Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Restaurant Industry
Transcript
- Lucas: So the May CPI came in at 4.2 percent annualized — highest in three years — and real GDP growth is sitting at 1.6 percent. That's the textbook definition of stagflation, and we're starting to see it show up in everyday consumer behavior in a really concrete way: where people choose to eat. Luna: You mean the whole 'trading down' phenomenon? I've definitely noticed more fast-casual and takeout spots popping up in my neighborhood, while some of the sit-down places seem to have 'for lease' signs. Lucas: Exactly. And the data backs that up. The National Restaurant Association's index for full-service restaurants has been declining for four straight months, while limited-service — think Chipotle, Sweetgreen, Panera — is actually seeing same-store sales growth. The gap is now the widest it's been since the 2008 recession. Lucas: And if walking through the economy with us has made something click — like why your favorite bistro is suddenly offering a 'value menu' — the way these episodes stay ad-free is listener support. You can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small gesture that keeps the economics nerdery going. So back to the restaurant split — what's driving the shift beyond just price? Lucas: The biggest factor is that real wages aren't keeping up. Average hourly earnings are up to $37.50, but when you adjust for 4.2 percent inflation, purchasing power is actually flat to slightly negative. So consumers are making trade-offs. Luna: Right, a $20 entree at a sit-down restaurant feels a lot less justifiable when your grocery bill is also up. Meanwhile, a Chipotle burrito bowl at $10 — you can still rationalize that. Lucas: Precisely. And the limited-service operators are leaning into it. Chipotle reported first-quarter earnings last month — same-store sales up 5.4 percent, and they cited 'value-seeking customers' as a key driver. They're also shrinking store footprints — their new 'Chipotlane' digital-only locations are about 40 percent smaller than traditional stores, which lowers rent and labor costs. Luna: That's a smart hedge for stagflation. You want to keep the price point accessible, but you also need to protect margins when food costs are volatile. Lucas: Exactly. And it's not just Chipotle. Sweetgreen reported a 9 percent jump in same-store sales, and they're rolling out automated salad-making kiosks in about a third of their new locations. That directly addresses labor cost pressure — the JOLTS data showed job openings jumped to 7.6 million in April, so hiring remains tight, especially in food service. Luna: So automation is part of the survival playbook. But what about the full-service restaurants that can't just automate a steak dinner? Are they just doomed? Lucas: Not doomed, but they're having to adapt in different ways. Some are shrinking menus to reduce waste and streamline kitchen operations — fewer options means less inventory to manage and fewer staff needed. Others are adding service charges explicitly for 'inflation adjustment' or 'kitchen appreciation fees' — which is controversial, but it's a way to pass on costs without raising menu prices. Luna: I've seen those fees. They range from 3 to 5 percent. Customers hate them, but restaurants say they'd rather do that than raise prices 10 percent and scare people off. Lucas: Right. And the data shows customers are more tolerant of a flat fee than a big menu price jump — psychological pricing still matters. But the real long-term shift is structural. We're seeing a permanent reallocation of dining dollars toward limited-service, and that has implications for commercial real estate, for labor markets, for food supply chains. Luna: Let's talk about commercial real estate. If full-service restaurants are closing or shrinking, what happens to all those prime corner locations? Lucas: Landlords are having to get creative. Some are splitting big restaurant spaces into smaller units for fast-casual chains. Others are converting them into ghost kitchens — central preparation facilities that serve multiple delivery-only brands. There's a company called CloudKitchens that's been buying up distressed restaurant properties and turning them into multi-brand delivery hubs. Luna: Ghost kitchens were already growing pre-pandemic, but stagflation seems to be accelerating it. Lower overhead, no front of house staff, and you can pivot menus quickly based on ingredient costs. Lucas: Exactly. And that flexibility is crucial when food commodity prices are volatile. The CPI data shows food away from home prices rose 4.6 percent year-over-year in May — even faster than overall inflation. So operators need to be nimble. Luna: What about the labor side? You mentioned job openings are up, but we also saw initial jobless claims tick up to 225,000. Is that starting to loosen the labor market for restaurants? Lucas: Slightly, but not enough. The unemployment rate held at 4.3 percent in May, and wage growth in leisure and hospitality is still running above 5 percent. So restaurants are still competing for workers, which puts pressure on margins. That's a big reason why automation and smaller footprints are so appealing — they reduce dependency on a tight labor pool. Luna: And it's not just the big chains. I've seen local mom and pop pizzerias installing self-ordering kiosks and QR code menus to cut down on waitstaff. Lucas: Absolutely. The technology is getting cheaper. A self-ordering kiosk can cost around $1,500 to $3,000, and it can replace one or two front of house positions. In a stagflation environment, that pays for itself in under a year. Luna: So the takeaway seems to be that the restaurant industry is bifurcating: the limited-service, tech-forward players are thriving, while traditional full-service is in survival mode. Is that sustainable long-term? Lucas: I think the bifurcation will persist as long as stagflation does. But historically, when inflation moderates and growth picks up, there's a rebound in sit-down dining. The question is whether the structural changes — smaller footprints, automation, ghost kitchens — become permanent even after the economy recovers. Luna: And what about the consumer? Are we going to see more 'value wars' like we saw in the late 70s? Lucas: We're already seeing it. Taco Bell just launched a $1.99 value menu. McDonald's is testing a $5 meal deal. The fast-food chains are fighting for the penny-pinching customer, and that's exactly what happened in the 1970s — the 'dollar menu' concept actually originated in that era. Luna: It's fascinating how history rhymes. One thing I'm curious about: are there any restaurant segments that are actually benefiting from stagflation? Lucas: Surprisingly, yes. Discount and dollar-store adjacent dining — think Cracker Barrel's retail side, or even the frozen food aisle — but also, some high-end tasting-menu restaurants are doing well. They cater to a clientele that's less sensitive to inflation, and they can raise prices without losing customers. The New York Times reported that several three-Michelin-star restaurants have waitlists months long despite $400 per person tabs. Luna: So we're seeing a barbell effect: low-cost and ultra-luxury thrive, while the middle gets squeezed. That sounds a lot like what's happening in retail and housing too. Lucas: Exactly. It's a consistent theme across the economy. The middle-market full-service restaurant — the Chili's, the Applebee's, the local Italian place — that's where the pain is. They can't compete on price with fast-casual, and they don't have the cachet to charge luxury premiums. Luna: So what's the playbook for those restaurants? How do they survive the next few years? Lucas: A few strategies I've seen working: one is to lean into off-premise dining — takeout and delivery. Dine-in traffic is down, but off-premise now accounts for over 40 percent of sales at many full-service chains. Another is to shrink the menu and focus on high-margin items — pasta, for example, has much better margins than steak. Luna: And then there's the 'subscription' model. Some restaurants are offering monthly dining clubs — pay $50 upfront and get 20 percent off every meal. It builds loyalty and gives them predictable revenue. Lucas: Right, that's increasingly common. It's a way to lock in repeat business and smooth out demand. And it works especially well in a stagflation environment where every dollar counts for the consumer. Luna: What about the supply side? We've seen avian flu and weather events hit food supplies. Is that compounding the inflation problem for restaurants? Lucas: Absolutely. The CPI for food at home is up 3.8 percent year-over-year, but certain items are much worse — eggs were up 20 percent at one point. Restaurants that rely on eggs, like breakfast chains, have had to either raise prices or reformulate recipes. Some are using liquid egg substitutes or sourcing from different regions. Luna: It's a constant game of whack a mole. So looking ahead, what should listeners watch for as indicators that the restaurant industry is turning a corner? Lucas: I'd watch two things. First, the spread between full-service and limited-service sales — if that starts to narrow, it could signal that consumers are feeling less squeezed. Second, job openings in leisure and hospitality — if they decline significantly, it might mean restaurants have adjusted their labor models enough to stabilize margins. Luna: And personally, I'll be watching the menu boards. When the $5 meal deal disappears, I'll know inflation is truly easing. Lucas: Hah, that's as good a leading indicator as any. I think there's a deeper lesson here: the restaurant industry is a really sensitive barometer for the broader economy. When people stop going out to eat, it's usually the first sign of trouble, and when they start again, it's a sign of recovery. We're in the middle of a structural shift right now, and it's worth paying attention to what your local restaurants are doing. Luna: Absolutely. Next week, we'll look at another sector that's being reshaped — maybe something less obvious than food. Thanks for listening, everyone.