You've been paying more at restaurants and that's not about to stop

Key Points
  • Consumers have been paying more for meals in 2017, thanks to minimum wage increases and rising food costs.
  • Fast food chains, in particular, have felt more pressure to increase prices, as they typically have had lower labor costs in the past.
  • In a recent NPD survey of more than 9,100 consumers, Riggs said that 30 percent of respondents had said that they had cut back on spending at restaurants.
Nick David | Getty Images

Last year, restaurants aggressively raised prices and that move is haunting them in 2017.

In 2016, the top 500 chains in aggregate hiked menu prices by 4.3 percent, according to Technomic data.

The increase last year, drove away some diners, and as they have started to come back restaurants have been slammed by higher wage and food costs. After making selective increases in the first half of the year, it's likely more price hikes are on the way — if restaurants can find a way to keep customers walking through the door.

"Restaurants are between a rock and hard place right now," Joseph Pawlak, managing principal at Technomic, told CNBC. "They need to increase prices because of tight labor supply and commodity inflation resumption, but they will have a difficult time doing so because of potential negative consumer reaction. It's a very fine line they are walking right now."

Fast food chains, in particular, have felt more pressure to increase prices, as they typically have had lower labor and food costs in the past.

While many of these restaurants have adapted to the increase in minimum wage by implementing digital technology, adjusting work shifts to better fit peak service hours or finding ways to cut costs in other areas, many have turned to a seemingly simple solution — increasing menu prices.

During its latest earnings conference call, Wendy's said it bumped menu prices for select items up 1 percent to battle back against higher beef and bacon prices. The chain is expecting to see food prices inflate its costs between 3 percent to 4 percent in 2017.

McDonald's increased menu prices 1.8 percent year-over-year in the second quarter, a direct result of the fact that it will have to spend between 0.5 percent to 1.5 percent more on food this year.

But fast food joints aren't the only ones forced to ramp up prices to counteract higher food costs. While fast casual and casual dining restaurants are usually insulated from wage hikes, since these establishments tend to already have higher wages, many of these chains have had to pass rising food costs onto the consumer.

Casual dining chain Buffalo Wild Wings raised menu prices about 0.6 percent in the last year, due to higher commodity costs. CEO Sally Smith blamed "historically high" chicken wing prices and a shake-up of the company's menu promotions for the weaker-than-expect sales last quarter. The chain tried to shift customers to purchase higher margin items like boneless wings by offering better deals with those purchases.

Traditionally, restaurants across the industry have bumped prices about 2.9 percent annually over the last 30 years, Pawlak said.

While some restaurants have feared customer backlash, as of two months ago 38 percent of restaurants had raised prices so far in 2017, David Henkes, principal at Technomic, told CNBC.

"Even though labor costs and rent/occupancy are going through the roof for restaurants, it is difficult for them to take price increases given the highly competitive environment as well as their recent history of being very aggressive on this tactic," Pawlak said. "Many restaurants have arrived at the point where they are no longer price competitive with their core demographic."

In fact, at quick-service restaurants there is only a 14-cent difference between checks that include a consumer-perceived deal from a value menu or other promotion, and checks that were for items that were not discounted, according to Bonnie Riggs, an NPD Group analyst.

"Price increases in today's environment aren't necessarily good," Henkes said. "Restaurants are already facing a value issue (especially among chains) and price increases, even minimal increases, can be off-putting to consumers."

Chipotle Mexican Grill found that out the hard way this year when it bumped its prices up about 5 percent in April at about 440, or 20 percent, of Chipotle's 2,200 locations. This was the burrito chain's first price hike in three years.

The chain had forecast the price increase would result in a 25 percent drag on how much customers spent, as some gravitated to less expensive menu items, and on how often customers visited. Their projection estimated that they would still make money off the price hike.

However, Troy Li, senior analyst at M Science, said that customer behavior changed enough during the first three weeks of Chipotle's price hike to completely offset any potential gains.

In a recent NPD survey of more than 9,100 consumers, Riggs said that 30 percent of respondents had said that they had cut back on spending at restaurants.

Riggs said that the number one reason cited for the reduction in restaurant spending was because it was cheaper to eat at home. For restaurants that need to raise prices to offset labor and food costs, Riggs suggests that they evaluate the menu and lift prices on specific items rather than across the board.

"It's almost a kiss of death to take [price] across the board," she said.

Riggs said that restaurants have taken too much price in the last year and a half and consumers no longer see these locations as a good value for their food budget.

"Consumers today understand they have many choices for prepared meals, including meal kits and supermarket prepared foods, and restaurants aren't the only game in town," Technomic's Pawlak said.