The drive-thru is becoming a splurge like never before

The gap between cooking dinner and ordering it is getting harder for Americans to ignore.

The Bureau of Labor Statistics reports that restaurant prices increased by 3.5% in September compared to the same month last year. While limited-service meals, which include the majority of fast-food and drive-thru restaurants, showed a 3.2% increase, full-service meals saw a 3.8% increase.

The increase in grocery prices was more subtle. In September, food-at-home costs actually decreased by 0.1% and increased by only 1.8% over the previous year.

Because American wages are also not keeping up with general inflation, this growing disparity is significant.

While consumer prices jumped by 3.7%, average hourly wages increased by only 3% over the previous year. Real hourly wages decreased by 0.7% annually and by 0.5% between August and September after accounting for inflation, leaving customers with less money to spend.

For McDonald’s (MCD), Yum Brands (YUM), Domino’s Pizza (DPZ), and other restaurant stocks, that turns affordability into something bigger than a marketing slogan. It’s becoming one of the most significant barriers to the sector’s growth.

Restaurant prices keep outpacing grocery prices

The fast growth of restaurant prices helps explain why the same $10 or $15 that used to purchase a cheap restaurant dinner now goes further at a supermarket.

Grocery businesses do not absorb the same costs that restaurants do. On top of the meal itself are labor, rent, utilities, insurance, and delivery. Rising energy and gas prices increase pressure.

In the end, customers see such costs on the menu.

Nation’s Restaurant News noted that restaurant inflation is now running well ahead of grocery inflation; at the same time, wages are failing to keep pace with the broader rise in consumer prices.

Home cooking has always faced competition from quick-service restaurants due to both price and convenience. Restaurants run the danger of losing half of that business if the price difference between groceries and a drive-thru meal continues to grow.

McDonald’s has previously admitted the difficulty.

McDonald’s warned in September that persistent inflation could keep restaurant-industry traffic roughly flat in major markets. It unveiled an $8.5 billion, decade-long plan aimed partly at helping franchisees improve economics and bring customers back, Reuters reported.

McDonald’s has also leaned heavily into its McValue platform, including an under-$3 menu and $4 breakfast offers.

The message is clear: Pricing perception is something that even the biggest restaurant business in the world cannot afford to lose.

McDonald’s faces a problem that has little to do with burgers.

Aleksandr Zubkov / Getty Images

Restaurants are fighting to preserve the value equation

Although they are growing pickier about what they purchase, consumers have not stopped dining out.

For this reason, rather than just lowering menu pricing overall, restaurant chains are increasingly offering reduced servings, packaged meals, and temporary discounts.

Smaller Go Buckets have been tested by KFC. Domino’s has shifted its focus to promotional and smaller offers. To make the cost per person more obvious, some businesses have emphasized family meals or value packages.

Restaurants are attempting to maintain traffic without sacrificing too much profit, which is a clear commonality.

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It might be challenging to strike that balance. A cheap dinner can entice someone to come in, but they might forgo the drink, side dish, or dessert that would increase the order’s profitability.

Restaurant investors must thus consider factors other than headline comparable-sales growth.

Even if fewer customers actually attended the restaurant, same-store sales may increase due to higher menu pricing. Order volume, traffic, and promotional expenditures are becoming more significant measures of a company’s health.

McDonald’s has continued emphasizing affordability, even while reporting positive comparable sales. Taco Bell’s ability to sustain a strong value image has also helped it outperform other quick-service restaurants.

That distinction may become increasingly important.

Customers do not necessarily require restaurant prices to fall. They need to feel the meal is worth the extra cost compared to what they could eat at home.

The drive-thru now has to justify its premium

Restaurants are not at risk of Americans abruptly giving up on dining out. Rather, the challenge is that a less expensive option is becoming more competitive with every meal.

That decision becomes increasingly apparent each month if grocery inflation is lower than restaurant inflation. When a family sees a $35 or $40 fast-food order, they could start comparing it to the number of meals they might purchase at a grocery store rather than another restaurant.

Restaurant chains may be able to raise costs without significantly decreasing traffic if they have robust loyalty programs, unique cuisine, handy locations, or very high value perceptions.

The problem is that smaller eateries often lack the sophisticated digital loyalty systems, substantial advertising budgets, and massive buying power of chains like McDonald’s and Domino’s.

What stands out to me is that fast food is losing some of the psychological advantage that made it so successful.

In the past, the drive-thru served as a convenient alternative to dining in a full-service restaurant. But customers now must decide whether the convenience is worth a substantially higher price than groceries.

During the next several quarters, one indicator will be particularly crucial for restaurant investors: whether customers return.

Related: McDonald’s menu appears to have a price problem

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