MW Dining out is increasingly a domain of the wealthy. Restaurants are feeling it.
By Zoe Han
High-income people continue to dine in restaurants, while others are cutting back
A previous version of this report inaccurately characterized the cost of a meal at the Capital Grille. It has been corrected.
What's for dinner? For an increasing number of Americans, especially households making less than $150,000 a year, the answer doesn't involve going to a restaurant. And when people do go out to eat, they are spending less money.
Battered by higher-than-normal food prices, some consumers are pulling back on their spending - and restaurants are feeling the effects.
Dine Brands Global Inc. (DIN), the owner of the pancake chain IHOP and restaurant chain Applebee's, said in its earnings call Wednesday that fewer consumers earning $50,000 a year and below visited its restaurants in the past quarter. Even when they do, they are "more aggressively" managing the amount they spend, Dine Brands CEO John Peyton told investors.
Although some higher-income guests have traded down to eat at the company's cheaper restaurants, behavioral changes are most pronounced among lower-income consumers, he said. "[T]he most impactful change in consumer behavior is clearly the $50,000 and below segment," Peyton said on the call. Dine Brands Global did not immediately respond to MarketWatch's request for comment.
While lower-income Americans are dining out less - even at fast-food restaurants - higher-income Americans are dining out more.
Also read: Financial experts told consumers to stop 'wasting' money eating out. They're finally listening - and companies are rattled.
Darden Restaurants $(DRI)$, the owner of Olive Garden and the Capital Grille, said on a March earnings call that visits from diners earning more than $150,000 a year were higher during its last quarter than they were at the same time the previous year, while visits from diners with an annual income below $75,000 declined "at every brand," said Ricardo Cardenas, president and chief executive officer of Darden Restaurants. The shift was most pronounced in Darden's fine-dining segment, he said.
In fact, nationally, only diners from households earning over $200,000 a year spent money in restaurants more often in 2023 than they did in 2019, according to Circana data. Diners from families earning below $45,000 with kids pulled back on their restaurant spending the most, Circana found.
To be sure, people are still dining out, but the accumulated financial pressures from the past four years are hitting them, said David Portalatin, food industry analyst and senior vice president at Circana.
"In 2024, inflation is the dominant narrative," he told MarketWatch. That's part of the reason lower-income families with kids are trimming their spending the most. When you need to feed a family of four, "there's a little sticker shock at the end of the meal," Portalatin said.
There are two main types of consumers spending at restaurants at the moment, he said. One is looking for an experience for special occasions, where they can share food and enjoy a good time with friends and family. The other is looking for convenience at a lower price point, he said.
Diners are ordering fewer and smaller meals
Menu prices are rising faster than grocery prices. Prices for "food away from home," or restaurant food, were up 4.2% in March from the same month a year earlier, according to the most recent data from the Bureau of Labor Statistics. Grocery inflation, in comparison, was 1.2% in March year over year.
Because dining out is a splurge for many consumers, it's often the first thing to go when people want to trim their budgets. Although inflation has eased, 42% of Americans surveyed by the Bank of America $(BAC.SI)$ Institute in November said they planned to pull back their spending on dining out and takeout in 2024.
The average cost of a meal out at a fine-dining restaurant was $47.73 per person in 2023, up from $41.18 in 2019, according to Circana. At the Capital Grille, that's roughly enough to cover one entree plus a 20% tip, according to the restaurant's online menu.
But even eating at fast-food restaurants is becoming more expensive. The average price of a meal at a fast-food restaurant increased from $5.93 in 2019 to $7.63 in 2023. Eating at a casual restaurant cost $16.53 per person on average in 2023, up from $13.73 in 2019.
Darden Restaurants diners have been ordering fewer items in addition to their main entree compared with the same time a year ago, including fewer alcoholic drinks, the company said in its second-quarter earnings call. That's true for takeout, too: Papa John's $(PZZA)$ said Thursday that while people bought more pizza in the past quarter, they did not buy sides and beverages as much. Papa John's and Darden declined to comment further.
Diners are cutting back in other ways, too. On its most recent quarterly earnings call, Darden said diners older than 65 were increasingly shifting to going out for lunch, which usually costs less, instead of dinner.
Restaurant workers' wages are rising, but diners are having a hard time swallowing that change
Rising labor costs are one of the factors behind increasing menu prices, said Circana's Portalatin.
In addition to the ongoing effects of labor shortages in the past few years, new minimum wage laws, including California's law setting a $20-an-hour minimum wage for fast-food workers, will further raise costs for restaurants, he said. Those cost increases could be passed on to diners, he added.
Read: Yes, that Big Mac meal may cost $18 - but there's one good reason for it
The wage increases for restaurant workers come as wage growth for the country's lowest-paid workers has outpaced wage increases for other groups over the past four years. Advocates have celebrated these gains as a win for low-wage workers - who, in some states, still make the $7.25-an-hour federal minimum wage.
It's a good thing that restaurant workers are earning more, but some diners, especially lower-income ones, are having a hard time adjusting to the increased prices that come with higher wages, said Allison Schrager, a columnist and an economist at the conservative-leaning nonprofit think tank Manhattan Institute.
"One thing that was great about cheap services is that even lower-income people got to enjoy them," Schrager said. "They got to go to restaurants too."
-Zoe Han
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May 14, 2024 15:06 ET (19:06 GMT)
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