Supermarkets Preparing to Eat Restaurants' Lunch

Supermarkets in the U.S. generated around $634 billion in revenues last year, according to the Census Bureau, with Wal-Mart (NYSE: WMT  ) owning the lion's share. Groceries counted for 55% of the retail king's $469 billion in total revenues in 2012, sales of which were up about 5% from the year-ago period.

That's about the same growth rate in sales the top 500 restaurant chains enjoyed last year, but far lower than the top 10 fastest-growing chains' 20% average growth rate, which underscores why supermarkets may be looking to get more into the restaurant business. Consider it a fast-causal dining experience while doing your grocery shopping.

Cleanup in Aisle 3
Recently privately held Kings Food Markets launched a store in Gillette, N.J., that will feature several new concepts including its MarketSquare restaurant-style food-service offerings. You'll be able to buy fully prepared meals, and there is also a cheese shop and a coffeehouse that serves cappuccino, espresso, and pastries. Price Chopper plans to offer a similar concept later this year when it opens a new grocery store with 16 quick-service areas.

It's an idea gaining a lot of traction, though not a new one for some supermarkets. Tops Friendly Markets, for instance, has offered a Tim Hortons in some of its stores for years. Of course, Whole Food Markets (NASDAQ: WFM  ) has long mastered the melding of the two concepts. Sales there rose 4% to $12.2 million; prepared foods account for some 19% of the total.

A flu shot and a meal
Moving beyond just the deli counter, supermarkets are seeking to attract some of those dollars that have traditionally flowed to restaurants in an effort to shore up their own bottom line. The thinking is that money spent at restaurants is money not spent at the grocery store. It's a trend that's crossing over even at convenience stores, where pharmacy chain Walgreen (NYSE: WAG  ) is looking to blur the distinction between its stores and fast-casual restaurants with hand-rolled sushi and sashimi, baristas, and self-serve frozen yogurt stations.

Although grocery stores might be able to siphon off customers from restaurants, tapping into the popularity of fast-casual chains' ability to provide a reasonable mix of price and quality food, it's not a two-way street: Panera Bread can't easily open a produce aisle to attract shoppers. And that may pose a risk to restaurants, which are already competing for scarce discretionary dollars.

According to the Knapp-Track Index of monthly restaurant sales, sales at casual-dining establishments fell 5.4% in February, which was on top of a 0.6% decline in January and a 1.6% drop in December. The tax hikes President Obama pushed through that took effect Jan. 1 seem to be taking their toll. 

As noted by the CEO of Brinker International (NYSE: EAT  ) , the owner of Chili's and Maggiano's Little Italy, "casual dining is not necessarily the bright shiny star that it used to be."

Now with supermarkets elbowing their way into the space, expect the pressure to build even more on restaurants. It may be time for investors to start eyeballing the grocery chains for investment ideas and rotate out of the sit-down dining experience.

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