Why your restaurant meal now costs more

For the fortunate of us in areas where the pandemic and lockdowns have eased and hospitality venues have reopened, restaurant dining has rekindled the joys of being out of the home and being served good food in good company. But take a look at most menu prices, and you quickly will realize that the cost of your meal likely has risen, sometimes by double digit percentages.

What accounts for this inflated cost of dining out? Several recent factors weigh into the higher amounts you may be seeing on your last restaurant bill and likely your next bill as well.

Food prices have risen during the pandemic and will remain high in the near term as demand has increased and food supply chains have struggled to keep pace. For example, in the U.S., the prices of beef and veal were up over 3% between April 2021 and April 2020. Pork prices rose almost 5%, and poultry prices about 1%, during that same period. Yet these general increases mask greater inflationary pressure when focusing on the higher-value cuts that tend to find their way onto restaurant dishes. For example, the cost of beef lion primals has jumped by 86% in the past year, and chicken breast prices have risen by 132%.

These increases in food prices are the highest on record since the 2008 global financial crisis. Restauranteur and producers have noted that higher feed costs, such as for corn and grains, partially account for these price rises. As does uncertainty in some areas. Many local farmers who were unsure earlier in the year as to whether restaurants would reopen planted less in order to minimize potential losses. As a result, crop prices have risen as demand now outweighs supply.

To counteract the higher costs of many restaurant dishes, some restauranteurs are relying on substitutions (such as chicken instead of pork) to limit price increases. In some cases, portion sizes also have decreased slightly. But even these changes have minimal impact on the increased costs of items such as cooking oils, which are up by 100% over the last year, or the ever more vital need for gloves to handle and serve food, which now cost 300% more than they did last year. Moreover, higher food and materials prices are not the only reason we are seeing higher restaurant bills.

Labor costs have increased significantly in almost all aspects of the restaurant industry. Wait staff in particular have had to weigh the opportunity costs of returning to work or continuing to collect unemployment, as well as the increased risk (or perception thereof) of Covid infection by being in close contact with restaurant customers and other employees. As a result, many restaurant servers have opted not to return to work or demand higher wages for their efforts. These increased labor costs then largely are borne by the customers as higher menu prices. Indeed, many restauranteurs have blamed the labor shortage and wage inflation as the primary reason for increasing menu prices, in some cases over 20% from the prior year.

Interestingly, restaurant meal prices have not increased uniformly. Recent data shows that fast food prices have increased at twice the inflationary rate of full-service restaurants. This pricing differential largely can be attributed to higher demand for fast food. Despite the overall increase in food and labor pricing, full-service restaurants appear less reluctant to pass on the full increased cost of food and wages to their customers, perhaps fearing that customers will choose to remain and cook at home. Fast food restaurants, in contrast, benefited tremendously from delivery, takeout, and drive-through services throughout the pandemic and realized that they could both increase prices and grow their customer base.

Fast food restaurants also appear to have had greater difficulty in recruiting and maintaining servers and staff, who usually do not rely on tips to supplement their salaries, and were compelled to increase hourly wage rates. Further, many fast food and chain restaurants relied on third-party delivery services during the pandemic and raised their base prices to account for those delivery costs.

On the positive side, many restauranteurs have noted that customers, many of whom managed to save money eating at home during the pandemic, are eager to return to the dining out experience and grudgingly have accepted the increase in restaurant prices. As the food supply chain also overcomes backlogs and plans around higher costs and increased demand, many economists believe that some of the inflationary pressures being experienced in the food industry will prove to be transitory and more manageable.

And restaurant customers themselves may prove to be the greatest cause for optimism. In a study conducted in the U.S., over 25% of all Americans intend to increase their spending at restaurants and bars in the second half of 2021. For that reason, many investors are pouring additional capital into restaurant stocks, particularly in the fast-food sector, which have seen share prices grow in some cases by more than 90% (Shake Shack: SHAK) or close to 70% (Jack in the Box: JACK) in the last year.

So while food prices and restaurant bills are increasing, so too is the appetite to dine out and invest. Not all bad. And while higher menu costs can be upsetting, remember that your server still deserves the appropriate gratuity. After all, he/she/they showed up to help ensure that your memories of dining out could once again become a reality.

Danilo Diazgranados is an investor, collector, and lover of fine wines and a member of the prestigious Confrérie des Chevaliers du Tastevin, a fraternity of Burgundy wine enthusiasts.

Investor in and lover of fine wine and restaurants.