Menu Prices Outpace Grocery Inflation in September

Restaurant menu prices rose 3.5% over the past year while grocery prices climbed just 1.8%, according to Fox Business, which reported on the September consumer price index released Oct. 14.

Overall inflation rose 0.6% in September, bringing the annual rate to 3.7%, above the 3.6% economists had forecast. Gasoline prices jumped 9.1% from August and accounted for more than half of the monthly increase. Excluding food and energy, prices rose 2.6% over the past year.

The commodity picture for operators was mixed. Beef and veal prices fell 1% in September, though they remain 3.5% higher than a year ago. Coffee moved the other way, rising 0.9% for the month and 7.1% from last year. Egg prices are down more than 20% year over year as supply recovers from avian flu.

According to Restaurant Business, limited-service menu prices were up 3.2% from a year earlier, compared with a 3.8% increase at full-service restaurants. Average hourly wages rose 3% over that period, meaning restaurant prices increased faster than wages.

That gap is already showing up at the counter. Quick-service sales rose just 0.6% in the third quarter as traffic fell 2.6%, according to Revenue Management Solutions data cited by Restaurant Business.

The September inflation report also changed expectations for the Federal Reserve's next move. Ahead of its Oct. 27-28 meeting, market expectations for another quarter-point rate hike rose after the release, though a hike was far from certain.

Restaurants are charging more, but fewer customers are coming through the door. Another round of menu price increases could help cover higher costs, but it may also give customers another reason to skip eating out.

Higher borrowing costs could also complicate franchise purchases. SBA 7(a) loans are one financing option for franchise buyers, and variable-rate loans can become more expensive when their benchmark rates rise. Buyers evaluating an opportunity may need to account for higher debt payments, depending on their loan terms.

Lower beef prices offer some relief to burger and sandwich operators, though beef remains more expensive than a year ago. For franchise candidates, the bigger question is whether a restaurant can maintain its margins without relying on another round of menu price increases. Franchisors should be prepared to explain how food costs, labor, pricing and other operating expenses affect a franchisee's bottom line.