Imperfect Storm

Food prices, retail competition, economy bite restaurant industry

ROSEMONT, Ill. -- Bad news for the restaurant industry may translate to good news for convenience-store and other retail operators with a foot in foodservice operations. Retail meal solutions (RMS)—prepared foods made at grocery and convenience stores—are growing at twice the rate of the foodservice industry in general.

That fact was pounded into the audience's heads at the seventh-annual Technomic Information Services' Restaurants Trends & Directions Conference held in Rosemont, Ill., last week.

A restaurant industry that shrugged off the retail sector as a viable [image-nocss] competitor is now on notice. That was the moldy cherry on top of a nearly full day of bad news for restaurant players.

Chicago-based Technomic's president Ron Paul was the bearer of much of the doom and gloom, as slide after slide of his opening presentation showed industry and economic data that offered little reason for short-term optimism. Sales growth in 2007 compared to 2006 was down from 5.9% to 3.9%, the lowest since 1991, while unit growth dropped from 2% to 1.2%. In 2008, consumer confidence is down (to a 35-year low), as is gross domestic product (GDP) and employment levels, and disposable personal income is decelerating.

The one area that showed increases was food inflation; Paul said the 6.5% increase in wholesale prices over a year ago could go to 9%. Commodity expert Bill Lapp, principal of Advanced Economic Solutions, Omaha, Neb., said higher grain prices brought on by bad weather will boost food prices 9% per year through 2012, and that dairy and meat-price increases are inevitable.

Technomic senior manager Wade Hanson estimated RMS as a $25 billion business. To illustrate the RMS effort to be a restaurant alternative, Hanson mentioned a marketing message from Whitehouse Station, N.J.'s Quick Check chain: "Restaurant quality; no reservations needed."

"Some of the meals have left the restaurant industry," Paul said.

Of course, if you are a part of the RMS crowd, you also got the message that your like-minded competition is fierce. Paul and his cohorts focused on the upscale, unique and creative ways the grocery industry is attacking foodservice.

Wegmans is opening this summer a $30 million "culinary innovation center" to produce what they can't find elsewhere. Whole Foods is planning a smaller format to capture the grab-and-go consumer. Fresh & Easy's prepared-food sales came in double their expectations. Safeway's new Market by Vons is 15,000 square feet and features 50% prepared foods, produce, meats and cheeses and only 15% of what you'd find in a typical grocery store. It is slated for 50 stores per year if the response is strong enough.

Other aggressive moves include merchandising RMS throughout the store, individual food-style stations, lots of sampling, and live-chef presentations featuring the use of ingredients found within the store in the preparing of meals. Grocery stores are leveraging what they were already doing—selling freshness and value and variety.

"They acknowledged they were laggards and are moving forward very aggressively," Hanson said. "They're saying, 'We can compete with restaurants in a lot of ways, except convenience, and we're going to shrink that [gap] as much as possible'."

Paul said one of the reasons Olive Garden is one of the exceptions to the industry's lagging performance—55 straight quarters of same-store sales growth—is that it "has a great perception of value" with its unlimited refills of soup, salad and breadsticks. He said convenience stores should be able to take advantage of the same tool in tough economic conditions. Because it is an industry that is used to value pricing, regardless of the economy, its position as a tradedown option is solid. Not recession-proof, he said, but recession-resistant.

Technomic's director of operator product development Kevin Higar said the key for trade-down locations—fast-casual restaurants grew at a 10% clip in 2007—will be keeping what they've caught when the economy inevitably rebounds.

"Do [consumers] go back when the economy improves?" Higar asked.

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