How Restaurants Can Increase Value Despite Inflation

The environment for limited-service restaurant operators is shifting fast. There are indications that restaurants are starting to emerge from the inflationary period that put so much pressure on wages and commodity costs. Consumers absorbed recent price increases and are still showing a healthy interest in eating out, especially at limited-service restaurants. While restaurant trends come and go, one thing that is always top of mind is how inflation impacts restaurant overhead costs, and in turn, how they can continue to provide value to customers.

Yet, inflation is still higher than the Federal Reserve would like it to be. That may continue to affect consumer spending, especially as surplus savings run out and fears of recession remain. It may also mean less opportunity for restaurant operators to increase prices. After all, customer and retail trends vary from season to season.

Another factor restaurants need to watch closely is the changing ratio between the price of grocery store food and the cost of eating out. Last year, grocery store prices were rising significantly faster than limited-service menu items, helping fuel consumer choice. As of July 2023, however, limited-service restaurants are charging 7.1% more than last year compared to the 3.6% average grocery price increase, according to the U.S. Bureau of Labor Statistics.

In this improving but still challenging environment, limited-service restaurants need to focus on ways to provide consumer value well beyond price. "That’s what can really drive traffic and sales," said Craig Wolf, Group Head for Consumer and Retail Corporate Banking at Fifth Third Bank.

Leading restaurant chains are redefining value to attract consumers in innovative ways. They are offering creative menu and service options that draw consumers away from the competition, while making sure to keep costs in line.

"Coming up with creative, ‘craveable’ products and providing a great guest experience are some of the best ways to drive repeat traffic and increase sales," said Jeff Poe, Managing Director, Head of Restaurant and Franchise Corporate Banking at Fifth Third Bank. For example, Taco Bell reintroduced its Beefy Crunch Burrito that had been a hit five years earlier after conducting a customer survey about which items people would like to have brought back to the menu. "Taco Bell created an experience and buzz around these products," said Poe. "Price wasn’t the first consideration. Consumers wanted it and would pay for it."

Sometimes price cutting and innovation go hand in hand. This summer Wendy’s announced a BOGO for $1 deal to boost sales for many of its menu favorites. When customers bought a Dave’s Single, Spicy Chicken Sandwich, 10-piece Chicken Nuggets, or a Medium Frosty, they could grab a second one for a dollar. In addition, the recent launch of the Ghost Pepper Ranch Chicken Sandwich and the reintroduction of the Strawberry Frosty helped fuel a second-quarter increase in same-store sales.

Digital Presence

Value doesn’t just mean price or "craveable" products. Consumers put a premium on convenience, too. Limited-service restaurants wrote the book on convenience, and the industry continues to propel this concept with in-store kiosks, mobile apps that fuel drive-through and curbside pickup, drive-through lanes and pickup windows dedicated to mobile orders only, and app-driven loyalty programs designed to attract repeat customers.

Panera Bread’s MyPanera loyalty program, for example, boasts 53 million members. The fast-casual chain also maintains a successful "free for a fee" program in which members pay $11.99 a month for unlimited coffees and self-serve drinks. These paid programs can provide restaurants with a reliable revenue stream and increased customer loyalty, which in turn provides the benefit of attachment and a trail of other menu items.

Panera has long been established in digital ordering. Its app, website, and kiosk orders account for more than 50% of sales. In May, Panera announced the rollout of nationwide drive-through service with an emphasis on mobile orders.

Starbucks is a leader in mobile apps. After the pandemic made lingering in-store out of the question, the company decided to move away from physical ambience in favor of digital drive-through and pickup business. The results seem to be paying off. Starbucks’ same-store sales for the third quarter ended July 2, 2023, increased 10% globally and 7% in North America.

Reliable, easy-to-use apps with plenty of rewards for online customers are the key to success for both companies. It’s important to remember that app downloads drive sales but also provide information that can help fuel future promotions and marketing campaigns. The leading companies combine the two best practices.

Balancing Operating Costs With Value to the Consumer

Even when a new menu favorite is achieved, limited-service restaurant operators need to think about the costs involved, including ingredients, labor, and marketing. "You want to hit that sweet spot that balances consumer cravings and profitability," Poe said.

Poe noted that one reason Taco Bell was successful with its Mexican Pizza offering was that the chain used many of the same ingredients it employs for almost all of its other products. Reimagining products using staples already efficiently sourced is a good way to balance new product introductions and profitability.

Franchisee Participation

If you’re a franchisee, make sure you have a voice with your franchisor, no matter what size your business represents. How are promotions working for you and your consumer community? What’s driving traffic and profits, and what are the loss leaders? You’re on the front lines so you can help your franchisor make sure its marketing, promotion, and new product efforts are profitable for you and appealing for all consumers.

The limited-service restaurant market is constantly evolving. Owners and operators must find a balance between economics, tastes, and service to provide the best value to meet consumers exactly where they are right now.

Fifth Third Bank’s restaurant industry specialists understand your business challenges and provide experience in the areas of credit, debt capital markets, investment banking, treasury management, and currency processing solutions to help you achieve your operational and strategic financing objectives. For all restaurant banking needs, contact Jeff Poe at 312-517-3256. Learn more about our Consumer & Retail Banking services.