One of the most basic tips for personal finance beginners getting a handle on their monthly spending is to cook more meals at home. Still, many of us enjoy the occasional meal out, perhaps once a week or so. It provides a break from cooking, a bit of entertainment, and maybe a date night.
A month or so ago we sat down for lunch at a restaurant we were passing by and ended up leaving upon seeing the prices on the menu. No, I’m not paying you $18 for a burger or $22 for a chicken sandwich. And I’m certainly not paying $10 for a pint of draft beer from a brewery a few towns over, when a larger 19.2 oz can of the same stuff retails for $3.29 at my local liquor store.
I understand that restaurants are businesses seeking to make a profit and their input costs including food and labor have risen, so the price they need to charge for their product has also gone up. I don’t expect charity or at-cost food prepared with slave labor. As a consumer I just have to vote with my wallet if I don’t feel that an exchange of goods or services is worth the cost to me. Ultimately this means eating somewhere else that still feels reasonably priced, or using my personal (free) labor as an input to make my own food more often.
In the conditions of our current inflationary environment, the price inflation for food purchased at grocery stores is worse than at restaurants. For the one year period ending in June 2022 as measured by the Consumer Price Index, the percentage increase in price for “food at home” was 12.2%, whereas for “food away from home it was 7.7%.”
Initially, one may think this larger increase in grocery prices would narrow the gap and make restaurants more of a deal compared to preparing food at home. That’s the argument that articles like one from TastingTable titled “It May Soon Be Cheaper To Eat Out Than At Home. Here’s Why” have attempted to present. However as we will see that is not correct.
Even with today’s grocery prices I could easily make a pub style burger at home for $5 or less:
The cheapest (non fast food) restaurant by me that sells a similar burger is $13. As I complained about earlier, the worst I have seen is $18 and most places seem to be in the middle of those figures at $15. Let’s go with the cheapest $13 restaurant burger to be as generous as possible. After a 20% tip and sales tax that’s $16.41. Well over three times the cost of the homemade burger.
Let’s apply our June 2022 CPI numbers to these current prices for the sake of a quick illustration:
An additional 12.2% inflation on our homemade burger would be 55 cents.
An additional 7.7% inflation on the total price of the restaurant burger would be $1.26.
It’s this large delta between eating out costing multiple times the price of cooking at home which has caused restaurant prices to quickly seem so absurd, despite the price of groceries inflating faster in percentage terms. A small percentage of a large number can be greater than a larger percentage of a small number.
Sure, restaurants can exercise economies of scale and purchase ingredients for cheaper than individual consumers can at the grocery store. However, as we can see, raw ingredients are clearly only a small portion of a restaurant’s costs. Even if they were paying retail grocery prices, $4.48 is only about a third of the menu price of the $13 burger, and they’d be paying even less than this via restaurant supply services.
The remaining vast majority of the price must cover things such as the cost of the retail space, utilities, workers’ pay, business insurance, and profit for the owner. While all of these items inflate at different rates, they’ll always make up the majority of the price of a restaurant meal, regardless of what happens with grocery prices.
Food prices don’t move in a vacuum, and it’s likely that increasing food prices would put inflationary pressure on wages as well. Rising rents in an area would increase the commercial space cost at lease renewal time, and likely also pull wages up with it.
Mathematically, it’s simply unlikely for inflation in food prices to ever narrow this gap and make restaurants marginally more economical than cooking at home. For this to happen, the ratio of the cost between a meal at a restaurant and one prepared at home needs to be less than than the ratio of the inflation rate between “food at home” versus “food away from home.”
For example, in June 2022 we saw a 12.2% / 7.7%, or 1.58x ratio between the inflation rates of food at home versus away from home. Unless restaurant menu items cost 1.58x or less what it would cost to make the same item at home, restaurant meals are increasing in dollar-denominated price faster than groceries.
Going back to my $4.48 homemade burger and fries example, that would have to cost only $7.08 at a restaurant to bring the dollar value increase on par with grocery inflation (55 cents applying both respective inflation rates). I don’t think it’s possible to get even a low quality fast food burger for that price anymore, and I am not aware of any restaurant items which cost only 1.58x the price of their component ingredients, let alone less than that.
The takeaway from this analysis is that in our current inflationary environment, the value proposition of restaurants is declining. In terms of saving money, it has actually become more worth it on average to prepare your own food over the past year. The total cost for eating out has inflated by a larger dollar amount, and therefore one can capture even more savings than a year ago by cooking at home.
My shifting perspective on restaurants
I’ve definitely been making a conscious decision to eat out less than our usual once per week. Also, while I’ve been consuming less alcohol in general, I haven’t bought any drinks out in the past couple of months because I feel the prices have just become too extortionate.
I also haven’t had any work travel trips for the past couple of months, so this shift in my monthly restaurant spending is quite obvious; in June and July of this year it was $86.32 and $57.61 respectively.
Still, it’s nice to go out every now and then. When I do, I’m more conscious about ordering things which I don’t have much practice making at home. For example, it’s quick and easy to make a decent burger, so it’s silly to pay a premium for one, and there’s nothing more disappointing than getting a meal out and ending up with the same or worse product than you could have crafted at home for a fraction of the cost.
Another thing I’ve been doing recently is making sure to support local restaurants that have had smaller price increases. In my area it seems there were a lot of menu redesigns this year, which came with around 25% price hikes across the board (often you can find user-submitted photos of the old menus on Google Maps to compare prices). This has meant cutting some of our “regular” spots out of the rotation. Providing higher sales volume to the businesses that have tried to keep their prices under control is doing my little part to hopefully help them continue doing so.