Food Providers Find Consumers Will Pay Higher Prices

But analysts advise against boosting the cost of menu items excessively.

August 06, 2019

ALEXANDRIA, Va.—Higher food prices are helping foodservice operators increase sales and profits, according to the Wall Street Journal.

Mondelez, Chipotle and McDonald’s are among the U.S. companies wagering that U.S. consumers will pay more for food as the economic expansion continues. In fact, some are notching revenue at the expense of customer counts or unit volumes. Higher prices and more premium products are helping the bottom line. The restaurants subset of the S&P 500 climbed 32.2% this year through Friday of last week, while the broader index rose 17%.

Consumers are driving the decade-long U.S. economic expansion. The price of eating out has increased faster than the overall index of inflation, but the cost of eating at home is also up. Restaurants and food makers are charging more, in part to cover increased costs for ingredients, transport and labor. However, restaurant prices have climbed faster than the generally modest inflation rates in recent months, Labor Department data show, and grocery prices are rising again after a long slump in recent years.

Coca-Cola Co. increased revenue with higher prices in the U.S. in the second quarter, though volumes were slightly down. PepsiCo’s stronger revenue in the U.S. and Canada was driven for the most part by price gains. Chipotle reported a 10% sales increase driven largely by bigger orders after raising prices in 2018.

Consumers are more discerning about what they will pay up for than in the past, and analysts caution that some companies risk eroding their customer base if price increases outpace wage gains.

Prices at McDonald’s U.S. outlets have risen by about 2% on average in each of the past several quarters, boosting revenue overall as guest counts have fallen. McDonald’s said last month ​that it is having new success drawing in guests through some discounts, such as a two-for-$5 value menu. Burger King ​is studying ways to better promote value items on its menu after reporting flat sales in the U.S. last quarter.