How restaurants charge more but make it look like a bargain

New York restaurants are raising menu prices as wages rise and inflation hits ingredients and packaging. But they still want customers to feel like they’re getting a good deal.

That’s a tricky proposition, especially for fast food, fast casual, and casual dining—places where low prices are part of the appeal.

THE Applebee’s and IHOP, owned by Dine Brands, are examples of this movement.

“Both of our brands are value brands, and that’s particularly important right now,” said John Peyton, CEO of Dine Brands (Din), during a call with analysts in March.

That means franchisees are walking “a tightrope… maintaining value for our customers as well as protecting their margins,” he added.

Franchise operators IHOP and Applebee raised prices between three and four percent last year. Typically, these prices rise by between one and three percent per year.

But then how do you raise prices and still convince customers that your food is cheap?

Restaurants expect customers to consider more than absolute price when deciding where to eat.

They might, for example, consider the ambiance of the restaurant or the amount of food they are getting for their money.

And they can swallow higher prices at one of their favorite restaurants because those prices are still lower than a competitor’s.

As the situation evolves, customers may want to do some comparisons to try to make sure they aren’t paying too much.

price x value

Brands hope that as prices rise, consumers will do their own math—and find that, all things considered, the amounts charged are still pretty good.

At Applebee’s, the “value equation… is much more than price,” company president John Cywinski told Applebee’s CNN Business in a recent interview.

“It’s the food, it’s the experience, the packaging [se você conseguir algo para viagem]”, he said. “You can get the Applebee experience for a very good price.”

Some places, like Domino’s, are taking a more surgical approach, raising prices on some items and keeping others low.

On March 14, Domino’s raised the price of its classic “mix and match” by one dollar, from $5.99 to $6.99 — but on delivery orders only.

“We believe $6.99 is still great relative value for our delivery customers, offering variety, good taste and competitive pricing,” said CEO Ritch Allison, who left the company, during a call with analysts in March.

Keeping the price at $5.99 serves a dual purpose: giving customers the lowest-cost option they’re used to, and encouraging them to pick up the food rather than deliver it. It is a more economical option for restaurants.

Darden Restaurants, which owns Olive Garden, Cheddar’s Scratch Kitchen and other restaurants, also expects customers to see its prices as relatively affordable, even as they grow, because the price increases are relatively moderate.

“We will continue to look for below-inflation pricing opportunities,” CFO Rajesh Vennam said during a recent call with analysts.

Darden leaders mentioned, for example, that Olive Garden is still cheaper than other full-service restaurants.

Inviting customers to compare prices with the competition is a good strategy for large companies that manage to keep their charges low.

However, this can also make customers think more about pricing. And they should – it’s a good time to look around and make sure your bargaining point is still really a bargain.

Everything is relative

Chipotle raised its prices by about 10% last year. But CEO Brian Niccol argued during a conference call with analysts in February that Chipotle food is still a good deal, even at higher prices.

“The chicken burrito, in most parts of the country, is still less than $8,” he said. “That is phenomenal value.” Consumers may well buy into this argument.

If a product “was 99 cents when everything else was $2, and now it’s $1.99 when everything else is $4 — the same relative price is true,” said Mark Bergen, a member of James D .Watkins Marketing at the University of Minnesota, USA.

Before the pandemic, consumers had their favorite places to get the best deal. But a lot has changed since then—and not all in the same way.

“Different companies have different pressures and cost structures,” Bergen said. “It could be that Chipotle was a big deal before for customers. But [agora] there is another company that is a much better deal because of their supply chain or the way they do business.”

Bergen highlighted that while prices are rising, not all items are being impacted in the same way.

“Inflation is not a monolith,” he said. A look at the Consumer Price Index, a key measure of inflation, provides a good example of how prices fluctuate even within a category.

Overall, food at home in the US was about 8% more expensive in the 12 months to February, with no seasonal adjustments. But some categories saw minor bumps and some major ones.

The price of cheese, for example, rose about 2% in the US, while bacon rose almost 19%. So while all companies are dealing with higher prices, not all are necessarily facing the same pressures.

“Consumers can forgive price increases during inflation. But we’re also paying attention to that tag price,” Bergen noted.

“We as consumers tend to experience absolute prices. I think there will be some setback to that,” she concluded.