Cheap Groceries Create Empty Restaurants? Darden’s CEO Doesn’t Think So

Grocery prices — as we have reported often recently — have been on the decline nearly across the board lately. A mixture of factors — commodity prices trading at unusually low levels, resultant falling food prices and the expanding number of players competing for grocery dominance, to take some quick examples — have all exerted increasing downward pressure on the cost of groceries for the consumer.

Good news for customers — particularly those who like to cook (and who aren’t vegans or vegetarians — the recent price reductions in milk and meat have not extended to fresh or frozen produce, which has actually ticked up in price); not great news for restaurants, or so the recent conventional wisdom has gone. Faced with inexpensive groceries, customers are just staying home.

The effect is particularly notable in fast-food and fast-casual chains, which showed signs of growth in early 2016. Since around Sept. 2015, sales were, on average, increasing by about 2 percent per quarter before March of this year — when they suddenly stalled. That was followed by wave of disappointing earnings. McDonald’s, Dunkin’ Brands, Wendy’s and Starbucks all reported weaker-than-expected same-store sales growth last earnings cycle. The trend across fast and fast-ish food was clear, even when the results of Chipotle (which has its own set of issues) are stripped out.

Darden Restaurants CEO Gene Lee is a noted skeptic on the cheap grocery explanation, noting in his call with investors that he simply has trouble buying into that explanation.

“I just have a hard time, when you think about our brands, that people are trading out and staying home because they can get their groceries a little bit cheaper,” Lee said. “I’m just having a hard time with that.”

Darden certainly knows about restaurants — simply by nature of the number of chains it owns: Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, Eddie V’s Prime Seafood, The Capital Grille and Yard House are all Darden properties. And it is one of the few large mega-chain brands reporting upward-pointing numbers during the latest earrings period, with location sales up 1.3 percent, ahead of The Street’s expectations. Skepticism about explanations for poor performance are usually somewhat less common from brands not trying to explain bad performance away.

But despite doing better than expected, Lee noted that uncertainty remains more the rule than the exception for the near course and that the battle to actually win the customers’ spend will be increasingly intense as the holiday season wears on. The consumer environment is challenging, he told his investors; it’s just that cheap groceries aren’t the reason.

“The consumer environment continues to be difficult,” he said. “There are a lot of choices that consumers have for their discretionary income.”

And not all of Darden’s brands enjoyed the success that Olive Garden did, with its same-store sales up 2 percent. Eddie V’s and The Capital Grille both saw same-store sales drop, though their underperformance was balanced out by better performances elsewhere.

“Thanks to good cost control, and some lower food input prices, Darden has managed to translate its meager sales uplifts into healthy profit growth.” Neil Saunders, CEO of Conlumino, said. “Darden isn’t immune from wider trends; however, we believe it will continue to buck them in the quarters ahead.”

But those wider trends will continue to be a headwind going forward. The holiday sales environment remains rife with consumer distractions and competition for spend. Fuel prices have been inconsistent throughout the year, and despite the various dips and peaks, it actually has been unclear if fuel price has any effect on consumer spending. Job growth has also been inconsistent in the U.S. economy, which has lead to various fits and starts in consumer spending across the board throughout the last quarter.

Where one can reasonably count on those bouncier effects to level off once the election is officially over and done in early November and the holiday season of spending kicks off in earnest remains to be seen. On the whole, the spending picture has received many positive previews, which could bode well for the restaurateurs of America — particularly if U.S. consumers end up venturing out more prominently during this holiday season. But if the sluggishness in sales continues?

Expect to hear a lot more about cheap groceries in the Q4 earnings reports.


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