The average American spends over $900 a year on eating out for lunch -- and that's just the one meal out of three per day. Dining out is cutting into your wallet, and it all comes down to an increase in the cost of raw materials, a shift in the market from fast food to fast casual, and companies' heavy reliance on brand value.
Some businesses have taken it on the chin, keeping prices low for you but crushing their own earnings. Others have had an easier time finding ways to stick you with the bill, either through rebranding or through an outright price increase. First, let's look at the biggest thing that's increasing your cost to dine out.
Food inflation in the U.S.
The costs of meat, dairy, grains, and vegetables have all risen over the past year, and consumers are paying almost 3% more even to eat at home than they were just 12 months ago. Those rising costs have, of course, had an impact on dining out as well. The Department of Agriculture has said food prices will continue to rise as long as the drought in California continues to affect production.
Chipotle Mexican Grill (NYSE:CMG) is one of many companies trying to deal with rising costs. The burrito chain implemented a price increase of as much as 6.5% earlier this year because of a rise in the cost of the ingredients it routinely uses, such as steak and avocados. When the company reported its next earnings, it said the bump helped push average checks up 2.5%. If you were wondering where your extra change went, now you know.
Chipotle has had the ability to increase its prices because it has a brand that people are willing to pay up for. Other companies haven't been as lucky, and weaker brands, such as those in the Darden Restaurants (NYSE:DRI) portfolio, have taken a hit. If dining out at Olive Garden has seemed like a break for your wallet, it's probably because the chain is eating the cost and getting hit on the bottom line. Darden reported margin pressure coming especially from dairy in the middle of the year, and earnings have suffered.
Coffee price inflation
It's not just food that's denting wallets. We're a nation of coffee drinkers, and leaf rust and other environmental problems have been plaguing producers. With daily drinkers consuming over three cups of coffee per day, the impact is quickly adding up, as coffee prices have been on the rise over the past year.
Earlier in the year, those increases led Starbucks (NASDAQ:SBUX) to raise some of its menu prices by between $0.05 and $0.20. Like Chipotle, Starbucks has the brand strength to get away with those sorts of changes. The company is still facing challenges, though, and CFO Scott Maw has said that 2015 is going to be even tougher than 2014 for coffee prices. Considering that many of us spend upwards of $1,000 a year just on coffee, further increases could put a pinch on little Johnny's college fund.
The move to fast casual
Fast-food chains are making moves to shroud their price increases by adopting fast-casual attitudes. The success of Chipotle and other higher-end brands has tempted chains such as Wendy's (NASDAQ:WEN) into introducing the occasional higher-end menu item. Pretzel rolls, lobster, and pulled pork have all turned up on traditional fast-food menus to help bring in customers willing to pay a premium for presentation.
Wendy's CEO Emil Brolick touched on the point earlier this year: "If you look at [Wendy's] in the context of traditional QSRs [quick service restaurants], we are giving a new QSR quality experience, but we're charging that at the same price as our traditional competitors." That comment reveals the dual value of fast-casual presentation -- helping to boost margins and bringing in new customers. Wendy's is trying both.
What to do about rising costs
If you're looking at an unhappy checking account or credit card statement, the cost of dining out might be a great place to start thinking about a budget. As costs continue to rise, it's easy to let them get ahead of you. A cup of coffee here and there might not seem like much, but over the course of a year, you might be looking at hundreds of dollars in potential savings.
A quick example: If you buy one grande iced latte a week at Starbucks, you'll spend $190 per year just on that one drink. If you got an iced coffee instead, you'd save $60 a year. That's a nice dinner out just for having your cold java served up in a slightly different way. Now imagine if you were having three a week or more.
Restaurants are eventually all going to find a way to pass their costs on to you, and it's up to consumers to decide whether they want to pay the premium. If you think we'll keep buying in, then maybe you can get a little back by investing in your favorite stocks.
Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple, Chipotle Mexican Grill, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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