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Restaurant pricing - death spiral

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Does anyone know of information available that shows what the correlation of raising menu prices vs lost sales is? What I mean is lets say your business drops off 10% and you need to raise prices to cover your fixed overhead. If you raise prices 10% to makeup for the lost business how many fewer customers will come in because of the increased prices. At some point you have to raise prices to the level where you have priced yourself out of business.

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  1. Raising prices is one way to recoup the lost income, but so is laying off staff, using cheaper ingredients, etc. Or are you just trying to solve a hypothetical math problem?

    1. Your example is far too simplistic. You are assuming that all price increases actually cause loss of sales & that there is no other cause for loss of business. Raising prices isn't the only way to increase revenue to cover fixed overhead, but it is the laziest, IMO.

      Would love to hear what has prompted this question!

      1. You're essentially asking about the price elasticity of restaurant prices.

        There are numerous studies done on this in the economics field. There is not a simple answer to your question as it is too broad. The price elasticity of restaurant prices will vary across different types of restaurants.

        For example, the prices for high-end restaurants like Per Se are probably very inelastic -- i.e., increases in prices will show little in decreased sales.

        On the other hand, prices for fast-food like McDonald's will generally be very elastic -- i.e., even a small increase in price of a Big Mac will probably result in a significant decrease in sales because there are so many comparable substitutes (e.g. Wendy's, In-N-Out, Burger King, etc.)

        2 Replies
        1. re: ipsedixit

          "On the other hand, prices for fast-food like McDonald's will generally be very elastic -- i.e., even a small increase in price of a Big Mac will probably result in a significant decrease in sales because there are so many comparable substitutes (e.g. Wendy's, In-N-Out, Burger King, etc.)"

          Spot on! Here in Toronto, both BK and Wendy's offer $3.99 combos - sandwich, drink, and side (salad in my case). McD's used to, but stopped; now, even if you buy off their "value menu" (which is $1.39 for a double cheeseburger, $1.39 for small fries, etc.), you can't get a meal for less than $4, at which point the provincial sales tax also kicks in, so you end up paying about 10-15% more for a tiny McD meal, whereas at BK, your sandwich (varies by day) will be a Whopper, Big King, or other full sized sandwich. Result? Haven't eaten in McD's in months.

          1. re: KevinB

            ""Haven't eaten in McD's in months.""

            As far as "my money", Summer 1982 or 26 years and ~6 months.

        2. This was on the front page of our Houston paper yesterday. It isn't about pricing, per se, but still interesting:

          http://www.chron.com/disp/story.mpl/h...

          The upscale aren't suffering and the fast food aren't either. It's the mid tier places.

          6 Replies
          1. re: danhole

            ""The upscale aren't suffering and the fast food aren't either. It's the mid tier places.""

            Generally it is the Mom and Pop "like" places that is stuck in the middle. They are also the ones that would generally sell can sodas vs the more efficient fountain mixing machines. Increases in food costs literally blindsides them in such a menu setting, when that signature soup ends up costing more per spoon full, if they are not on their toes. Change is a killer for these folks.

            1. re: RShea78

              And, it will be this segment, that most of us on this board will miss, when it is only Morton's at the top and Applebee's at the bottom. I've personally seen the demise, and that was when "times were good."

              Maybe all of us will stop singing, "ABC," anything but chains. From a very personal point, I hope not, and will do all that I can with my AMEX, or whatever, to insure that the local restauranteurs survive.

              Good luck to the mom-n-pops,

              Hunt

            2. re: danhole

              My friend tried to open a McDonald's because it's relatively recession proof. When time are good, lower income people go more because they can afford it. When times are bad, the midle income people go, for a chance to eat out, fairly inexpensively. It's probably one reason why mid-tier places are hurt the most, at least initially. When the economy tanks, it eventually hits everyone including high end places.

              1. re: chowser

                What really scares me about the words "relatively recession proof" is that in my little town both Burger King and Pizza Hut have gone out of business in the last two years. There were two factory closings which crippled the local economy, which was not that healthy anyway. Lots of unemployment, lots of educated or skilled people vying for minimum wage jobs... scary times. I'm holding my breath to see if our MacDonald's can last out the current economic troubles...

              2. re: danhole

                Danhole,

                The link is now dead. I was interested in reading it, as most of our dining is in the upscale, higher-end restaurants.

                Hunt

                1. re: Bill Hunt

                  Bill, I will try to find it in the archives for you.

                  Dani

              3. When McDonalds' sales took a dive in the 70's, they opted to both raise prices and increase portions, effectively operating at the same gross profit while increasing cost of goods sold. It saved the company and "supersize it" was born. Other than that, I'm not really familiar with restaurants raising prices while sales are down - seems like the kiss of death unless you can do it with great creativity.

                1 Reply
                1. re: almansa

                  Thing is that M'Ds and the Fast Food Industry as a whole, relies heavily on the starch and drink profits. They would be doomed in less than a week, if the entire world wised up to this fact, and ordered burgers, sandwiches, or entrees only.

                2. I have not, but have wondered about it.

                  With very general observations, I see restaurant traffic down a bit, in the places that we dine. I have not noticed a change, plus, or minus, on the menu items. Maybe it's still early.

                  I would not want to be a restauranteur (or a CEO for a major US auto manufacturer) right now. I would attempt to hold my line of quality and also on my prices. I'd take less in my personal payroll, and hope that my banker was in the mood to work with me.

                  One area of particular interest to me, will be on wine prices at restaurants. Much discussion has preceeded on the CH Wine Board. Some years back, an industry group did a survey on wine pricing. The result, as I recall, was that restaurants that had lower markups on wines, served more wine. The upshot was that they ended up making more profit, in the end. I have searched for, and pleaded for, this report, but have yet to locate it. Should not have lost the bookmark, when I changed laptops. This will be an interesting aspect of the state of restaurants and the economy. I cannot imagine many diners doing a vertical of DRC's right now - unless they work for AIG.

                  Hunt

                  1. I was at the Wynn in Las Vegas yesterday. (Yes, I drove there and back just to eat lunch). There were more than 100 people waiting in line for the $40 lunch buffet at 1 p.m.(about double the usual price- all Thanksgiving week the menu is higher). Every place was crowded with gamblers as well as people eating. Families with children and singles, visitors and locals.

                    People choose how to spend and save. Restaurants can price themselves high or low and will just get a different crowd.

                    4 Replies
                    1. re: Cathy

                      Interesting observation from the "trenches." While the info was more on the lodging, than the food, all I have been hearing is how "down" everything is in Las Vegas. Apparantly, only *some* things are down.

                      Thanks,

                      Hunt

                      1. re: Bill Hunt

                        You're welcome, Mr. H-

                        I will be going to the National Finals Rodeo next week, staying for two nights. We usually stay at Green Valley Ranch, a resort-ish/luxury-ish place off the strip in Henderson. It is sold out for the nights we wanted. All price levels. Least expensive room was $130 for the days we wanted. Last year least expensive was $140.

                        The food at GVR is excellent, by the way. I always get the European breakfast and the breads, croissants and pastries are fresh made and *really* good.

                        1. re: Cathy

                          Have a good time Sorry that GVR was sold out. We had a lovely meal at their Italian restaurant (forget the name now, but it's in my review) and then a marvelous meal at Todd's Unique not too far away.

                          Please report, when you return.

                          Hunt

                      2. re: Cathy

                        About two weeks ago, we went to Moonstar in Daly City - it's an Asian buffet in the higher price range in a suburb of San Francisco, and the place was packed with people eating and people waiting to get in. It was probably about 5:45, although a weekend, but I guess I wasn't expecting people to just throw in $30/pp in our economic time.

                      3. Just did an "up-n-coming" local spot. It's in the upper-middle range, price-wise ($600 for a party of five with a lot of nice wines). It was packed, though the "season" HAS started in PHX and they did just get a good review by the local food critic. I asked the owner about business and he said that it had slowed a bit, just as the "season" began. Then the piece in the newspaper hit, and they have had every chair filled since then.

                        Though this does not address the long-haul and also has to have the featurette weighed in, it seems that some places are not being hit as hard as others.

                        In general terms, it does seem that the resort businesss here (PHX) is down, but I have yet to see it in the restaurants, that we visit.

                        Time, and any changes in the economy, will tell.

                        Hunt

                        2 Replies
                        1. re: Bill Hunt

                          Bill, here is a link to that article I referenced above, about restaurants in Houston.

                          http://www.hotel-online.com/News/2008...

                          Dani

                          1. re: danhole

                            Danhole,

                            Thanks for that link. Interesting reading. Since I'm not in the business, I can only get an idea of what is happening by talking to the restauranteur, observing (looks CAN be deceiving) and reading various business journals. However the latter can be frought with problems too. Locally, it is hard to get any kind of straight data. PR puff-pieces are often veiled as economic/business reports. All it takes to get a lot of "business" ink, is to have some sensational aspect to the story. Here, it's often a Paris Hilton sighting, and it's masked as business news. Oh well.

                            We were just in San Antonio and it appeared that everything along the Riverwalk was filled. The restaurants there, as you know, run the gamut. Only place that seemed to be hurting was one of the two very high-end spots, where we dined. Still, when I walked past them on other occasions, the crowds seemed to be there - guess we hit them on a off night?

                            Thanks,

                            Hunt