. This presents a significant opportunity for grocers to differentiate themselves by offering high-quality, fresh food in convenient formats.

Grocers are aware of this opportunity, with 52% of grocery executives identifying fresh food as their most strategically important department over the next one to three years. The produce, deli, and meat departments are expected to lead this charge, providing the fresh options that consumers crave.

The New Wave of Grocery Competition

Despite the emphasis on fresh food, grocers are facing an increasingly complex competitive landscape. Traditional grocers must now contend with not just online players but also restaurants and dollar stores, which are rapidly encroaching on their territory by offering convenient, fresh food options. The Deloitte report underscores that 56% of grocers are concerned about competition from online grocery stores, while 53% are wary of third-party shopping apps. However, the real competition may come from other traditional grocers, restaurants, and dollar stores, which are often underestimated.

Grocers must also navigate emerging consumer preferences and economic pressures. As consumers’ wallets tighten, the demand for both value and convenience intensify. This trend is particularly challenging for grocers, who must balance the need to offer affordable, convenient options without compromising on the quality of fresh food that consumers are willing to pay more for.

The Role of Generative AI in Meal Planning

One of the most promising avenues for grocers to enhance convenience and boost sales is through meal planning. The Deloitte report indicates that 44% of consumers would regularly buy from a grocery store that could help them with meal planning. This is especially true for younger consumers, with 66% of Gen Z and 60% of Millennials citing meal planning as a primary pain point.

Enter Generative AI (GenAI), which is poised to revolutionize the grocery shopping experience. Eighty percent of grocery executives are optimistic about GenAI’s potential to transform their operations, with many seeing its application as a consumer assistant for meal planning as a "killer app." By leveraging GenAI, grocers can offer personalized meal planning services that not only simplify the shopping experience but also drive customer loyalty and repeat purchases.

Strategic Investments in Convenience

To stay competitive, grocers are increasingly investing in technologies and strategies that enhance convenience. According to the Deloitte report, 85% of grocers are making significant investments to increase convenience, with a focus on the pivotal moments throughout the shopping process. The biggest opportunity for boosting in-store convenience lies at the point of sale, where 73% of consumers prioritize faster checkouts, followed by more convenient store layouts and easier returns.

However, convenience isn't just about speed; it's about making the entire shopping experience seamless. Grocers that can integrate fresh food with convenience—whether through meal kits, ready-to-eat options, or efficient in-store experiences—will be best positioned to capture consumer loyalty.

Conclusion: A New Era for Grocery Shopping

The grocery industry is undergoing a profound transformation as consumers demand more convenience and fresh options. The days of overwhelming shoppers with endless menus and ingredient lists are fading. Instead, the future belongs to those grocers who can deliver complete, ready-to-eat meals that cater to time-starved consumers without compromising on quality.

As the Grocerant Guru®, I see a bright future for those grocers who embrace this shift. By focusing on "fresh convenience," leveraging technologies like GenAI for meal planning, and making strategic investments in the shopping experience, grocers can not only survive but thrive in this new era. The question isn’t just "What's for dinner?" anymore—it's "Who will provide it?" And for the grocers who get it right, the answer will lead to growth and success.

Invite Foodservice Solutions® to complete a Grocerant ScoreCard, or for product positioning or placement assistance, or call our Grocerant Guru®.  Since 1991 Foodservice Solutions® of Tacoma, WA has been the global leader in the Grocerant niche. Contact: Steve@FoodserviceSolutions.us or 253-759-7869

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McDonald’s Food Industry Leadership: A Historical Perspective on Customer-Focused Marketing and Interactive Participation

 

McDonald's has long been a trailblazer in the food industry, setting benchmarks for customer engagement through innovative marketing strategies according to Steven Johnson Grocerant Guru® at Tacoma, WA based Foodservice Solutions®. The brand’s success is not merely a result of its iconic Golden Arches or its globally recognized menu but rather its ability to evolve with consumer trends, consistently placing primary focus on customer engagement and participation. This approach is once again exemplified in its latest collaboration with the popular video game Genshin Impact, a promotion that underscores McDonald's leadership in marrying interactive marketing with customer loyalty.

The Evolution of Customer-Focused Marketing at McDonald’s

McDonald's has a rich history of integrating popular culture into its marketing efforts, ensuring that its brand remains relevant across generations. This strategy dates back to the introduction of the Happy Meal in 1979, which revolutionized the way fast food was marketed to children. The Happy Meal, with its combination of food and a toy, wasn't just a meal; it was an experience that engaged young customers and fostered brand loyalty from an early age. This idea of creating an experience rather than just selling food has been a cornerstone of McDonald’s marketing strategy ever since.

As consumer preferences evolved, so did McDonald’s marketing tactics. In the 1980s and 1990s, the brand began to focus on interactive marketing through collectible items like the Batman Forever mugs or the Ty Beanie Babies promotion. These campaigns encouraged repeat visits and leveraged the excitement of collecting, further enhancing customer participation and brand loyalty. The ability to tap into the cultural zeitgeist, whether through movies, TV shows, or games, has allowed McDonald’s to maintain its position as a leader in the food industry.

The Genshin Impact Collaboration: A New Era of Interactivity

Fast forward to today, McDonald's continues to innovate by partnering with Genshin Impact, a wildly popular anime-inspired video game. This collaboration is a perfect example of McDonald’s strategy of leveraging interactive participation to deepen customer engagement. Starting on September 17, McDonald’s app users can purchase a Genshin Impact Apple Pie, which comes in limited-edition packaging featuring characters from the game, or the Genshin Impact Deluxe McCrispy Meal. These purchases unlock exclusive in-game rewards, such as Primogems, special items, and cosmetic upgrades that enhance the gaming experience.

This campaign is not just about offering a meal; it’s about creating an integrated experience that blurs the lines between the digital and physical worlds. By tying menu items to in-game rewards, McDonald’s is effectively engaging with a younger, tech-savvy audience that value’s both the tangible and the virtual. This strategy reflects a deep understanding of the current consumer landscape, where brand loyalty is increasingly driven by experiences rather than just products.

Historical Context: The Power of Interactive Participation

McDonald’s partnership with Genshin Impact is not an isolated event but part of a broader trend in the company’s history of using interactive participation to drive customer loyalty. For example, in the early 2000s, McDonald’s launched the Monopoly game promotion, which became one of the most successful interactive marketing campaigns in the brand’s history. Customers would collect game pieces attached to food packaging, with the chance to win prizes ranging from free food to cash. This campaign was so successful that it became an annual event, drawing millions of customers to McDonald’s restaurants each year.

Another notable example is the My McDonald’s loyalty program, which was rolled out in recent years to further personalize the customer experience. By tracking customer preferences and offering personalized deals, McDonald’s has been able to create a more tailored dining experience, enhancing customer satisfaction and encouraging repeat visits.

Current Strategy: Aiming for 250 Million Loyalty Members

McDonald’s current collaboration with Genshin Impact is not just about marketing; it’s part of a strategic push to grow its loyalty program. With a goal of reaching 250 million 90-day active loyalty members by 2027, up from 150 million currently, McDonald’s is leveraging mobile-only incentives to drive app downloads and usage. By offering exclusive rewards through the McDonald’s app, the brand is effectively creating a new digital touchpoint for customer interaction, further solidifying its position as a leader in customer-focused marketing.

The recent Genshin Impact promotion follows a series of successful collaborations, including one with the anime series Jujutsu Kaisen, which featured special sauces and packaging. These campaigns demonstrate McDonald’s ability to stay ahead of the curve by continuously adapting its marketing strategies to resonate with current consumer interests.

The Future of McDonald’s Customer Engagement

As McDonald’s continues to innovate in the realm of customer engagement, the focus on interactive marketing and customer participation will likely remain central to its strategy. The brand’s ability to seamlessly integrate physical and digital experiences, as seen in the Genshin Impact collaboration, positions it well for continued success in an increasingly digital world.

Think about this, McDonald’s has consistently demonstrated leadership in the food industry by placing a primary focus on customer engagement and participation. From the early days of the Happy Meal to today’s mobile app promotions, the brand has evolved with the times, ensuring that it remains relevant to each new generation of customers. As the Grocerant Guru®, it’s clear that McDonald’s will continue to set the standard for customer-focused marketing in the food industry for years to come.

Success does leave clues. One clue that time and time again continues to resurface is “the consumer is dynamic not static”.  Regular readers of this blog know that is the common refrain of Steven Johnson, Grocerant Guru® at Tacoma, WA based Foodservice Solutions®.  Our Grocerant Guru® can help your company edify your brand with relevance.  Call 253-759-7869 for more information.