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Chains improve service, license products to fend off retailers’ sales gains

In America, restaurant meal choices are so boundless that the citizenry need never cook for itself again. But grocery store owners are well aware of this fact, and their increasingly bold moves to give consumers the options they crave are yielding them a growing cut of the action.

According to research by The NPD Group, in the 12 months ended March 2010, sales of takeaway meals prepared at grocery stores increased 1 percent, while total restaurant industry traffic dropped 3 percent. Although it’s challenging to establish a direct correlation between those numbers, it’s clear that more meals purchased from grocery stores means fewer purchased at restaurants. It’s also clear that the threat posed by supermarkets — especially as it relates to casual dining — is growing.

What’s already at stake is an estimated $13 billion in sales of prepared and ready-to-eat meals sold by supermarkets annually, according to a report issued by in July. And researchers at market research firm Packaged Facts expect that figure to rise by more than 7 percent in 2010, as the lingering effects of the recession and Americans’ growing love for cocooning at home continue to influence purchasing behavior.

At the same time, grocers continue to up the ante with an increasingly sophisticated array of prepared and ready-to-eat meal options. Old standbys such as take-and-bake pizza and fried chicken now share space with made-to-order sushi, Korean-style barbecue, exotic mushroom lasagnas and lamb tikka masala prepared by skilled culinary crews. At many 
Whole Foods Market stores, customers can not only consume hot meals in an on-site cafe, but also can wash them down with wine or beer. Recently, Wegmans markets added full-service pubs to two of its 76 units. There, customers can see their meals prepared in a display kitchen located a short distance from the actual shopping aisles.

In a study released in June, research firm Technomic found that the percentage of consumers who said they buy prepared foods at least once a week more than doubled from 15 percent in November 2009 to 33 percent in May 2010, and the percentage of consumers buying prepared meals two or three times a month went from 27 percent to 33 percent.

While the economic downturn may have driven consumers from restaurant dining rooms to their local deli counters, an upturn is no guarantee that people will return to their old habits, especially as the speed with which culinary trends move from restaurants to retailers increases, said Jenny Anderson, manager for Technomic’s Retail Meal Solutions Monitor Intelligence service.

“The biggest thing that restaurant operators need to recognize is the true threat from retail,” Anderson said. “I think many do not have a clear sense of what’s happening in retail and how widespread [retail meal solution] expansion is. Some of the most compelling developments are from chains with regional presence, but mainstream retailers are more rapidly incorporating trends and innovations from prepared foods leaders like Whole Foods, Wegmans and others. So even if a restaurant is operating in a market where one of the well-known leaders does not have a presence, that doesn’t mean they are immune to the threat. It’s increasingly important to track some of the prepared foods leaders to see restaurant-inspired upgrades poised to migrate to larger and more mainstream retailers.”

Ultimately, industry analysts say, the increase in sales of grocery-prepared meals will most greatly impact casual-dining restaurants whose food and price points are relatively similar. Plus, “if customers can save on the 15 to 18 percent service tip in a tough economy, why not?” said Dennis Lombardi, vice president of WD Partners, a foodservice consultancy in Dublin, Ohio. “There’s no doubt that supermarkets are getting better at this, and they very much see foodservice as a growth opportunity.”

Cleaning up in Aisle 3?

The increased competition from grocery delis can be viewed as a sort of payback since many casual players, such as California Pizza Kitchen, T.G.I. Friday’s and Tony Roma’s, have held slots in grocers’ cold cases for years. But that relationship was mutually beneficial since restaurateurs regarded grocery sales as a builder of both the brand and licensing revenue, while grocers enjoyed their usual sales margins.

Now, however, meals prepared at the grocery should make
casual-dining operators take note. “This is not life-threatening, but it’s more significant than many casual diners believe it to be,” Lombardi said.

Technomic executive vice president Darren Tristano agreed, saying casual operators are so closely focused on more traditional competitors that they’re possibly unaware of new enemies entering the battle.

“We talk to [casual] chains all the time and find many don’t even look at fast-casual and quick-service as real threats,” he said. “But they have to wake up and accept that that share of stomach is going to places other than restaurants.”

While many casual operators agree that grocery store food is dramatically better than even 10 years ago, not all are convinced such improvements have hurt restaurant sales. Nearly all blamed the ongoing economic slump and stiff intrasegment competition — not food purchases at grocery stores — for casual dining’s struggles.

“We’ve seen zero impact from grocery stores,” said Chris Jacobsen, head of marketing at Louisville, Ky.-based Texas Roadhouse. In the second quarter of this year, the chain’s comparable restaurant sales rose 1.4 percent at company units and
2 percent at franchise sites. Guest counts were up as well. “We’d be hard-pressed to think the supermarket sector put any hurt on us,” Jacobsen said.

Jacobsen believes the experience of dining out is not only something guests crave, but that the impossibility of replicating the dining-out atmosphere at home or in a grocery cafe will keep most casual restaurants safe from grocery sales. Jennifer Weerheim, vice president of marketing at Irvine, Calif.-based Yard House, agreed.

“It’s not just about beer and food, it’s also about walking in and being visually stimulated by the way our restaurants look and feel,” Weerheim said. A casual-dining experience is also about variety and choice, she added, and at most Yard Houses, guests can choose from more than 180 beers on draft.

Not that Yard House believes it’s immune to outside challenges. The chain is undergoing what Weerheim termed “a brand refresh — putting everything we do under the microscope to make sure we’re doing all we’re capable of doing.” In the initial stages of the systemwide examination, Yard House determined it should add “a kind of snack category,” which led to a small-plates rollout in one unit.

“We wanted to add options that would complement your meal — things like shrimp ceviche spoons, crunchy deviled eggs and chilled edamame, all of which come in around the $3 to $5 mark,” Weerheim said.

Scott Taylor, chief operating officer at Tampa, Fla.-based Beef ‘O’ Brady’s, acknowledged that the high-quality dining the sports-bar chain offers is appealing to customers, but noted that socializing with friends is a big draw of dining out.

“It would be difficult or simply unrealistic for [grocery stores] to try to replicate our full bar and atmosphere,” said Taylor.

License to make money

A slowly growing number of casual-dining restaurants are also searching for new revenue streams through the sale of food in grocery stores. Proof, according to observers, that such lines can become profit powerhouses over time can be found in the Stouffer’s and Chi-Chi’s retail brands. Although the restaurant companies no longer exist, their items still grace grocery shelves.

Survey the shelves at shopping clubs to see the real evidence of this escalating trend, Tristano said. “You’ve got Legal Sea Foods, Panera selling soups, Hooters products ... Wolfgang Puck and Macaroni Grill, too,” he said. “If you believe in brand loyalty, why not extend that into grocery stores where you can keep it top of mind when people aren’t in your restaurant?”

California Pizza Kitchen’s line of frozen pies has netted tens of millions of dollars in licensing revenues since its 1997 launch with longtime partner Kraft Foods; CPK switched production to Nestlé earlier this year. Sold at 22,000 grocery stores around the United States, its frozen items generated $159.8 million in sales for 2009, which in turn created $7.7 million in fees for the gourmet pizza chain. That’s a highly favorable revenue stream, Tristano said, since CPK does no production, distribution or marketing of those products.

“What’s most impressive is when you look at the profits generated from those sales,” he said. “What would it take? Twenty or 25 CPK restaurants to produce the same profit? There’s much less investment involved in that strategy.”

Several years ago, Janna Markle, vice president of licensing for the Valen Group in Cincinnati, helped T.G.I. Friday’s get into the grocery market. Now, every other major casual-dining chain has or is considering a piece of that action, she said.

“This is an opportunity for restaurants to get more share of stomach and for a grocer to make sales,” she said. “People aren’t going out to eat every night of the week, so why not be present in the supermarket where you can highlight your brand?”

Markle also dismissed the notion that selling restaurant items in grocery stores cannibalizes restaurant sales. Dining out is primarily a social occasion, she said, while a meal consumed at home is a fuel stop.

Dan Drummond, brand director at P.F. Chang’s China Bistro, said the chain never intended for its line of grocery meals, released in May, to compete with its restaurant offerings. The lineup’s primary mission was to fill in gaps between customer visits to restaurants and to maintain brand awareness.

“In the restaurant, our dishes are cooked to order in 600-degree woks, which produces a distinct crunch and char you can’t get at home,” said Drummond of the Scottsdale, Ariz.-based company. “We wanted it to amplify and boost our restaurant brand. And some of the early feedback we’re getting says it’s doing just that.”

Service is key

Competition for coveted stomach share is coming from multiple channels in 2010. In the Southwest United States, Fresh and Easy Neighborhood Markets are packaging ready-to-eat, cold combo meals of entrées and sides for around $4.50 each. Publix markets in the Southeast are packing kids’ meals with protein-centered sandwiches and fruit and vegetable sides for a mere $3.99. Walgreen Co. — yes, the drugstore chain — will begin a 12-store test of sandwiches, wraps, prepared fruits and vegetables in Chicago this fall. And even restaurants in IKEA housewares stores offer breakfasts of scrambled eggs, bacon and potatoes for 99 cents and a baby back ribs dinner for $7.99.

Such competition is significant, Lombardi said, but not unbeatable when restaurants lead with their best one-two punch of innovative food preparation and superior service.

A recent NPD report stated demand for carryout and delivery will outpace population growth over the next eight years, and that has Randy Steinbrenner excited. As vice president of sales and marketing for Dallas-based Boston’s Restaurant and Sports Bar, he views the company’s combination of online ordering, curbside pickup and home delivery as highly attractive for consumers demanding options. Where grocery store customers have to park and cross a typically sizeable asphalt expanse, Boston’s allows them to remain in their cars to get their food, or just have it hauled to their houses.

To boost delivery awareness, many of its franchisees have purchased new cars branded with eye-catching graphics. “We know delivery will only continue to grow, so we’re making investments in it now,” he said.

Taylor said his chain is working on online ordering and more curbside service opportunities in order to adapt. And though he didn’t provide specifics, he said the company’s “new Beef’s 2.0 restaurant design is specifically planned to take advantage of these trends.”

Such efforts, Lombardi insists, will help casual dining gain firmer footing on the currently slippery sales slope.

“The only sustainable strategic advantage a restaurant chain can have is consistently outstanding service,” he said. “Yes, competitors can copy and reverse-engineer menus and dishes, but the hardest thing to do is deliver consistently outstanding service. That’s going to be a challenge for groceries.”

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