Why Grocery Stores Will Threaten Restaurants

The American food landscape is changing. Earlier this week, I discussed the rise of both the organic and local food movements. Today, let's focus on another trend that's tangentially related, and could mean big changes for both grocery stores and restaurants: the proliferation of freshly prepared food -- or FPF.

Source: Whole Foods 

The future of FPF
Food that's freshly prepared for consumption has been around as long as grocery stores. However, when TV dinners and fast food became popular following the end of World War II, a lot less attention was paid to this part of the shopping experience.

Though it never disappeared, the section of a grocery store devoted to FPFs became less and less important. Folks who really cared about freshly prepared food would simply go to a restaurant, the thinking went.

According to two different studies, however, that trend is reversing itself.

NPD Crest came out with a report saying that "instances of prepared food purchased at retailers for at-home consumption will increase by ten percent over the next decade compared to a four percent increase forecast for restaurant traffic." According to NPD, both baby boomers as well as the next generation to enter the workforce will be relying more on FPF than previous generations. FPF prices are usually lower than restaurants, while still providing a time benefit in an otherwise busy schedule.

Concurrently, Technomic released a paper (link opens a PDF) with almost identical findings. The writers argued that any food-service company that wants to remain relevant cannot ignore the FPF segment, and offered four different models for FPF offerings:

  1. In-store preparation: While the most aesthetically and nutritionally pleasing, having a kitchen within a store can be a major undertaking.
  2. In-store finish: Frozen products are shipped into the store, where they are then heated. Though less wholesome, they're much easier to pull off than in-store preparation.
  3. Commissary model: Multiple independent kitchens provide differentiated offerings. This requires a careful build-out of network relationships.
  4. Food processor model: The least labor-intensive of all four, this involves one major company providing ready-to-eat, prepackaged meals for customers.

The potential big winners
Make no mistake about it: When it comes to FPFs, Whole Foods (NASDAQ: WFM  ) is the runaway winner. The company started breaking out the percentage of revenues from this segment back in its 2008 annual report. As far as I could find, it is the only major grocer publishing this information. Over the past seven years, the segment's growth has hovered around 12% per year, and it has consistently accounted for about 20% of all company revenues.

Source: SEC filings; revenue figures in billions.

The Technomic study authors even refer to Whole Foods by name, stating, "The 'Whole Foods effect' is deeply ingrained in discussions about contemporizing the segment."

But the winners don't need to stop there. Any patron to some of the major grocery chains in the United States have noticed that the food court's role is becoming far more central. Earlier this year, Kroger (NYSE: KR  ) announced that it was buying Harris Teeter (UNKNOWN: HTSI.DL  ) , a company known for its in-store selection of fresh breads, cheeses, and sub sandwiches. And Safeway (UNKNOWN: SWY.DL  ) has also been gaining traction with its "Signature Cafe" brand of ready-to-eat soups, sandwiches, and other items.

The potential losers
While it's easy to highlight companies that have already made strides to benefit from this trend, predicting the losers is a bit more difficult. It's no secret that fast food companies have felt a pinch from the health-conscious movement -- but those who would favor FPFs are unlikely customers at such chains.

And fast-casual chains such as Panera Bread and Chipotle Mexican Grill don't look like potential losers, either. Both chains drive lots of traffic outside the dinner crowd -- which is where FPFs are most popular -- and they offer competitive pricing as well as fast and convenient service.

Instead, I would argue that sit-down restaurants stand to lose the most. That includes the likes of Cracker Barrel, The Cheesecake Factory, and Darden's Red Lobster and Olive Garden chains. These represent businesses that cater to a clientele that may see a distinct time, money, and health advantage to eating FPFs. 

While it won't mean the end of business for these restaurants, its clear that the fast growing FPF segment will likely leave them behind. If you're interested in other fast-growing trends, Motley Fool co-founder David Gardner, founder of the world's No. 1 growth-stock newsletter, has developed a unique strategy for uncovering truly wealth-changing stock picks. And he wants to share it, along with a few of his favorite growth stock superstars, with you! It's a special 100% free report called "6 Picks for Ultimate Growth." So stop settling for index-hugging gains, and click here for instant access to a whole new game plan of stock picks to help power your portfolio.

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  • Report this Comment On August 24, 2013, at 11:26 PM, unclamaui wrote:

    The trend can also be due to the automatic tips servers think they are owed.

  • Report this Comment On August 25, 2013, at 12:59 AM, ThatNameIsTaken wrote:

    unclamaui... servers are often paid less than the usual minimum wage, which is legal, because it's expected that they will make up the rest in tips. For waitstaff, the federal MW is just $2.89 an hour. Some restaurants pay more than that, but many don't. So yes, in a sense they ARE 'owed' at least a minimum wage, which can vary depending on locale. Federal minimum wage is $7.25/hour, but many cities and states set a higher level than that. For instance, MW in Illinois is $8.25/hour, while Washington State has the highest state wage of $9.19/hour. Thus a waitress in a higher-wage state must be paid that state's wage. If wages plus tips don't make the grade, then the employer has to make up the difference. You might say that it's up to the employer to divvy up tips 'evenly', but in some places the other staff gets a cut. Cooks might get part, the hostess might get a cut, busboys, etc. If nobody tipped because of attitudes such as yours-- that is, they think that the waitstaff is being 'greedy' by 'expecting' a tip-- then many restaurant personnel would never even get the minimum wage. If the tip is built into the cost of a meal, then menu prices would skyrocket and fewer people would dine out. These people work very hard for the low base pay, so please have a bit of heart and tip your server generously for good service.

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