Restaurants vs. grocery stores: Who’s winning?

In recent months, there have been rumblings of a possible recession in the U.S. restaurant industry. Will Canada follow suit? It’s not likely, but there’s no question the industry is facing stiff competition from grocery stores

But first, a look at foodservice sales growth

In Canada, same-store sales reported by several publicly traded foodservice companies slowed in the second quarter following a strong first quarter. Preliminary data show a modest improvement in the third quarter.

South of the border, the situation has been tougher. According to Nation’s Restaurant News, restaurant operators posted disappointing sales growth in the second quarter. Between the first and second quarter, the median slowdown in same-store sales growth was 1.7 percentage points for publicly traded companies.

Rising costs give grocery stores a leg up

Foodservice operators in both countries are concerned that rising costs are hitting foodservice businesses harder than grocery stores. While prices at grocery stores are falling, menu prices at restaurants continue to inch up due to growing input and labour costs.

U.S. consumers paid 2.2% less for food from grocery stores in September 2016 compared to a year ago, due in large part to lower prices for beef (-7.0%), pork (-3.6%), and dairy and related products (-2.5%). In contrast, menu prices at restaurants increased by 2.5%. With prices moving in opposite directions, foodservice operators are struggling to protect traffic and market share.

The drop in food prices at grocery stores is not as severe in Canada, but could still pose a challenge in the coming year. In September, food prices at Canadian grocery stores fell by 0.9% –  the first year-over-year decline since March 2008. At the same time, menu prices in the country rose by 2.5%.

In this environment, price-sensitive consumers may divert some of their food dollar to grocery stores. A big challenge for Canadian restaurateurs is rising minimum wages across the country, which will continue to put upward pressure on menu prices. (Here’s some advice on how to manage this.)

Foodservice still a strong player

Despite the competition, foodservice sales in Canada grew by 6.8% in the first eight months of 2016 compared to the same period in 2015. The United States saw 6.3% growth in the same period. (Both countries benefited from an extra day in February that led to double-digit sales growth in that month.)

Restaurants Canada’s newly released 2016-2020 Foodservice Industry Forecast is calling for Canadian sales to slow to 4.0% growth in 2017, after several years of strong gains. This is partially due to rising menu prices at restaurants and high household debt levels. While an outright recession in the Canada’s foodservice industry is not in the cards, restaurateurs will experience a much more competitive market place. Focusing on the restaurant industry’s core points of differentiation – such as quality, service, experience and innovation – will keep operators in the game.