The Consumer Price Index fell 0.1% in June — the first drop since February 2020. It is up 3% from a year ago — the smallest year-over-year gain in 12 months, moving closer to the Federal Reserve's 2% goal.

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Big contributors to this, though, were the falling prices of homes and rent. Food is a different story. New data received recently from the U.S. Bureau of Labor Statistics showed that the food index increased 0.2% in June, maintaining the robust advance of 0.1% in May. The cost of food at home, meanwhile, crept higher by 0.1% on the month while the food-away-from-home index swelled by 0.4%, matching the gain seen in May.

Food Price Changes Every Year

The food-at-home index is up 1.1% year over year, vs. a 4.1% gain in restaurant prices. With the June-to-June advances, restaurant prices have been firm/rising more rapidly relative to grocery prices for 16 16-consecutive months since February 2015, and by 300 basis points. This spread has, on average, come in at 60 basis points, according to Kalinowski Equity Research.

Full-Service vs. Quick-Service Restaurants

The June inflation index showed some eye-popping differences between full-service and quick-service restaurants. Prices for full-service restaurants advanced 0.6 percent in June, with prices for limited-service meals up just 0.2 percent. Full-service menu prices gained a bit more, building on a 0.4 percent increase in May and a 0.3 percent rise in April. Prices for limited-service meals were flat in June, and this offset May's 0.2 percent gain while marking a slowdown from 0.4 percent in April—perhaps a real signal about the pressures of QSR value strategies.

Full-service meal prices are up 3.9 percent compared to a year ago, versus a 4.3 increase for limited-service menu prices. There is a more significant minimum wage hike impact in limited service, and it's not driving a higher rate of increase versus full service.

Impact on Restaurant Industry Sales

The prices between restaurants and grocery stores haven't converged," according to Mark Kalinowski, chief executive and president of Kalinowski Equity Research. "Consumers are now more price-sensitive and cook at home.". One key aspect, he notes, is that, in 2016, when the gap extended out to 390 basis points, the restaurant industry notched the second-worst same-store sales performance in seven years, behind only the pandemic-impacted year.

Same-Store Sales Growth Forecast

Now, Kalinowski claims that same-store sales growth will lie much weaker in the full year of 2024 compared to that of 2023. "We continue to fully expect full-year 2024 same-store sales growth to be meaningfully lower than full-year 2023 same-store sales growth," Kalinowski wrote in a note. "Full-year 2024 same-store sales growth will likely be the lowest – excluding pandemic-impacted 2020 – since 2018."

Consumer Behavior Shifts

The persistent gap between restaurant and grocery prices would suggest, among other things, changing consumer behavior. If food, at home, is increasing but at a lower level than in restaurants, then consumers will shift more of food preparation to the home to control costs. This new behavior can affect the restaurant's overall sales performance. That impact is already witnessed through the trends established over the recent past.

Final Verdict

Worth noting, the slight decrease in the June Consumer Price Index, if it does come to pass, would be the first decrease in inflation since 2020. A portion of this drop has been cooled by house and rent price reductions, while aliquots for food remain worrisome. These wide chasms between full service and quick service, and restaurants versus grocery store prices for identical items, are setting consumer preference trends for a reduced sales growth trajectory in the Restaurant Industry. Through these changed times the industry will sail, and it shall be very capital-efficient in understanding and changing consumer behavior to maintain profitability and growth.

This will, therefore, put restaurant owners and managers at the forefront of such trends, strategizing on winning and retaining consumers going forward. Value offerings need balancing against quality service, especially in consideration of the critical role data insights are going to play in adjusting to the emerging conditions of the market.

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