Flat Commodity Outlook Means Further Grocery Competition
The final Consumer Price Index update for 2016 came out yesterday, and the gulf between grocery prices and restaurants widened again, albeit slightly.
Through November, food away from home ticked up .1% and food at home ticked down another .1%. That puts the year-to-date total at 2.3% and -2.2% respectively for a gap of 4.5%, slightly narrower than earlier in the year, but still substantial.
The World Bank predicts mostly flat commodity prices, with grain moving slightly higher as the corn industry laps some of the outsized crops of 2016. Under the new OPEC goal to reduce output, oil and gas will likely tick up as well, though it remains to be seen how those goals will look in reality.
“Commodities have been the savior for the industry this year to offset the labor, it’s almost dollar-for-dollar,” said Andy Barish, a restaurant analyst at Jefferies, who foresees a mostly flat next year as well. “I do think it will be a manageable year for food costs, but I don’t think it will be as deflationary.”
And with labor still rising, the cheap commodities won’t be as much of a help if they do stay flat.
“The market forces are really taking care of that and driving wage increases in the mid single digits, nobody is paying $7.25 no matter where you are, we’re in a full employment environment,” said Barish. “We think labor pressures will continue to be challenging with less ability to raise prices.”
If labor was the only concern, flat commodities would be a great thing, but when competing head-to-head against grocery stores, convenience stores and meal delivery kits, the industry might actually be hoping for higher costs of goods.
According to consulting firm BDO’s third quarter Restaurant Benchmarking Update, the overall same-store sales figures went negative for the first time, driven down by a big dip in fast-casual sales. Though without Chipotle’s weight on the numbers, the segment would have grown comps by 1%. Dustin Minton, co-leader of BDO’s restaurant practice that puts together a quarterly benchmark of the industry, said that flat performance is indicative of the market share battle going on in an oversupply of restaurants and other outside forces.
“Restaurants aren’t just competing against restaurants,” said Minton. “The big giants out there, the Kroger’s out there, they do a nice job of not only providing groceries but go there for a nice lunch.”
And it’s not just millennials who are going; everyone wants choice, fresh food and value.
“I go there and I’m not a millennial, it’s out of convenience and it's nice to have that variety,” said Minton.
That means restaurants have to be better, and offer more value. That’s not just cheap food, but a better experience.
“In order to maintain your market share and if you want any chance of growth, the customer experience has to be good and the quality of food has to be good,” said Minton. “You can’t take your eye off those things, if you do, your product is going to lose any relevance.”