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Is a Food Consumption Shift Eating Away at American Restaurants?

June 27, 2017
Is a Food Consumption Shift Eating Away at American Restaurants?
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Have you been watching consumer spending trends? If so, you’ve seen massive changes in behavior that are uprooting more than a few industries and practices in this second decade of the new millennium. Retail may be among the most glaring, as the move toward online shopping is leaving major shopping and strip mall centers with imposing blocks of dark stores.

Shifts in food consumption are also eating into the American routine in ways that may be bringing the family back to the dinner table at home, but are forcing the industry to rethink its strategies. It’s tricky business getting consumers to eat these days.

Major food and beverage companies, the nation’s scrappy collection of grocery stores (both big and independent), and its overindulgence in all levels of out-of-home dining are getting gnawed at as consumers look for cheaper and healthier alternatives to processed foods that were once a staple in many households. In a major move toward healthier food consumption at a time when food prices are falling but labor prices are rising, the food industry is in a choose-me battle for what it calls “share of stomach.”

Some Food for Thought

This is all happening while food-at-home prices, as tracked by the U.S. Department of Agriculture, tumbled last year—falling 1.3% below 2015 levels—and when food-away-from-home rose. Egg prices plunged 21.1%, beef and veal prices dropped 6.3%, pork 4.1%, and dairy and like products slipped 2.3%. Among those that rose, fresh fruit was notable at a 2.2% upward climb, according to the USDA. Food prices in both instances edged up in April, but grocery and supermarket food bills are still 0.8% below the year-ago receipts; restaurant tabs are 2.3% higher, thanks to higher menu prices more than better traffic.

Against this backdrop, grocery stores are competing with casual and fast-food restaurants by offering prepared meals that are easy to pick up on the way home from work. All three segments are up against a wall with the growing popularity of fresh-food meal kits delivered to your home and the proliferation of food-delivery apps. And the health craze that has consumers opting for fruit, nuts, and quinoa over packaged sweet and savory treats has prompted legacy food and beverage giants—which now are also competing against much smaller, independent health-food startups—to rejigger recipes for their packaged products while introducing new, good-for-you offerings.

Blame it on the millennials. Everyone else is. Indeed, this group that outnumbers every other living age group in the U.S. has been fingered by industry experts across the board as those most responsible for the recent swing back to at-home eating.

Here’s what Buffalo Wild Wings Chief Executive Sally Smith had to say before announcing her retirement in June after losing a critical activist shareholder bid for board seats:

“Casual dining restaurants face a uniquely challenging market today,” she wrote in a letter to shareholders. “Millennial consumers are more attracted than their elders to cooking at home, ordering delivery from restaurants, and eating quickly, in fast-casual or quick-serve restaurants. Mall traffic has slowed. And, surprisingly, television viewership of sporting events (important for us, especially) is down.”

The Restaurant Recession

Ignite Restaurant Group is an example of the mounting troops of restaurants filing for bankruptcy. The parent of Joe’s Crab Shack and Brick House Tavern + Tap threw in the towel not long after reporting another deep drop in first-quarter same-store sales—14.3% at Joe’s and 12.6% at Brick House.

In its June 6 Chapter 11 filing, Ignite said that bidders interested in buying the chain dropped their plans because “amid declining same-store sales trends, the degradation of restaurant-level margins, and broader concerns that surfaced in media and analysts’ reports regarding the casual-dining and restaurant sector as a whole, these trends created an extremely challenging backdrop for investors,” Nation’s Restaurant News reported.

Major restaurant chains of all types nationwide have closed stores, folded, or filed for bankruptcy protection as restaurant density—what the industry counts as units per million in population—tapped its lowest level in 10 years at 1,924 units per million as of September 30, according to data from NPD Group, a market research firm specializing in consumer purchase data. Independent restaurants—those owned by a hometown celebrity chef or your neighbor’s parents—slumped 3% in 2016. Restaurant industry sales are still growing, expected to reach $798.7 billion this year from $586.7 billion in 2010, according to National Restaurant Association, which notes that the “rate of growth remains moderate.”

“This is the most significant drop in total U.S. restaurant counts since the recession,” Greg Starzynski, product management director at NPD Foodservice, said in the report. “If consumers continue to reduce their restaurant visits, we expect the number and density of restaurant units will continue to decline in response to the lower demand.”

Food prices are lower, which might make you think that you should be seeing menu prices shrinking as well as an incentive to eat out. But food is just a small part of the costs of operating a restaurant. Labor, location, and utility costs far outweigh the price of putting food on the table or counter, and are pressuring profitability at a time when traffic is slowing. Interestingly, labor costs are rising not only because of the push to raise minimum wages, but there’s also a deepening shortage of skilled hospitality workers to fill both the front and back of the house at all restaurant types.

Here’s another conundrum: Fast-food chains, which are adapting better to food-consumption vagaries, are opening more new stores while fast-casual and even fine dining are closing and calling it quits. That’s a trend that NPD sees continuing throughout this year and perhaps beyond as the industry shakes out from being over-saturated.

New Dining Spot: The Grocery Aisle

Grocery-store chains are taking restaurants, particularly fast-casual chains, head on with perks that make the produce aisle look more like a garden and the wine department more akin to a wine bar, with snacks. You can grab a full-course, ready-made dinner or a quick sandwich to eat in a comfortable grocery-store café or on a to-go basis. Too much work? Have it delivered.  

Falling food prices are making the eat-at-home trend even more attractive. Sure, the prep work and delivery are adding costs to grocers, but in the race for share of wallet and share of stomach, these are incentives that local food stores have to provide for attention.

The grocery and supermarket business accounts for about 91% of all food sales, according to data from the USDA's Economic Research Service, and it's a low-margin business. In 2016, the industry rang up $612 billion in sales, according to IBISWorld research group. On average, annual growth in the industry has been a mere 1% from 2012 till now, IBIS reports.

Moreover, consumers are shifting habits tied to where they shop. Traditional grocery and supermarkets were once the go-to for loyal customers, according to the Food Marketing Institute (FMI). That’s been eroding since 2005, when traditional grocery stores as the primary channel to stock up the pantry stood at 67%. That figure fell below 50% for the first time in 2016. Consumers are increasingly looking to supercenters, limited-assortment and organic channels, and even drug stores to buy food. And with Amazon's (AMZN) recently-announced plans to acquire Whole Foods Market (WFM), maybe even add shopping at home to the list.

More proof that eating at home is king: Some 89% of shoppers told FMI in a recent survey that “eating at home is healthier than eating in a restaurant.” And therein lies the food-consumption rub.

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