The media is feeding us a confusing narrative.
On one hand, restaurants should be benefiting from recent low gas prices and food deflation — with meat, chicken, and egg prices, in particular, depressed.
Depressed food prices are not inuring to the benefit of restaurants…or grocers.
One the other hand, we’ve seen that restaurant chains are suffering from increased rent, healthcare and employment costs and, thus, more than a dozen restaurants have filed for Chapter 11 or 7 this year alone. While there are some outliers, e.g., Olive Garden, traffic at restaurants has fallen in 10 of the last 11 months (this includes the once-hyped fast casual segment, which is experiencing a customer count decline so far in 2016). And a U.S. Labor Department regulation increasing overtime pay for managers may still take effect and potentially make matters worse — despite a recent 11th hour injunction issued by a Texas District Court judge halting, at least temporarily, the December 1 effective date.
Some argue that grocers are benefitting from the restaurants’ pain. Are they? The numbers reflect that grocers’ margins and stock prices are also taking a hit from this wave of food deflation. A number of publicly-traded grocers like Sprouts Farmers Market, Smart & Final Stores Inc., and Kroger Co. have lowered full-year ’16 guidance. WholeFoods reported its first annual comparable sales decline since 2009. Randalls, Jewel-Osco, H-E-B, Albertsons and even WholeFoods are slashing prices like crazy in a race to the bottom. And others have fallen victim to bankruptcy — A&P (the second time), Fresh & Easy (the second time), Haggen, Fairway, Garden of Eden — or been bailed out.
Much of this is just natural competition. Discounters like Family Dollar and big box stores like Target and Walmart are sacrificing margin in exchange for foot traffic. Indeed, Dollar General reported lower comp-store sales this week and a 10% decrease in its bottom line (and initiated a wholesale marketing process of various rental properties). WholeFoods and KMart are aiming to offer food to lower scale markets. Amazon Fresh, Munchery, Maple, Blue Apron, Zakara Life, Caviar (owned by Square and on the market), Hello Fresh, UberEats, and a seemingly endless array of other app-based food distribution and/or delivery services are also complicating matters. With free introductory experiences, consumers can have at least a week’s worth of food subsidized by Silicon Valley: this isn’t helping grocers in major markets.
What does this all mean in the end? For starters, we are likely to see continued stress and distress in both the restaurant and grocery space. As we get there, there will likely be job losses — at the highest levels of management and beyond — and additional technological advancement. Touchscreens are likely to proliferate and, where possible, broader-based automation deployed. To point, McDonalds this week announced the launch of its touchscreen self-service ordering kiosks in its 14,000 locations. While MCD’s CEO Steve Easterbrook indicated that this would not reduce costs/jobs — merely alter them — do we really believe that? So he proposes to pay workers more to effectively do less? Not with the Eatsas of the world expanding — now at 5 locations.
The space has come a long way and there are more drastic changes in store.
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