It’s no secret that worried consumers have been going out to eat less. In response, many restaurants have been trying to woo homebodies by expanding their branded fare into grocery stores. This move might sound yummy to foodies, but it also may underline why investors need to exert caution when considering restaurant stocks at the moment.
The Wall Street Journal explored the phenomenon in a recent article. I could have done without the picture of Burger King’s (NYSE: BKC) "Fresh Apple Fries," which are packaged in a lookalike french fry container with a ketchup-like packet of caramel dipping sauce and -- oddly enough -- will be available in the produce aisles of grocery stores. That’s kind of weird, but it might be crazy enough to work.
Among others participating in the trend are California Pizza Kitchen (Nasdaq: CPKI) with its flatbread melts sandwiches (in addition to its existing pizza offerings), and Starbucks (Nasdaq: SBUX) and Dunkin’ Donuts with coffee (of course).
Restaurants have been experiencing flagging traffic, and if consumers are eating in, there’s a chance they’ll still embrace the restaurants’ brands as long as they can put them in the grocery cart. And there are high hopes that these brands are popular with shoppers, and so could be good for food retailers such as Kroger (NYSE: KR), Safeway (NYSE: SWY), and Wal-Mart Stores (NYSE: WMT).
Still, the strategic move wasn't purely reactionary. According to the Journal, restaurants had been working on in-store offerings before the recession hit, as a means of boosting their brand image. However, the entire concept underlines the hoops that many retail and consumer goods companies have had to jump through in the changing consumer landscape. Eating out is one of the first discretionary spending items that can be slashed from a budget.
Some investors face related risks right now, too. I recently pointed to five “buyer beware” stocks, all restaurant stocks (including California Pizza Kitchen) that have soared over the last six months. I suspected that investors were way ahead of themselves in bidding those stocks up when many consumers are still spooked (and some are downright broke).
And what about recent IPO OpenTable (Nasdaq: OPEN), which was met with such a warm reception by investors? Good luck with the supposedly high-growth story there; I’m not sure eating out every night is going to come back in vogue on a grand scale for some time.
There’s absolutely nothing wrong with consumer-facing companies seeking ancillary revenue streams. In fact, shareholders should always be glad to see their companies trying new ideas to try to shore up areas of weakness. However, such strategies do underline the fact that restaurants and retailers face challenges in wooing consumers’ dollars these days, and investors need to weigh these considerations carefully when they’re shopping around for stocks.
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