How Food Markups Are Eating Your Paycheck
There is a tremendous amount of variety within the food industry. Like any industry with great variety, there are huge gaps in quality that create niche markets for those who don’t need the product to survive and have the desire and enough resources to pay for the high-quality goods.
As consumers, we have what is called perceived quality, or the perception of overall quality from one brand to the next. Perceived quality is a tool used by luxury brands to get folks to pay exorbitant amounts for their products solely based on the quality they think they’re getting. Utilizing that tool allows Ferragamo to charge $400 for a freaking belt when I could go to Kohl’s and get one for $20. It’s what drives status in this country, creating a cycle purely based on hype.
But what about the food industry? Does my trip to T.G.I. Friday’s for endless appetizers really cost them $40 when I power slam 9 servings of potato skins? Or are they marking up the price to generate perceived value so I think I’m getting a deal? These are the questions that keep me up at night.
I’d like to start this out by saying that I am in no way, shape, or form a “foodie”. I think guacamole is overrated, coleslaw should be its own food group, and I still don’t know what aioli is or what purpose it serves.
A markup is what is added to cost price of goods to cover overhead and profit. In layman’s terms, it’s the price of a product minus what it cost to produce, usually shown as a percentage. The markups in the restaurant industry are incredibly high compared to what it would cost you to make a similar meal at home.
For example, if you wanted restaurant wine, that’s usually marked up around 400%. Domestic beer isn’t any better at 694%. And if you wanted to be the responsible one drinking a bottled water? That’ll mark you up to the tune of 2,000% (for obvious reasons).
My fascination with food markups started with a conversation between me and my little brother. We were ordering a pizza from Papa John’s (the premier chain pizza restaurant) and I wondered how great the deals on the “specials” page really were. We ended up getting two large specialty pizzas that would have cost us $40 had we not had a half off promo code; it made us curious in how much these chain pizza restaurants profited from us getting a perception of “better ingredients, better pizza.”
AOL Finance reported that a medium pizza from one of America’s chain’s only cost about $2.60 for them to make. Broken down into ingredients, that’s 25 cents for dough, 35 cents for sauce, and $2 for cheese. Those pizzas regularly go for $8, meaning you could save yourself roughly $5.40 by just being savvy enough to make it on your own. Of course, production costs like labor, equipment, building rental, franchising rights, etc. are factored into the equation but $5.40 is still a pretty hefty markup.
Another interesting thing about dining out, particularly in fast food, are the deals that are frequently given out to customers. It’s like buying a car; nobody actually pays the chain restaurant sticker price for take out! My fellow SnoQap members (looking at you Katy, Alex, & Drew) are Dominos loyalists who will gladly inhale that glorified cardboard if it only costs $5.99 per pizza.
What’s so interesting to me about these specialty pages are the mind games that they’re playing with us. It’s a pricing strategy called markup to markdown and it happens all the time in retail. Retailers will mark up the prices of certain items just so they can mark them down to make you believe that you’re getting a deal.
Back to food though. This is all relevant because we’re at an interesting intersection in food history. For the first time ever, we’re spending more on eating out than we’re spending on eating at home. It’s a habit born out of convenience. More people than ever are living in cities, which means easier access to restaurants in addition to the ease with which one’s favorite meal can simply be ordered off an app like GrubHub or UberEATS.
In a recent survey by Lux Research, it was found that people are willing to pay 30% more for prepared meals and 55% more in restaurants for takeout. So we’re doing this to ourselves essentially, succumbing to the markups. It’s almost impossible not to, especially in our society.
Socially, we just have to bite the bullet on this. After a company event, we go to happy hour, we dine out at a fancy restaurant for birthdays, we even go so far as to spray each other with bottles of carbonated alcohol when we achieve something. If you chose not to partake in our marked-up society, you might get labeled as cheap and may be left to the wayside to rot away in the loneliness of your home cooked pasta meal.
As you can probably infer by now, there are extreme markups all over the place and they’re not going anywhere. If I were to write a more responsible article on markups, I’d write about how pharmaceutical companies are robbing the American public off of drugs like Daraprim, which has a markup of 5,000%! Granted, pharmaceutical companies will claim that there are millions spent on R&D behind these drugs but that’s a whole other can of worms. Writing about pharmaceuticals may not be as glamorous as writing about how your Dominos’ markup is more figures than your salary, but maybe I will because our marked-up world isn’t changing anytime soon.
Beck, Julie. 2015. “The Drug With a 5,000 Percent Markup.” The Atlantic, September 22. https://www.theatlantic.com/health/archive/2015/09/daraprim-turing-pharmaceuticals-martin-shkreli/406546/.
Bhasin, Kim. 2017. “JCPenney Is Raising Prices So That It Can Mark Them Down.” Accessed July 29. http://www.businessinsider.com/jcpenney-raising-prices-to-mark-them-down-2013-3.
Durden, Tyler. 2017. “For The First Time, Americans Spend More On Eating Out Than On Food At Home | Zero Hedge.” 2017. July 26. http://www.zerohedge.com/news/2017-07-26/first-time-americans-spend-more-eating-out-food-home.
Staff, A. O. L. 2017. “Top 5 Food Mark-Ups Where Restaurants Make Huge Profits.” Accessed July 29. https://www.aol.com/2010/09/08/top-5-food-mark-ups-where-restaurants-make-huge-profits/.
Zhang, Maggie. 2017. “37 Products With Crazy-High Markups.” Accessed July 29. http://www.businessinsider.com/products-high-markups-2014-7.