KD Deshmukh says he recently celebrated his spouse's birthday with a salmon dinner at home. He also buys in bulk, clips coupons and has switched to more store brands to save money at the grocery store.

KD Deshmukh says he recently celebrated his spouse's birthday with a salmon dinner at home. He also buys in bulk, clips coupons and has switched to more store brands to save money at the grocery store.

Higher prices have Americans reconsidering their dinner and coffee.

For the first time in years, people's grocery hauls are getting bigger. And many are choosing to splurge a bit at the supermarket over going out to eat, prompting fast-food and other chains to step up deals and meal combos.

This week, McDonald's reported its first decline in sales since the COVID-19 pandemic shutdowns of 2020. Sales at Denny's dipped 0.6%, and profit at Wendy's declined in the latest quarter. Starbucks sales fell 2% in the U.S. as people came in less often.

"When [restaurant inflation is] still ahead of where grocery inflation is," Denny's CEO Kelli Valade told investors this week, "we definitely feel like people are probably still saying, 'I should just cook at home a little bit more often.'"

In the past year, grocery prices increased 1.1%, federal data shows, while the cost of restaurant meals grew 4.1%.

Choosing a grocery splurge over dinner out

Those price increases are much lower than in recent years. Yet they are layered on top of many past price hikes, which companies tend to blame on higher costs from wages, ingredients, packaging and transportation. Since mid-2020, the cost of groceries has grown 19%, while restaurant prices have jumped almost 24%.

This has more shoppers recalibrating where they are willing to put extra dollars.

Take KD Deshmukh, an engineer in Tulsa, Okla., who has tightened his budget by buying more in bulk or with coupons and often switching from brand names to store brands. When deciding how to celebrate his spouse's birthday recently, the couple chose a trip to a higher-end seafood market for a homemade dinner over an outing.

"Instead of going to a restaurant," he says, "we were like, 'We are pretty good cooks — let's go splurge on a better piece of salmon that we know came in fresh.' And it's a bit of premium but definitely worth it."

Market research firm Circana has tracked this shift for months: While many shoppers are reaching for cheaper store labels, a growing number of them are also upgrading to premium brands.

"Because at least it's a little treat," says Circana's Sally Lyons Wyatt. "It's a little reward of — all right, I'm cutting back in these places, but at least I can have something that I perceive to be better quality, better taste, better experience" at home.

Prices at supermarkets are rising much slower than those at restaurants, and some prices are actually declining.

Prices at supermarkets are rising much slower than those at restaurants, and some prices are actually declining. / AFP via Getty Images

In fact, after years of shoppers getting less, even when spending more money at the grocery store, they are now leaving the supermarket with more items, Circana finds. At the same time, food purchases at cafes and other eateries have declined since the start of the year.

Some chains win — some chains lose

The impact on restaurants varies. Sit-down restaurants saw more diners in May and June compared with those months last year but came out flat in July, according to OpenTable's tracking of online reservations.

KFC, Arby's and Buffalo Wild Wings saw fewer visitors in July compared with last year, according to Placer.ai, which tracks foot traffic. Visits to Burger King, Wendy’s and Taco Bell increased.

Fast-casual chains — think Chipotle, Shake Shack, Panera — have benefited the most from the dinner reshuffle, as more people choose those chains' burritos, burgers and sandwiches over a pricier sit-down meal.

A similar trade-down is no longer helping McDonald's, which is losing business from inflation-wary lower-income families.

"They're dropping out of the market, eating at home and finding other ways to economize, cutting down on trips," McDonald's CEO Chris Kempczinski told investors. The chain still gets more higher-income customers, but "it's just not enough to offset the pressure that we're seeing on that low-income consumer."

McDonald's is extending its $5 meal deal through the summer, saying the offer is helping to draw more customers.

McDonald's is extending its $5 meal deal through the summer, saying the offer is helping to draw more customers. / Getty Images

More deals to coax diners

McDonald's is now extending the run of its new $5 value meal through the summer and is doubling down on promotions like free fries for purchases through its app. Speaking to investors, executives didn't talk about lowering regular menu prices but called out the chain's own inflationary costs as reaching 20% to 40% around the world over recent years.

As restaurant chains present their financial reports, a focus on deals and value meals is a big theme. Starbucks has been offering discounts and meal combos more frequently.

One priority for Starbucks is to "demonstrate our value by making sure customers believe that Starbucks experience is worth it every time," CEO Laxman Narasimhan told investors.

That's tricky now that more people are watching their going-out budgets. At the grocery store, the most common items people are upgrading on include wine, pasta sauce and pizza dough.

"The Italian night is still huge, especially the premium Italian night," says Circana's Lyons Wyatt. "That night, I don't think, will go away anytime soon."

NPR's Scott Horsley contributed to this report.

Tags: McDonald's  Starbucks  Denny's  inflation  food prices  restaurants  grocery prices