Falling food prices give supermarkets competitive edge
The restaurant recession some analysts portray is actually an opportunity for retail grocerants.
While a 3.0% restaurant traffic decline through the first ten months of 2016 exceeds the 0.8% drop for all of 2015, the best same-store sales growth so far in 2016 is in quick service, upscale casual and fine dining segments. “Mid-scale spending is where they’re having the most trouble,” says Victor Fernandez, Executive Director for Insights and Knowledge for analytics firm TDn2K.
The primary culprit is less disposable income for eating out, say Wall Streeters and industry watchers, due to reasons such as higher housing and health insurance costs, purchases of big-ticket items on credit, and more working and shopping from home-based computers.
Now mix in falling food prices—which supermarkets tend to pass along to customers and attract more trips—and the pressure on restaurateurs grows more intense. But the lower food prices are good news for retail grocerants, which benefit from the greater supermarket traffic. They also enjoy ready access to full stores of ingredients at the lower prices. Advantage, grocerants!
By contrast, says the Baum + Whiteman consultancy: “Restaurants, by and large, are hiking prices as they grapple with rising rents and wages, increasing health care costs, parental leave and other mandates. Supermarkets benefit by employing far less labor per dollar of sales than do restaurants…and consumers, acutely aware of the widening cost gap between eating out and eating home, are shifting behavior.”
This pricing cycle likely won’t end soon, since USDA projects 10% lower beef and pork prices over the next decade. “This all hurts farmers, ranchers and food stores, since they must continue cutting prices," adds B+W. "But it is a killer for restaurants. If food prices continue falling, restaurants will be compelled to lower menu prices precisely as costs spiral upwards."
Grocerant operators should relish today’s shifts in customer traffic patterns to where eateries are increasingly pervasive – such as supermarkets, c-stores and quick service – and plan strategies for expected growth.