Article

Retailers take bite out of fast casual profits

Pre-prepared meals pose probable threat to fast casual operations.

July 14, 2008 by Christopher Hall — writer, self

It's a threat that's been heard before: Supermarkets and retailers, with their gourmet pre-prepared meals, are going to start eating into fast-casual restaurant profits.

While the threat has long been ignored, this time it's for real, said Wade Hanson, a senior manager for Chicago-based consultancy Technomic Information Services.

"I think what's interesting is this has been billed as a threat to fast casual restaurants and other restaurants for a long, long time. â€¦I think restaurants have heard it so much, and the threat never materialized as it was billed, that the tendency has been to kind of shrug it off," Hanson said. "What we're seeing right now in the marketplace is that this time it is different."

A convergence of consumer needs, consumer preferences, the economy, and retailers have finally presented an option that has been successful for retailers such as Whole Foods, Trader Joe's and others, to offer a good option for consumers, Hanson said.

"What we're seeing is that it may have taken a while, but restaurants are finally starting to take notice and saying, â€˜You know what, we now have to say we are competing against a number of different entities, including retailers, namely supermarkets,'" Hanson said.

According to Technomic research, supermarket foodservice sales are projected to reach $23 billion this year. That number includes foodservice sales from in-store delis, restaurants, kiosks, and other means, located within supermarkets.

Leading the charge is Wal-Mart Stores Inc, with 2007 sales totaling $134.9 million. Whole Foods came in at No. 13 with sales totaling $6 million while Wegman's Food Markets rounded out the top 20 with sales of $4 million.

Restaurant-industry impact

Technomic sees restaurants doing more consumer research than ever before, and consumers are telling restaurants that they view grocer-provided pre-prepared meals as an appealing alternative that offers better value and variety for each member of the family, Hanson said.

"It's hitting them because of what consumers are telling them," Hanson said. "And the message is hitting home much louder because the consumer is telling them."

And by pre-prepared meals, or prepackaged meal solutions, Hanson isn't talking about frozen foods, or even just about the old grocery deli standby of fried chicken or rotisserie chicken, coleslaw and potato salad.

"The reality of what's happening is there are players all over this country at a retail level who are taking meal solutions to a whole new level," he said. "The number of prepared food SKUs is far higher than it ever was."

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At some markets, such as Whole Foods, consumers will find as many as nine serving stations offering a range of gourmet foods, from sushi to Mediterranean to smokehouse.

"So they're almost walking in and seeing many little mini-restaurant options for them right there at the supermarket," he said.

So, the key question becomes what are restaurant operators doing about this, or what should they be doing?

Marla Sferra-Pieton, director of franchise marketing for Sharon, Pa.-based Quaker Steak & Lube, said the chain is seeing growth year after year from retailers and convenience stores in this sector, and that the trend so far seems to be affecting mainly their lunch sales — especially since prepared foods from a retailer may be more convenient and less expensive.

To offset the increased competition, Sferra-Pieton said the chain pays attention to what its guests want and reacts to their needs by creating programs to drive traffic. She said they also understand "we can't be everything to everyone."

Additionally, the company has created lunch items that are quick and easy-to-eat on the run.

Is it a threat?

While many restaurants have been slow to acknowledge the increased retail competition as a threat, Hanson said he is hearing anecdotally from both restaurants and manufacturers that is changing.

Restaurants have started to look at the issue as a two-pronged threat, he said: one, as a threat to their dine-in business, and two, as a threat to their carry-out business.

"From an in-restaurant perspective, they're trying to emphasize the things that make them stand out in the consumer's mind. They're trying to emphasize that this is more than just buying food," Hanson said. "And from a takeout perspective â€¦ a lot of these restaurants are saying we really have to make sure that we don't treat our to-go or takeout services as an afterthought, we really have to look at this as a core aspect of our business."