The manager of a nearby suburban value restaurant told me yesterday how he responded to higher costs.
It was somewhat different from Chipotle.
My Local Restaurant
Because of skyrocketing costs, a local NJ restaurant (I was asked not to name it) took steak off the menu and now has such high chicken prices that they can no longer serve wings. Meanwhile, the work-at-home crowd cut their lunch and happy hour traffic. The only good news was his locked in price for hambuirger meat. Continuing, the manager explained to me that family dinners were a big worry. Too big a bump in the check for a family of four could stop them from reurning. After all, just $3 for one meal is $12 for everyone. To offset this attack on all of his margins, he added a three percent surcharge on any credit card transaction. Because diners had the option of paying cash, they did not seem to mind the amount that could be added to the bill.
The Big Picture
WSJ tells us that Chipotle Mexican Grill raised its prices throughout 2022 with little pushback from customers. Up by about 13 percent last year, and 20 percent since 2020, Chipotle’s hikes outpaced McDonald’s 9 percent for the year and 14 percent for two years. However, NRN (Nation’s Restaurant News) reported that Chipotle’s lower income customers made fewer visits. Still though, Chipotle’s CEO said that after they lost the lower income diner during the 2007-2009 Great Recession, that business later returned. But also, during tough times, higher income customers traded into their business.
Our Bottom Line: Elasticity
An economist would explain that the rersponse to rising restaurant prices reflects customer elasticity. Defined as our reaction to a pice hike, when we have a massive response to a relatively small price rise, our demand is elastic. On the other hand, a minor change in the quantity we demand implies inelastic demand. Typically demand for luxuries is elastic while for medication it is inelastic.
With restaurant prices, we see bifurgated elasticity. Chipotle’s higher income clientele is more elastic than their lower income customers. As for my local restaurant, don’t they seem to have a more elastic ciustomer?
My sources and more: Randomly sitting next to the manager of a local restaurant, I had the oppostunity to ask some questions. The asnwers becamse my inspiration and a source of today’s facts. Then, I checked WSJ and NRN for more. And finally, we looked back at a past post that said less bread was a cost solution.