Episode 12: International Roundtable – How Restaurants and Consumers Are Responding to Inflation

Tracy Henderson
Welcome to the newest installment of Revenue Stream with RMS. Today in our series, we’ve invited a global panel of RMS experts to discuss what’s on the mind of every business and every consumer in nearly every developed country. Inflation will discuss the state of the markets in the UK, Europe and Asia, how restaurants are responding to inflationary pressures, and what RMS learned from surveying more than 2500 consumers in the US, UK, Italy, France, Germany, Spain and Japan. Our experts today are Philipp Laqué, the EME Director for RMS. Masato Yano is RMS’ Tokyo Director. And Francois Acerra, the US-based Director of Research and Consumer Analytics. Thanks for joining us, guys.

So let’s start at a high level. How are consumers feeling about restaurants in today’s environment, with labor shortages, higher prices and overall economic volatility? And so I Why don’t you start us off how are Americans feeling?

Francois Acerra
Americans are not feeling great about restaurants. I don’t think the restaurants sentiment and set its heights right now. About 50% of consumers report the restaurant industry to be worse off than last year. Almost 40% of consumers report getting less value from restaurants. And as you mentioned, it’s primarily driven by higher prices, inflation, as well as translation. So paying higher prices to get smaller portions. We also recorded quite a few complaints around lower food quality and restaurants as well as you know, lower lower levels of service from from the staff. So more related to labor labor shortages

Masato Yano
in that case. I mean, Japan is a little better than the US 40% of customers or two out of five to leave the restaurant industry is worse off today, versus in 2021. And yet, it 8% report spending more than the same of the disposable income of restaurants compared to last year. And almost all respondents believe they’re getting more or the same value from restaurants today as they were in 2021. I think this is partly because COVID restrictions are starting to get lifted gradually. Even though inflation is unprecedented because it was gradually are coming back to restaurants. The additional result supporting that is that pokey diners continue to spend nine in 10 Gas reported at least one weekly dining visit in the last month. With us we’re seeing the most significant increase in frequency.

Tracy Henderson
Phillip, how about in New York markets.

Philipp Laqué
Europe is a bit of a split picture. Let’s start with the UK. And just take a look in terms of how consumers think the restaurant industry is actually doing over here. And in the UK almost wanting to consumers believe that the industry is worse off today than it was in 2021. And this is due to the wide coverage in media where consumers are aware of the big issues cost inflation as well as labor shortage that are impacting the industry. Now if you move to the continental the other European markets, consumer perception of the industry is a bit more optimistic. For example, in France and in Spain, we see that 44% of consumers, um See the industry as better off versus 2021. But only about 30% thing the industry’s worse off.

Tracy Henderson
So that’s interesting. How is perception playing out in these respective markets? So for instance, in Europe, Phillip, the general optimism is that translating the stronger traffic and sales and vice versa in the UK General pessimism is that dampening traffic and revenue.

Philipp Laqué
So let’s start in the UK. 43% of those consumers that we’ve surveyed, reported that they’re spending less of their disposable income on restaurants compared to last year. So we see that tray down and trade out are really 40% shoes, less expensive restaurants and two in five trading down to less cost the items are ordering less. Now while the continent was more optimistic towards how the restaurant industry is doing, overall, the consumers themselves are still in favor of trading down. If you’re looking at Italy and Germany, two in five are trading down Just over a third 32 and 33%, respectively, reports spending less. So we’re seeing the straight out and trade down behavior across the whole of Europe.

Tracy Henderson
So you mentioned trading down are in around the continent or in the UK, I mean, are you also seeing trading out in terms of slower trip,

Philipp Laqué
you’re starting to see a traffic slowdown specifically in the light food service segments. So table service segments sit down restaurants, they are doing little worse than QSR. So following the chain rates, were trading down from full service into QSR. We will also see some trade out of QSR into supermarket shelves. But let’s not let’s not forget that all of supermarkets have very much increased their convenience range. So quality has improved in the supermarket shelves. And it’s still much more affordable than just going into a QSR. Restaurant.

Tracy Henderson
Interesting and getting off topic slightly. But I know in the US, I am shocked every time I walk into a supermarket. But if you’re not, people are still choosing the supermarket versus or food or food at home versus food away from home generally. At that kind of lower level.

Philipp Laqué
I wouldn’t say that at choosing supermarket shelves in supermarkets as in Shandra, over QSR restaurants. What we’re seeing here is a cost of living crisis. People need to make the decision whether they heat their home or they eat, quote some of the headlines or reasons, some of the reasons headlines. So with less money to spend with less disposable incomes, consumers face challenging decisions. They need to do both right, you will burn a hot warm home and you need to feed your family. Right. So the question is how can you how can you make ends meet? And there I think supermarkets specifically for the lower income, similar bracket is offering out right they can still create an occasion at home by buying something slightly nicer for people pre prepared in a supermarket, then just taking the family to a restaurant. So I think there’s going to be a bit of competition coming up from on that, on that and from the lower in the lower income brackets.

Tracy Henderson
Interesting. So France Wow, what are we seeing in the US trade out trade down a little bit of both?

Francois Acerra
I think a little bit of both. When we look at traffic trends year over year, we’re still seeing negative numbers. In the quick service restaurant industry. It’s right around four to 5% traffic decline. And we see also a lot of trade now. So similar to what Philip just mentioned, we see about a third to 40% of consumers trading down so choosing less expensive restaurants overall. So I would say in terms of traffic trend, it’s it’s very comparable to Europe,

Tracy Henderson
just saying Masada what’s happening in Tokyo,

Masato Yano
dining remain strong. As I mentioned, though, 25 consumers reported they visited full service less than in the past month. Nothing that in a survey that jumped out to me is the off premise channels are slowing slightly, with a respondent respondents reporting a less weekly frequency.

Tracy Henderson
Hmm, that’s interesting. And from what I’m seeing off premise seems to be declining across the board. Phillip, are you we talked a little bit about grocery what what is the survey saying about off premise?

Philipp Laqué
So Well, for one, we see as I’ve just mentioned that in the UK quick service are the most significant increase in frequency overall. And then if we’re looking at the rest of the of the segments, two in five reported visiting fast casual as well as full service less in the past months. And we can anticipate that a decrease in off premise will happen. So when looking ahead, when we’re looking at the survey respondents only 20% plan on dining out more. And one in three specifically states they plan to cut off off premise occasions, mostly delivery. So that’s in the UK if we now moving for example to Germany onto the continent, we see a similar picture QSR has done the best in terms of the overall restaurant segments with lower declines and frequency actually going a little bit out based on the survey results, but again, also in Germany, one in three Germans that we surveyed plan on using off premise less than they have done in the past. So there is a bit of a tendency to cut the unnecessary spending.

Tracy Henderson
Yeah, I know in the US we in the past, we’ve done what how price, or what’s causing price sensitivity, you mentioned delivery, Phillip is some of that, just the surcharges on delivery.

Philipp Laqué
Some of that might be true, and by the surcharges and delivery. But anyway, talking about sensitivity, I would take a step back and not only look at it from a delivery perspective, so let’s just put ourselves in the shoes of the consumers. They see negative headline and negative headline, even consumers that are very well off, are suddenly finding themselves in a position where they feel they might they need to save in some way or another some form or another. So it’s a halo effect that is not only happening at the lower income bracket, where as I mentioned, over here days, when the cost of living crisis happening, Pete families not knowing how to survive on current income levels. But that’s bad news. And that negative sentiment that triggers right up to the top, where people don’t struggle, whether they heat or they eat, they might need to cut down on luxurious vacations or these other things. But even their consumers feel that they need to make savings. Are they going to cut off on some of the discretionary expenses? It’s all psychological.

Tracy Henderson
Yeah. So delivery surcharges are the least of their worries. In other words,

Philipp Laqué
well, that’s one of the that’s one of these these luxurious expenditures that you might say, Okay, I’m getting away with, right, so So maybe, right? You’re just saying, Okay, let’s not order in. That’s right. Write that. Let’s have the supermarket pizza, as mentioned earlier on, or let’s just go and pick it up? Or let’s make a proper occasion out of it and actually eat at the restaurant and have, you know, celebrate the moment?

Tracy Henderson
Sure, if we’re gonna splurge, let’s splurge. Yeah, that makes sense.

Masato Yano
Interest. Interesting thing is that the situation is quite different in Tokyo, most respondents stuck to their habits across segments. And as I mentioned before fast food, so the aggressive increase in frequency, while 25 reported visiting poor service less in the past month. So it’s, I think the Japan is a little bit behind on what’s happening right now. I don’t know how long I mean, how it’s going to change in the near future. But for at this moment, at least, for now, what I’m seeing is a little bit different than Tokyo is a little bit different than other countries.

Tracy Henderson
Yeah. Is Japan as negatively affected by the war in Ukraine and and all of the oil and gas?

Masato Yano
Definitely, absolutely. We’re seeing a significant increase in, let’s say, food, and, you know, food prices, basically, the price of the grocery store are definitely increasing. But I think the, I would say interesting, but I think it’s coming from like our mindset that Japan has been deflationary for so many years, that. So if you look at the Producer Price Index, it’s up at almost about code very close to that 10%, like a percent, you know, 7% around that range. But if you look at the CPI, Consumer Price Index, it’s up only by 2%. I think what’s reflected on this, is that the companies are very hesitant to increase price. Because Japan has been so many, like, deflationary country for so many years in ways that are not increase increasing. So companies are very concerned that customers are very price sensitive. They’re afraid of losing customers. Sure.

Tracy Henderson
So just maybe walking more slowly or more carefully. Francoise. I don’t want to put words in your mouth but I mean, it’s six What was the last consumer Impact Report 16.9% average price increases

Masato Yano
here the or at least

Tracy Henderson
not at working as cautiously

Francois Acerra
No, I think I think there’s definitely been an appetite to to take price in the US and that’s that’s really driven by increased cost pressures, not just on the commodity side, not just on the food supply side but also on the on the on the labor side. So us us restaurant SQS Restaurant Brands have not been a shy and taking price. Most reach are well into double digit increase over over the last year now.

Tracy Henderson
Yeah, that was going to be my next question for you, Philip in terms of pricing. What are you seeing in the in the UK and Europe as it relates to how consumers are reacting to higher prices.

Philipp Laqué
So let me just add one thing on to Francois, he mentioned that the US has taken quite a large amount of inflation. The USA started much earlier on that track record than Europe. So why we have seen restaurant companies starting to take this to put up prices. In h2, literally last year, Europe has been hit since real pretty much beginning of this year. So so we are lagging behind a little bit on that development versus to us. Now if you’re looking at what the consumers currently say and how they feel about it. Looking at the survey, again, let’s start with the UK 60% of those consumers surveyed feel that for extra prices are higher compared to last year. Now in the UK, we need to keep in mind that we had the VAT rate change. So the VAT rolled back to 20%. In April, it was lower to first 5% and then 12 and a half percent, you’re in COVID. So there’s a bit of an impact there as well. Now, when we looked at justifiable reasons for price increases, we asked those questions in conjunction. The valid positive side for the industry is that 72% of consumers believe that increased food costs are justifiable reasons for restaurant to increase prices.

Tracy Henderson
But as you were saying earlier, if they’re if they have a choice between going down to the local restaurant and keeping the heat on.

Philipp Laqué
So that’s that’s exactly that’s exactly the that is the critical question that the continental the Europe is now facing, we’ve seen a similar France, I correct me. But if I’m looking at the numbers, I think we’ve seen a similar trend in the US where consumers were actually walking along with price increases quite nicely. And pretty much until the end of last year for about half a year, let’s say. And then we’ve started to see a decrease in traffic and transactions. And so those price increases absolutely don’t flow through as much as they have in the past. So to your point, Tracy, the real test of consumer resilience of pricing will come in q3 and q4 of this year in Europe. Let’s not forget that we are lagging behind us. And we’ve just started that we also had the first summer of unrestricted travel again in Europe. So a lot of consumers to actually make use of this for vacations. So for all non Europeans to Europe, the Europeans love their beach vacations in summer, right? So you go away and in incidentally, spending behavior changes, right, they become less price sensitivity sort of thing, right? And then to the point now we are coming back from vacation, heating gets on energy costs are through the roof. So the real stress test in terms of consumer resilience will be seen in q3 and q4 of this year.

Tracy Henderson
Yeah, I contributed to the European travel. So you’re welcome. Masada you mentioned, you know, are we being more cautious? I mean, do you feel like as Phillip said, maybe Japan is following in the footsteps, like Europe might be of the US? Or do you feel like you’re really kind of operating in a different state?

Masato Yano
Yeah, I think it’s very interesting. Actually, if you look at the survey results, six to six to 8% of customers reported higher restaurant prices in the US and Europe, while in Tokyo in France, that number was lower 46% and 48% respectively, respectively, if I remember correctly, for Japan specifically, the difference I see is actually on the behavior in the behaviors of restaurants and retailers that they tend to reduce the size or portion to keep the price the same instead of increasing the price. So actually, again, this is kind of related to what I explained before that the companies or restaurants or retailers are kind of afraid of losing. They don’t want to give a message to consumers. They took price, they increased price. So instead of they tend to reduce the size or portion and keep the price the same. So that’s kind of like the behaviors that we haven’t seen in Japan. And that is very quite different than the retailers restaurants in the US. For instance,

Tracy Henderson
France, one mentioned string inflation early on Misato. Do you do your consumers? I mean, do consumers in Japan have that kind of negative reaction to shrink inflation? Or are you seeing that at all?

Masato Yano
I think that’s a very negative that people normally, you know, I think people have not been noticing that so far. But I think this unpressed that we’re under very unprecedented inflation or period, people are just very cautious, but the size portion what they’re getting, and what they’re paying for. So it’s definitely it’s only online, but I’ve seen a couple of articles criticizing the downsizing, the size or portion shrink, sure inflation. So in that sense, I think we have a quite similar, I think we’re gonna follow the same reactions, customers gonna follow the same reactions as full time customers in the US.

Tracy Henderson
Yep. Francois, do you want to add more bad news?

Masato Yano
No, I think I think it’s really interesting what what Masada was saying about Japan being in a deflationary environment for so long, and having just a little bit of inflation changing consumer perceptions. So it really tells us that trade off decisions, such as the ones that Phil was talking about between discretionary spending, do I go to the restaurant? Or do I pay my utilities? Where do I go to the grocery store? All of this is very context specific. And perceptions are being changed by by this inflationary environment. And I think it’ll be interesting to see how it plays out across these markets for for the restaurant industry, I think in the US, we’re already seeing quite a bit of traffic pull back as a result of of pricing. Europe might be following and Japan might be might be a whole different story. But I think it just illustrates how how does different consumer perceptions play out in those different markets?

Tracy Henderson
Francoise, can you tell us what you see as opportunities for operators as we go into the end of 22.

Masato Yano
So I think in terms of opportunities, consumers still see restaurants as a special occasion as a discretionary spending that that they enjoy doing as a as getting together. So I don’t think that that’s going away. There’s also a necessity around using restaurants. You know, it’s nice to think that you could have all your meals at home. But that’s that’s not the reality. And I think there’s still a lot of growth opportunities for restaurant when it comes to off premise of premise, digital, as well as engaging consumers with with loyalty programs and things like that. I think Restaurant Brands need to think creatively about these things and seize these, these opportunities that that to me are still bright spots. The inflationary environment is what it is. But beyond that, there’s still growth for for the industry.

Tracy Henderson
Yeah, we saw that actually, in a different survey. I remember friends while were especially kind of the older generations keep haunting was still working, kind of discounting.

Masato Yano
Yeah, I think

won money back to the consumer a little bit to entice them to increase their their frequencies. So deals, deals, discounts, providing a little bit more value, I think will be a big piece of the equation going forward to offset some of the some of the inflationary costs that consumers are feeling not just when going to restaurants but across across the economy.

Tracy Henderson
Yeah, Misano. I know we talked a little bit about the marketing promotions. Do you want to comment on plans opportunities?

Masato Yano
Yeah, it’s kind of to piggyback on what Francois mentioned in the discounting. In Tokyo, even though the customers tend to be more, you know, a little bit more price sensitive. The flip side is that I feel that their customers are more reactive to the promotions at the same time. So as we see COVID restrictions are being lifted bother, including opening the border to welcome more inbound tourists into Japan, and more consumers are willing to eat up because the restrictions being lifted, I believe it increases, you know, increases the probability of being successful in the bear market. If we construct them, you know, very good pricing strategy to gather with effective marketing promotions. So that’s like a pro side. It’s not like oh, sadness, there is the opportunity for the restaurants.

Tracy Henderson
I know in the US Francoise mentioned that the special occasion dining, are you predicting that in the UK to where it’s like, you know, we’re celebrating someone’s birthday or

Philipp Laqué
stuff. occasions like this. Exactly. So birthdays, special occasions like promotions, these sort of things are just, you know, this one or two odd occasions, they actually get together with family and friends on. Because people living apart these sorts of things, I guess this dislocations are going to be remaining. Then, looking also on what fun so I mentioned regarding couponing, I’m looking at it from from a value perspective. And I think this more on the occasion, there’s more impulse occasion, there’s more dislocations that are driven by a need of eating and convenience combined. So when we’re specifically looking at QSR occasions, right, the lunch on the goal, these sorts of things, right? I think there will be cues, I will profit from the from the, from this current situation, because there’s trade down happening. But I also think that value is going to be a key traffic generator in the QSR segment, more than in, or it’s going to be driving more of a difference than in the food service in the food service segment. Because of the different consumer mindset, my reaction so consumers may be looking for offers and we’ll be making more price based efficiency QSR. You don’t lower consumers around with a voucher for full service restaurant, if we expect a great experience. You will not get them once or twice more in order to offset or to offset that I think full service restaurants really need to work around their proposition, they need to work around how to differentiate themselves, they need to work around how to provide this extremely good service. So people are actually craving that occasion. Whereas QSR, who are depending on this impasse, way depending on the frequency, it would seem value being the key differentiator or the key to success in that segment.

Tracy Henderson
Yeah, so Masato and Francois, both of you nodding. Do you have anything else to add?

Masato Yano
And you think is a great point Phillip is making and something to think about for for restaurants is that that type of occasion, right? How do you cater to that utilitarian occasion versus how do you cater to that hedonic experience? Right. So now you think it’s it’s right on?

Tracy Henderson
Well, this has been fascinating. And I know I asked lots of questions that weren’t even on the survey. But you guys are so knowledgeable. We really appreciate this global perspective. And I know our viewers will, too. Viewers can actually read more and download all seven international surveys at revenuemanage.com. And RMS also shares monthly sales and traffic data on its website, and the most up to date restaurant insights. And then remember to subscribe to our channel to get the latest edition of revenue stream. There’s much more to come including another round of international consumer surveys. Thank you.