Why Restaurants Have Been Holding Back on Hiking Menu Prices

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As food prices rise, the cost of dining out inevitably inches up as well, right? Well, maybe not.

Over the last year, and for many years really, consumers have heard plenty about rising food prices. Grocery prices were rising well before the summer of 2012 drought, and conditions are in place to push prices for meat and dairy up by another 4% or 5% in the year ahead.

Restaurants naturally react to rising food prices by passing along these costs to customers, in the form of a higher-priced menu. This has been the case at high-end steakhouses, for the most part. But by at least one account, menu price hikes haven’t taken place to the extent one might expect lately.

In a new survey compiled by SpenDifference, a food supply company that focuses on saving restaurants money as its bread and butter, chain restaurant executives reported being very reluctant to raise menu prices last year. More than one-quarter (26%) said that price increases were tiny or nonexistent in 2012, compared to 14% the year before. While the food costs encountered by restaurants for food rose by roughly 1.7% in 2012, and beef and dairy prices increased by as much as 5%, restaurant executives stated that as of November, menu prices had only inched up 1.2%, on average.

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The reason why restaurants didn’t hike prices higher is simple: doing so would likely scare today’s extremely price-conscious customers away. “[Restaurant chains] were taking modest increases, recognizing they weren’t as great as inflation, but their bigger concern was traffic,” SpenDifference executive Brad Moore told the trade publication Nation’s Restaurant News.

In fact, instead of simply jacking up prices, many chains have showed renewed interest in items at the lower end of the menu pricing spectrum. Last month, McDonald’s revamped its dollar menu after experiencing an unusually slow period for sales in the fall. More recently, Wendy’s expanded its value offerings with a new tier of under-$2 items in addition to classics that go for 99¢.

After weak earnings reports, Darden Restaurants, which operates brands such as Olive Garden and Red Lobster, is ramping up discounts to draw in customers, according to the Orlando Sentinel:

“We have not responded aggressively enough or effectively enough to address the need so many guests have for affordability right now,” Chief Operating Officer Drew Madsen told analysts in a conference call. “We’ve been a little too protective of brand image, guest satisfaction and [profit] margin and as result have not been sufficiently competitive.”

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Because restaurants can’t simply “eat” higher food costs month after month, they’re tweaking menus strategically and focusing on items that yield higher profits. Bite-size snacks are hot in particular, as are items featuring chicken, which is considerably cheaper than beef for restaurants—and therefore diners as well—to afford.

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