US Consumer Response to Menu Pricing Madness

It's good to be here. For those of you that don't know Mike, Uh, you know, he's he's uh, one of the smartest people I know in the restaurant industry, and it's somebody I lean on, uh in terms of trying to figure out what's going on in the market. So I'm excited to have him here. So, you know, before we get into it, why don't you talk a little bit about your new venture, Extra P three sixty, uh and kind of explain to us how it's different

than what you've done in the past. Sure, yeah, no, thanks. Um. You know, as you know, I've been in in the business of turning data into insights and decisions for the decades now, um, and you know, there's a lot there's a lot of new analytics companies that are coming out

and so forth UM and b I companies. And I think is this as this huge tidal wave of new data started to surge into the end of the industry, there's more and more people who don't know what to do with it UM, and it could be a tremendous asset UM. But really the a lot of the traditional players are just saying, oh, you'll put it in a data lake and you know, view it this way. And more often than not, the enormous sound of data, even when they get access to it, is just creating more,

you know, confusion. So there's just too much information and not knowing what's what's the information is actually UH worth paying attention to UM, And throughout my career, I've always been trying to come up with what's that final what's that solution, what's the answer? UH? And through actually three ext really our our mission is to focus on that, on that final on that final decision. How do we take the data and the methodologies and help business leaders

UH to distill it down into probabilistic outcomes. UM. You know, the kind of work that I've done with pricing and with promotional work and so forth. It wasn't just hey, this is what you should do, but it's hey, if you do this, then the probability of this happening to your sales and traffic and profit is this. And most of those tools were inward looking for the analysts that were supporting the businesses that I that I had been founded or partnered in UM and and now we're doing it.

We still have the services, but we're trying to make it more tools that are directly in support of those customers.

Because we're taking this approach, we're also able to not just incorporate things like the point of sale and all the inside data, but we've taken a lot of a lot of time and effort to really start getting into new types of data sets UM mobile UH mobile tracking data, UM macro economic data sets, all localized so that you can start to have UM forward looking leading indicators at a very local level to understand what's coming down the pipe, what's in the what's in the UH you know, what's

in the front window of you know, not in the rear view mirror. So that's that's what we're in. What's that's what we're building, and that's what we just recently launched very cool. Um So, let's you know, dive in here a little bit in terms of of of pricing because you know, from where I sit, I think it's it's going to be very important to second half performance.

And some of the companies that we cover, you know, have been the ones that have been you know, um, you know, more conservative on pricing, uh in an attempt to gain share, seemed to have outperformed some of their peers in the second half, in the second quarter, and um so I think it's critical, but you know, to get some insight into what is going to happen the

second half and next year. So, um, let's kind of start with the third party delivery uh uh aggregators, Right, So, consumers seem to generally accept higher menu prices for their door to ash or their Uber Eats orders. You know, is it because there's a little there's very little overlap between the third party delivery customer and the dining room patron or do delivery customers accept that convenience is costly or is there something else to it? And is this

the right strategy for the industry? Yeah, I think I think it's a little a little bit of both. Yeah, I think that there was a time when restaurant floors would say, you know, if you're not in my dining room and you're not connecting directly with my uh you know, with my service staff, then it can't possibly be worth as much as it is, you know when you come into the restaurant. So you know, they never thought that they could charge more for it to show up at

somebody's doorstep, you know, and in their living room. UM. And I think that what we've been seeing, not just through some some survey work and some research and also the price elasticities have really been showing that um, for the most part, you know, consumers are much more accepting of the higher prices. UM. I think part of it is because of that convenience. The people who don't want to pay for that convenience. It might be the same customer,

but it might be a very different occasion. Uh. You know, if they just want to sit back and have the food come to them in their living room, they're willing to pay more for that convenience. So, you know, so I think it is it is a combination now that can be very different from one from one trade area to the next. All these restaurants are not built in the same in the same area. So when you talk about some restaurants, some restaurant change not increasing the prices

as much and others increasing by a lot. UH, well, it may very well be about how they did it. Maybe some of them are more regionally focused, maybe some were more strategic in understanding what their trade areas UM

trade area dynamics were UM. But really inflation is is both of is both as a ceiling UH and a floor in pricing right now, because if you don't if you don't maintain a certain level of pricing, if you just said, hey, I'm gonna stop increasing my prices, well, first of all, the economics of your business they're going to start to really take a toll, even even by

getting more gaining more share. UM. You know the way that the UH cost of labor and cost of UH you know, running a restaurant in general is just is going up as as quickly as UM as the inflation. Right, So you've got to do something. The question is do you keep paced or do you come in a little

bit lower or do you come in a little bit higher. UM. I would say that up until UM probably as you're saying around second quarter and the first quarter into second quarter this year, it was pretty easy for restaurants to say, I'm jumping on the bandwagon. That's what cp I was. Uh, that's what flewd away from home is, is what my competitors are doing. You know, jack the prices up x

ray and it's gonna be okay. Um, that's not necessarily what we're starting to see, you know, come you know second and and and you know what I expect to see in the third quarter. And it's not universal. You know, it's when you really dissect it by uh, consumer segments, when you dissected by types of trade areas and and geography. Uh, it's very very different from from one uh, from one area the next. That that's uh, that's interesting and so um you know, you know, I guess, I guess what

you're getting at. It's very important to manage price, product and promotions locally. Um, you know, I guess what what areas of the country they seem more strength, um, you know, versus others. But it's it's it's funny because even you know, in the past, when we've seen cp I escalating, we've seen it going at a similar pace and a and a similar um in a similar cadence across the country. UM. And really what we've seen over the course of the past eighteen months is that it really hit UM the

coasts UH harder and faster. So you know, if you are in San Francisco or Los Angeles, UM, then you saw a big spike in um IN in food away

from home CPI earlier. UH, if you're in Florida, while the rest of the country was experiencing you know, close to double digit food away from home inflation for up until really December some you know, some areas in in Florida, So markets in Florida we're only experiencing about two So there was this crazy dichotomy UH that you know, not everybody was managing particularly well because they didn't necessarily have called you know, that sort of priced tearing structure to

be able to manage their stores um in in such a targeted way. But what was interesting is that come the second half of this year, that the second half is here become second po order. We started to see inflation rates flip flop. So you go into UM, you go into uh northern California, San Francisco area, and they might just be around I think the last meeting was

around six, where Tampa Bay was around eleven. So when you think about this sort of floor and ceiling and there a lot of the areas I think that we're called it ahead of the curve the floor are also starting to see a little bit more weakness and the lowest end of the consumer. But you might not notice it as much because some of them also have a very yeah, a lot a lot more density of the high income consumer. Right, so it might not be as

noticeably yet, but it's but it's coming. Um yeah. And then you know, interestingly, just the very big price increases across the across the more so in places like you know, the Midwest and and um, you know in Tampa in in the last couple of um, in the last couple of of CPR reports, it sounds like some of those areas are playing a little catch up. I gotta follow up on the c p I. UM, you know, the food away from home and and versus food at home

inflation has been very different, right. Package food companies have been more aggressive with their price increases, I guess other other than the fact that you know they can because it's a cheaper overall dining experience. What what do you think is behind the more aggressive price increases at the grocery store? Uh? Yeah, I mean I think I think you're right. It's it's a staple UM. You know, it's harder to it, so it's naturally less elastic. Where are

people going to go? And there they've always been. Grocery has always been much more UH cost based, then demand based restaurants would be, you know, a little bit more focused on what's the consumer willing to pay, whereas grocery stores have always been about well, what's it cost when it comes in my back door? And if they're not making their their multiples, then you know, then the business

that doesn't work. So, you know, as long as the UM, as long as the producer price industries keep going up, then the grocery store CP I know, food at home UH price index is going to continue to go up. I think what's interesting about that is that, you know, in the past, we've seen that when UM, when the gap between food at home and food away from home inflation starts to spread, the lowest income UH consumers would drop out of qs R at the low end, lowest

in qs ARE and into grocery. But now we're seeing grocery increasing faster than uh, faster than than QS are by by a pretty large margin. Um. So now we're still seeing the lowest end consumer dropping out because what's happening is that even though the spread isn't there like what like it once was, Um, it's just taking a complete it's just taking a toll on their total spending capacity. It's really floated the consumer for the better part of

this year. Was this huge savings bubble that happened during COVID, And when you look at people's savings rates and how that's been just so quickly diminishing from the beginning of this year through the middle of this year. Um, it's

it's drastic. And now we're back down below pre COVID levels in terms of uh, you know, individual savings rates, um, which I think is why you know, as you were mentioning uh in another conversation, people are starting to more on credit now too, Right, Yeah, for sure, and we'll we'll get into that a little bit later in the pod.

But um, you know, can you also talk a little bit about dynamic pricing systems, right like the days of menu pricing based on competitor benchmarking and food costs multipliers have passed us by. Um, can you talk a little bit about how dynamic pricing systems are going to change the game for restaurants and how long will it take the industry to to get there? Yeah, you know, it's it's funny, you know, even the word dynamic pricing, you know,

would make restauranturs shutter. And I think, yeah, I get it right because they hear and then they envision, you know, the prices on their menu changing every minute like a stock kicker. Yeah, and and yeah, I think I think some of that is probably, you know, because some of the technologists were a little bit over ambitious about, you know, how how a dynamic system might roll out, like you know,

an airline airline pricing or something like that. Um. I think I think it's if you take it on on a spectrum though, you need to think about, well, what's the static pricing that the industry has been used to where they look at pricing once a year, once over eighteen months. Now because of inflation, so many companies have been forced to look at it, uh, quarterly. I think a lot of a lot of companies are going to

more of a quarterly look at it. But a lot of the systems that they have in place just make it really difficult for them to be able to implement even a new price change on a new even on some of the digital menu boards that are out there. It's just not a simple task for them to update all of their prices across the multi unit chain. UH. In what's now all um multi channel, right, You've got multiple channels at the same staurant. UH, And there's there's

just this there's this complexity to it. So so I think that you know, if if you think of dynamic pricing on sort of a spectrum and sort of redefined as well, what's dynamic, right and what's static? And static would be the traditional way of to take a look at pricing, you know, infrequently and update it with all of your manual way and dynamic could be all the way over to the extreme. But I think that that

works are very very few restaurants in between. There are things like, well, how do I how do I get more efficient about being able to UM change my merchandising? Right? Wheybe it's the center panel of the digital menu. Maybe it's a printabal insert h inside of a menu instead of the you know, for full service instead of having to uh yeah, the manager prince every evening, instead of having all the all the prices having to go to

be professionally printed. Maybe it's um, you know, drink menus on you know an iPad or some sort of a digital presenter. Um, it's it's a whole different I think host of ways of figuring out how to become more efficient and being able to get the products, the bundling, the merchandizing and the prices out there, uh in a much more uh in a much more efficient and faster way. Um that moves with the temple with the business, not just the tempo of what a lot of restaurantoris wishes

the business would be. Sure, Um, and you know we've seen aggressive price increases in in the QSR industry for the last three years, full service for the last two. How much do you think US consumers can take? That is the question that yael Um. You know, I when you look at um, yeah, real income, you know, real real wages versus um versus inflation to right, that starts to tell you the real story about where the disconnect is gonna be. So you take the real wages and

then you take the savings rates um. And then and and again you've got to get really local, right because look, there's a lot of people who did really really well through COVID, as you know, a trillion dollars hit the capital markets, and even with the market correction that's going on now, it's still above where it was pre COVID something like that. So you know, so there's still a

wealth effect going on in the highest achalon um. Now with mortgage rates uh creeping up, you know, that's something that you know, we'll start to affect higher reschlant and middle income folks um. But monetary policy, these things, those are real lagging indicate or you know real is it a real lab right, we're experiencing, you know, stuff that the Fed did eighteen months ago. You know, the stuff that that they did two months ago is really going

to be felt significantly until next year. This sort of peaked to the you know, peake to not so peak inflation that we're feeling. It didn't really feel like a big tick down, did it. But yeah, there was a little bit of celebration over over eight and a half percent unbelievable, right right, right, And and so you know, and so the crowds applaud. You know, it was a little shocking, but um, but you know it's it's um,

it's gonna you know, it continues. They hit different different income levels and different demographics much differently, and those those lagging indicators, Um, that is really monetary policy. It's gonna take a while, and you know we see it basically trying to slow down the economy. But still we see five hundred thousand jobs being created last last week. That's not slow right, So so when when is the feederm gonna be able to get ahold of real inflation and

inflation expectations. What we're seeing in the tip down from uh from June is energy prices, right. That was you know, things really shot up in March when uh, you know, when things got you know crazy in Ukraine and you know other energy uh supply chains snarled, uh, and then there was just a huge expectation of recession, right, so everything shopped through the roof. So what we're saying now is just, uh, it's just energy prices coming down. That's

bringing things slightly more moderated. But what's going to happen in another month, you know, going into the winter, when you know Putin decides to shut off all the natural gas to Europe? Yeah, is that a risk? Is it going to happen? It's a risk for sure. If it

does happen, what's gonna happen in natural gas? And what's happened to do to the consumers in the Northeast and the north um, and a lot of it depends on what the you know, how how how cold the winter is gonna be, right as heating heating a home could be very Uh, is going to cost a lot much much, much more than it did a year ago, especially up

there and me especially your main that's for sure. Yeah, yeah, I mean the Feds really, you know, we've talked about this in the past, but the Feds really put itself into a box here right last year, they could have gotten away with increasing rates, um, you know, without having too much impact on consumer spending. Instead, they decided to blow some bubbles. And now, uh, they're kind of putting box right because that they're they're forced to almost cause

a recession to to slow down the inflation that we're seeing. Um. Yeah, it's it's it's I mean, it's frankly, it's it's worrisome, right because you know, looking at the delay from last year that was not good judgment, you know, and now looking at the increases like, okay, yes you have to do something, got it right, understood, We've got to Um. But are we gonna look back on it and say, you know, all right, yeah, we won't know until it's over right. Um. The idea of a soft landing, um,

I don't. I don't know how that happens, you know, with with also getting if you want to get inflation under control. Yeah, I don't know how there's a soft landing at this point because the time for gradual uh increases, it's sort of it's sort of over even the market things. You know. I seem to think last week that the FED was about to stop increasing, but I think they

read that wrong. But you're right. I mean, the seventy five basis points is an admission that they were behind the curve, right, So, um, you know, so I think you're right on that. So, you know, I think we touched on this a little bit. But you know, a big common theme for the second quarter earnings calls was the pullback and low income consumer spending. Young brands, McDonald's and some of the other companies recover, are starting to see some cracks. You know what what is your data

telling you? Yeah, now we we started seeing it, you know, going back to UH mid or at least spring um and and and it's getting and it's getting worse UM and particularly one of the one of the things that we've been analyzing is um UH is looking at trade areas where people are more dependent on gas and energy prices and so forth. Right, so understanding okay, you know by bye, by trade area and even by by brand, you know, how far are people commuting to work? UM

what uh? What are there? UM? What's your disposable income? And how much is the energy homage their energy use as a portion of the disposable income. And by using those kinds of metrics, you can really just see it's just like a big signal flare, you know, popping off the map UM showing you know where these where these pockets are and they're not necessarily limited to you know,

a particular region in the country. You know, they're they're within pockets of you know, lower income UM and longer commutes around you know, a lot of different municipalities from so forth. I think for people who are who are

in jobs maybe who can work from home. It might be less right now, but there's gonna be a compounding factor, right, because there's a there's a like with gas prices, um, the real consumer impact happens six to eight weeks after they make the purchase, because most gas purchases are done on credit, so gas prices go up um. Six eight weeks, you know, is when people are actually paying you know, paying the bills for it um. And you know that

starts to starts to perpetuate. Now, now, what also happened a lot of you know a lot of particularly the south, southwest and southeast with these massive heat waves where people had to just pump up the um the the air conditioning, and they're gonna they're gonna get a shock when the when the electric bell comes in because electric prices are are up, you know, depending on again what municipality live and so forth. But we're seeing some you know, some

areas with you know, increases in electricity. Wow. Uh yeah. And to your point, I just recently read that two thirty million or so new credit card accounts are opened in April the June, and it was the most in two thousand and eight. So this is a pretty scary way to deal with inflation in a rising great environment. Yeah, there's there's also the rise of the the whole pay for it later thing, And I'm sure you say some of that, which it seems like it could uh it

could be another bubble waiting to burst, Yeah for sure. Um. So this is uh something I found interesting on the calls. Um, you know, some of the companies I cover mentioned that slowing sales were attributable to a return to seasonality, right, so they're going back to a decline during the summer months. I thought it was an interesting take. I thought some companies had um had a decent take on it. I thought for others maybe it was just a convenient excuse.

I mean, do you have any thoughts on that? And and what do you seeing in your data? U? Yeah, I guess. I guess it depends on the brand. I mean, like, you know, it's it's a seasonal industry, so there could be seasonal, but you know, a national brand talking about you know, uniformly seasonal you know, bad summer traffic would seem yeah, a little hard to believe. Uh. Um, Yeah, I think that you know, we're still seeing a trend um even though there's a lot you know, there's a

lot bigger return to international travel for vacationing. But some of this, you know, I guess, I guess it's not consumer to a staycation. But there's a lot more domestic travel vacations this summer than there would have been pre

covid um. And where they're vacationing, also there's probably restaurants, right, So so the demand is shifting a lot, right, So you know, part of the I think part of the question, and I think you know it's a bit it's a really big question for a lot of these brands is you know, when you build your brand, did you build it all around trade areas that were UM business oriented and retail shopping oriented or did you build it more around um, you know, residential right, And because you know,

you get to some more remote areas that used to not have anybody there huge demand for restaurants and the restaurants can't keep up. But then you get into the old city centers that had a business park that you know they've got the return to office, but it's you know, three days a week on average, and you know, it's a completely different demand picture, and people have changed some

of their some of their eating habits. You know, they're not going out necessarily for the you know, for the big you know company luncheons and you know, the group dining and that kind of thing. Is that that that thing hasn't really come back the way a lot of other things have. Yeah, and it's interesting what it's done to the site selection, um you know for these companies. I mean, you know, Shake Shock, you know, and you did some great work on their site selection process for

me in the past. But um you know, it was all of their openings were in New York and Austin, in l A and all of these metropolitan centers. And then you know, in their last earnings call release they mentioned they opened in some town in Missouri I had never heard of, and up in Minnesota in these like suburban areas. So so it's really cause issues, I think

for companies that are trying to expand pretty rapidly. Yeah, and I look, I think it's a big question to you know, I think that the um I don't think there's really much question that you know, this some portion of remote working stays right, there's no going back to you know, five days in the office. So um so there's a lot of so so I think the the restaurants that were really dependent on that kind of traffic, there's a big question. So do they ever you know,

do they ever get that at that business staff? Um? The one that I think time will tell is, you know, there was a migration by a lot of people during COVID out of city centers probably and back to suburbs and back to rural Um does that does that stead right? Or do people start to come back into city centers because you know the threat of the pandemic is eased and you know they missed out that that type of life. Yeah, that's that's that's a mystery that will will solve over time.

But it'll be interesting for sure. Um. So you know, I think we touched on a little bit. But but um, I guess how our middle inn middle income and high income consumers holding up? And and where do you see that going in the second half? Yeah, I think I think so so far it seems pretty pretty resilient. You know, certainly at the at the high end um middle income. I think regionally, you know you're starting to see some

uh some some weakness, but no no capitulation yet. Um. But I think that, you know, to your point about more credit cards being opened up, on average, we've seen savings rate diminish, right, and you know, and I was seeing more people going to credit and so forth. So you you got that middle income to her. Um. You know, they may still be you know, they may still have some pretty decent savings you know. UM, I need to

look a little bit deeper into that. But there's a lot of reasons why, you know, why they're gonna they're gonna be able to fare a little bit, you know, a little bit further into whatever kind of you know, weakness we end up having. Uh. And what the timing of it is, um, But the the defense is going to be pretty pervasive, right, They're going to get on top of the flat and the only way to do

it is to yeah, stop out some economic growth. Um. And eventually that's going to hurt people who are you know, homeowners paying mortgages and you know have um, I have have credit cards, you know. And I don't think it's I don't think it's having a big effect yet. UM. But I think that if energy prices have another spike going into winter. Um. And of course interest rates are already going to be high. I think that that could really uh, we're gonna start seeing some weakness there. I

would expect, you know, by the end of the year. Yeah, it's unfortunate. Um and you know, uh, well we're hearing a lot and I keep bringing up earnings calls. Man, but it's been it's been my life for the list

three weeks. Um. But we're actually starting to see some discounting. Um. You know, it's been very very benign for for several years now, m KFC, Pizza, Hutton and Shake Shock where some of the names uh that that have announced discounts here in the third quarter, and there was more talk about value menus than I've heard for for a long time. So I know when we talked earlier this summer, you're kind of uh you mentioned that the deal wars we're

gonna begin begin sometime uh this year. How do you think the second half plays out and what does that do to third party delivery? Yeah, no, it's look, it's it's it's gonna make it's gonna make a comeback, you know, because you know we're already seeing you know, as we said, you know, the people who want to deal the most, you know, are the people who are dropping out of the experience, right, so how are you going to get

them back? The hope is that, I mean, the hope for the for the strength of the industry is that they're smarter about than they have been in years past. It's there's so many ways to be more targeted than there ever has been before. Um so. So, so you you don't have to say, you know, I'm back to you know, text dollar, you know, menu special everywhere all the time. Um yeah, that's easy. And I'll probably drive traffic and I'll probably gain share for the for the

biggest um for the biggest brands. Um but it's probably not going to be the one that the smaller brands you're gonna want to are gonna follow down because they can't compete at that at that scale. Um So. But it's it's it's going to come back. The question is whether it comes back smarter or just as dumb as it has in the past. Maybe not dumb, maybe not dumb,

but he is the wrong word. But but as you know, as just you know, blanket, uh you know, blanket and untargeted, you know, and as as it has in the past, I guess would be a better way okay, alright, cool man. I think that's that's a great place to wrap it up. I want to thank you for having me on. Every time I speak to you, I I learned something, so I'm sure there's a lot uh here for our listeners to um pick up on it and using their business