Michael Bacerott was thinking about heading to Shake Shack for lunch on Wednesday. He decided to go to the McDonald’s at Lake and LaSalle streets instead for a simple reason: it’s cheaper.
Bacerott, who lives in South Hammond, Indiana, and works as a clerk in the Loop, has started making adjustments to his dining-out routine. When he goes in to work these days, he’s more likely to bring his lunch from home.
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“If I do go out, I go out to more cheaper restaurants, like McDonald’s and what not,” said Bacerott, who has three children, including an 11-month-old.
“Life’s not as comfortable as it used to be,” he said.
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Over the last several months, Chicagoans have been dealing with soaring food costs as inflation hit 40-year highs. To combat inflation, the Federal Reserve has raised interest rates four times since March. Interest rate hikes are the only tool the Fed has to tamp inflation down, but doing so diminishes access to credit, raising fears of possible recession, though experts have said the economy isn’t there quite yet.
Some relief from high inflation came in July, when the Consumer Price Index rose 8.5% over the same month last year, dropping from a 9.1% year-over-year increase in June, according to the Bureau of Labor Statistics. Gas prices and airfare fell, but food and rent prices continued to rise. The cost of food eaten away from home, including at restaurants, rose 7.6% over July of last year.
People like Bacerott are responding to high prices by trading down: subbing their lunchtime Shake Shack for McDonald’s, trading sit-down dining for fast-casual meals at Chipotle or Panera or simply eating at home more often. When they do go out to eat, they’re sometimes choosing cheaper items off the menu.
Doug Collins, 28, said on his way into McDonald’s on Wednesday that a year ago, he probably would have been sitting down for lunch in the Loop. These days, he’s trying to eat out less often and is choosing cheaper restaurants when he does.
Collins, who lives in Wicker Park and works in sales, said he’d noticed even his McDonald’s double cheeseburger get more expensive. It costs him about $2.99 now, which he estimates is about a dollar more than it did a year ago. “It’s just like everything’s a little bit more expensive now,” Collins said.
Over the last three months, 57% of people surveyed by the Chicago-based food industry market research firm Datassential said they’d cut back on restaurant spending because of inflation and higher prices. Fifty-six percent said they were visiting sit-down restaurants less often; half said they were cutting back on fast-food visits.
People who make less than $45,000 in household income and have kids are pulling back on restaurant spending the most, said David Portalatin, senior vice president and food industry adviser for the NPD Group. In the second quarter, consumers in that group visited restaurants almost two dozen fewer times than they did in the same quarter last year, he said.
Meanwhile, people who make more than $45,000 and don’t have kids increased their visits to restaurants slightly, adding three extra visits on average. “It’s really hitting families with kids,” Portalatin said.
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McDonald’s CFO Kevin Ozan said in a late July earnings call the Chicago-based burger chain had noticed consumers trading down. In particular, Ozan said, lower-income consumers were choosing value offerings more often and eating fewer combo meals.
Yum! Brands, which owns fast-food brands including Taco Bell, Kentucky Fried Chicken and Pizza Hut, has also seen lower-income consumers pulling back, CEO David Gibbs said in an Aug. 3 earnings call. So has Shake Shack, according to CFO Katherine Fogerty.
Food industry executives have tried to assure investors that aspects of their businesses will insulate them from the worst effects of inflation.
After pointing out that he’d started at the company during the Great Recession, Domino’s CEO Russell Weiner suggested potential benefit from trade-downs. “This is a category where for folks who want to continue to eat out when times are tough, they will maybe down switch from a sit-down or what have you, into pizza,” he told investors last month.
“The low-income consumer definitely has pulled back their purchase frequency. Fortunately for Chipotle, that is not the majority of our customers,” CEO Brian Niccol said in a July 26 earnings call. Niccol told investors that higher-income consumers had increased their visits to Chipotle restaurants, potentially trading down from pricier spots.
Mark Brandau, group manager at Datassential, said Niccol probably has a point — but fast-casual companies like Chipotle, which planned to increase prices 4% this month to help offset higher dairy, tortilla, packaging and labor costs, aren’t immune from consumers’ sticker shock.
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“They’re not without the risk of some of their customers trading down to a fast-food restaurant,” Brandau said. “Just like how fast-food executives aren’t immune to this either, and they may lose some customers to a convenience store or just to not going out at all.”
Food companies and restaurant owners are trying to strike a delicate balance: They need to increase prices because their costs are up, but they don’t want to raise them so high they start alienating customers. At quick service restaurants, menu items have increased about 7% on average, Portalatin said.
“When you raise your price, guests don’t eat more,” said Guy Hollis, who owns and operates 10 Culver’s, most of which are in the Chicago area.
Like all restaurant operators, Hollis is dealing with more expensive materials, from meat to paper goods to bread products such as buns. Labor is more expensive now, too. And Hollis hasn’t increased prices at pace with inflation, which means his margins are smaller than they once were.
He’s raised prices at his Culver’s between 5% and 6% since the beginning of the year. That means that a burger that used to cost $6 or $7 is now costing customers about 35 or 40 cents more.
In a statement, Culver’s vice president of supply chain, Dan Gorsky, said the company’s sales nationally had “softened” but “continue to be very strong for the (quick-service restaurant) industry — especially considering many brands are struggling to maintain traffic.”
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Portillo’s has also taken the strategy of increasing prices below inflation. In the second quarter, the company reported “unprecedented commodity inflation,” especially for meat products such as chicken, pork and beef.
The Oak Brook-based beef and hot dog chain has increased menu prices on certain items by about 5% since January after raising them 3% last fall; the company also raised wages at the beginning of the third quarter. Executives said lagging behind inflation in price increases was the right call.
“We think that we’re getting some trade-down customers and that our value proposition is really resonating with consumers right now,” CEO Michael Osanloo said in an earnings call last week.
“It’s a smart strategy if you have the leeway to hold your pricing power by that much,” Brandau said. “Portillo’s has such high restaurant volumes that they may have a little bit more leeway than others. It’s kind of harder, I think, if you’re an independent restaurant.”
At the family-owned Superdawg Drive-In, owners Lisa and Don Drucker haven’t raised prices this year. A Superdawg with fries goes for $7.25 at the drive-in’s Wheeling and Norwood Park East locations, the same amount the meal has cost customers since last fall. The Druckers haven’t yet seen customers pulling back from visits.
But they know that in an industry operating on such thin margins, they’ll have to raise prices eventually. Their costs are up across the board, from the shortening used to fry potatoes, which has more than doubled in price, Don Drucker said, to paper goods, hot dog buns and especially labor.
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“Our employees have to earn more because their costs are more,” Lisa Drucker said.
“We struggle when we have to raise prices,” she said. “It is a gut-wrenching, hand-wringing experience. We don’t want to.”