Price growth at restaurants outpacing grocery inflation as businesses struggle

Restaurant price inflation has been outpacing grocery inflation for months, a sign that business owners continue to grapple with higher costs, said Restaurants Canada.

"When we started to see these initial inflationary pressures start to creep in, restaurateurs were a little nervous to start passing on those increases in costs to the guests," said Kelly Higginson, president and CEO of Restaurants Canada. 

More and more, restaurants have been "pushed to the brink," leaving owners no choice, she said. 

Grocery inflation continued to slow in March, rising just 1.9% compared with a year earlier, Statistics Canada reported on Tuesday. That's down from February's annual rate of 2.4% and a far cry from the peak of grocery inflation at 11.4% in late 2022 and early 2023. 

However, prices for food purchased from restaurants rose 5.1% from a year earlier, the same rate as in February and January. 

That was led by fast food and take-out restaurants, where prices rose 6.4% in March from a year ago. 

Restaurant owners are struggling with a variety of inflationary pressures, including rising insurance and labour costs and higher interest rates, said Higginson.

"We came out of the pandemic with a lot of debt," she said, including lines of credit and credit cards. 

But restaurant owners have been wary of hiking menu prices too high or too fast, Higginson said. 

"Especially as we came out of the pandemic, there was a lot of concern about passing this on, because we were trying to build the industry back," she said. "We were trying to get people back into restaurants." 

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Throughout 2022 and just over half of 2023, inflation on food purchased from restaurants was consistently lower than grocery inflation, often by several percentage points. For example, when grocery inflation was 11.4% in November 2022, restaurant inflation was 7.7%. 

But grocery inflation began moderating into the second half of 2023, and September saw a reversal of the trend as grocery inflation dipped below restaurant inflation. It's been lower ever since, while restaurant inflation has remained above five per cent. 

Almost two-thirds of restaurants are operating at a loss or barely breaking even, Restaurants Canada said in a February report.

The association said bankruptcies in the industry last year were at their highest annual figure in a decade.

One of the main challenges has been weak sales, said the report, as consumers continue cutting back on discretionary spending amid rising costs. 

But even as patio season approaches, promising a boost in sales, that may not be enough for many businesses, said Higginson. The labour-intensive industry needs inflationary pressures to ease so margins can improve, she said.

"It's really tricky, because it's not necessarily a sales issue. It's a bottom line issue," she said. 

Restaurant prices were one of the five biggest contributors to overall inflation in March, Statistics Canada said, along with mortgage interest, rent, gasoline and car insurance premiums. 

Overall inflation for March was 2.9%, rising slightly from February. Food inflation, which includes both groceries and restaurants, was three per cent.

Persistently rising grocery prices have been a thorn in Canadians' side as shelter costs and interest rates have climbed as well. Canada's major grocers have been under fire from politicians, with the government last fall calling on the companies to present their plans to mitigate food inflation. 

The pressure has led more shoppers to seek out relief at discount grocery stores, or by buying private-label products instead of brand-name. The major grocery chains have responded by opening or converting more discount stores, in particular Loblaw, which opened more than 30 new Maxi and No Frills stores last year. 

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But while grocery inflation has steadily declined in recent months, that won't necessarily translate into relief in the short-term. 

RBC Capital Markets analyst Irene Nattel pointed out that food prices have risen significantly over the past couple of years, compounding and remaining a significant headwind for household budgets. 

Because of this, shoppers are likely to continue "value-seeking behaviours" like going to discount stores and choosing private-label or on-sale products, Nattel said in a note. 

One of the main factors putting pressure on the sector has been weak sales, said Restaurants Canada, as consumers continue cutting back on discretionary spending amid rising costs. 

Restaurant prices were one of the five biggest contributors to overall inflation in March, Statistics Canada said, along with mortgage interest, rent, gasoline and car insurance premiums. 

Overall inflation for March was 2.9%, rising slightly from February. 

Food inflation, which includes both groceries and restaurants, was three per cent in March.