The upside down industry: predictions for the future of food spending.
By Jonathan DeVito, Principal | email@example.com
The upending of an industry.
Over the past decade, food spending in the United States has been turned upside down.
Aside from reaching approximate parity in 2007 and 2009, 2010 was the first year that total Food Away from Home (FAFH) expenditures truly overtook Food at Home (FAH) expenditures.
While some may say that recent FAFH (also generally referred to as “foodservice” in this article) growth is a function of favorable economic conditions, this doesn’t tell the whole story. Although increases in foodservice spending over the previous years may reflect many Americans having more money to spend at restaurants, foodservice has been eating away at overall FAH (also generally referred to as “retail” in this article) expenditures since the late 1990s.
In all likelihood, the dominance of FAFH spending is here to stay.
Moreover, future foodservice and retail developments are going to play out in vastly different ways. Retail will face deflationary pricing pressures as consumers continue to cede the majority of their food spending to foodservice. On the other hand, a rising tide will not raise all boats in foodservice: limited service (LSR) operators will continue to absorb share from full-service operators (FSR).
The following dives into these topics and highlights key trends and implications that operators and suppliers should have on their radars.
A continuous shift over the past decade.
The inversion of foodservice and retail spending occurred shortly after the Great Recession. One might think that eating out would struggle to regain its footing following the greatest recession since World War II. On the contrary, foodservice’s rebound has been fairly robust: FAFH growth outpaced FAH growth in real terms by over .5% on an annualized basis from 2008 to 2018. Below is a 10 year snapshot of food spending in the US between 2008 and 2010 (overall figures that include households, government, and business).
This isn’t to say that foodservice is invincible. For example, from 2007-2010, real FAH growth was 0.07% on an annualized basis compared to -1.1% for FAFH. However, this doesn’t negate the overall share conversion trend. In fact, FAFH took share from FAH every single year from 1998-2018 except for 2007-2008 and 2001-2002 (the latter contraction also following a recession and comprising only a short-lived decline in foodservice share).
It is also worth looking at figures on a household basis since approximately 80% of US food expenditures are derived from households. During the 10-year period from 2008 to 2018, FAFH household spending took back more than all of the share it lost to FAH since the 1980s.
The degree and persistence of the shifts US food expenditures seem to indicate fundamental changes in how people spend money on food, not a temporary phase. As will be discussed, these changes are playing out in very different ways across foodservice and retail environments.
Shifting retail behavior: a bargain oriented industry?
Foodservice often provides bad value when it comes to dollars per calorie, even when accounting for large portion sizes. For example, even though more than 50% of food spending went to FAFH in 2017, approximately 80% of calories were derived from FAH spending. In other words, retailers are providing the bulk of food and foodservice is getting most of the money.
Further fueling the flames are uneven inflation rates across between FAFH and FAH. FAFH inflation has consistently outpaced FAH while maintaining real growth rates than FAH. In short, people seem to be eating out more and more even though prices are on the rise.
Bargain-hunting behavior may be the result of retail losing dollar share to foodservice while still being the channel where most people get their calories. This hypothesis seems to be supported by the way the retail landscape is changing. Warehouse clubs and supercenters, retailers with distinct value orientations, gained the most retail share from 1997-2017 (see graphic below). On the other hand, grocery stores were the biggest share losers during that same period.
Note that it would be expected that mass merchandisers would be expected to benefit from consumers’ demand for value, but this has not been the case. The reverse has actually transpired, but this may be due to mass merchandisers moving grocery offerings to supercenter locations. In other words, mass merchandiser grocery offerings may have been recategorized in some cases, making declines look steeper than they are. Also, declines in mass merchandiser grocery expenditures rebounded for the first time in over a decade rising by .08% between 2017-2018, a year outside of the scope of data highlighted above.
As for products, private brands seem to be continuously absorbing share in retail and now comprise a category with around $50bn in sales. While this isn’t good news for branded firms, CPG manufacturers do have tools in their branding toolkits to offset commoditization. Specifically, demonstrating meaningful, nostalgic, and/or purpose-driven narratives will be essential to maintaining differentiation. Pabst Blue Ribbon, Chobani, and Twinkies are good examples of how building the right narrative can help branded products stand out from the crowd.
Changes in foodservice: good news for some, bad news for others.
In the case of foodservice growth, a rising tide isn’t raising all boats. Like FAFH and FAH, restaurant spending has also flipped since the late 1990s. Between 1997 and 2017, limited service (LSR) overtook full service (FSR) as the leading restaurant channel.
FSR challenges seem to be deep-seated. For example, FSR advertising spend is actually negatively correlated with capturing consumer budgets. On the other hand, fast-food restaurants (Quick Service or QSR), a subset of LSR, display a positive correlation between advertising spend and the ability to capture budget share. Note: given the dollar ranges highlighted below, this dynamic is likely primarily germane to chain operators.
The reasons for this dichotomy are a sort of “chicken or the egg” question. LSR may be more aligned with consumer habits than FSR, LSR business models may be driving transformational trends in the way people eat, or a combination of these factors may be at play. In any case, it doesn’t look like FSR will be easily able to market itself out of decline.
Changes in foodservice: more eating outside of the restaurant.
One of the fundamental differences between FSR and LSR is the speed of service. While it would not be uncommon for a consumer to spend an hour at an FSR location, a consumer moves through a Burger King drive-thru in an average of 193 seconds, or just over 3 minutes.
It wouldn’t be that much of a stretch to assume that more LSR means less time eating and drinking because the length of the consumer experience is shorter.
However, as shown below, the amount of time Americans spending eating and drinking has remained virtually unchanged since 2003. Note: the data below exclude time spent on traveling to eating and drinking occasions.
If people are getting their food faster, but aren’t spending less time on eating and drinking occasions, where are they spending the balance of their time?
One possibility is that consumers may be opting to eat their food outside of the restaurant. This is good news for operators that offer takeout as well as packaging suppliers and bad news for full-service concepts where a big piece of differentiation involves experiences inside of the restaurant. Highlighting this shift are findings from a recent study from the National Restaurant Association and Technomic highlighting off-premise behavior. According to the study 60% of dining occasions are now off-premises.
Some consumers may also have an increasingly attenuated tolerance for waiting for their food while still wanting to eat on-premise. The rise of fast casual and improved QSR decor illustrate the ways that LSR operators are improving their guests’ in-restaurant experiences. The image below highlights Wendy’s old (top) and new (bottom) decor.
And lastly, even within LSR shares are shifting. While it would warrant an article in and of itself to dive into share conversion across LSR, fast casual appears to be the winning sub-segment. During the 15 year period from 2000 to 2015, the number of fast casual locations in the US grew by nearly 450% and climbed from 2.9 to 10.8% of all US LSR locations. A variety of factors may be at play, but it seems that fast casual has benefitted from offering elevated quality versus traditional QSR while also providing more convenience and lower price points than FSR. In other words, it represents a happy medium or a sweet spot. Future developments will be interesting as traditional QSR operators undergo “fast-casualization”, as indicated by the changes in decor highlighted above, in an effort to reclaim lost share.
The dominance of foodservice spending is here for the long run. The changes associated with this development have serious implications for retailers, foodservice operators, and the firms supplying these operators.
Retail may face downward pricing pressures as Americans choose to cede increasing amounts of their food budgets to restaurants. Although this is bad news for the food retailing industry overall, the situation is nuanced. For example, club stores seem to be performing well by capitalizing on bargain hunting behavior to gain increasing amounts of market share.
Similar to retail, changes across the way people choose to procure food and eat is nuanced. Foodservice is gaining share, but within the channel there are winners and losers. It seems that FSR will continue to struggle as Americans gravitate towards LSR concepts.The reasons for this shift are multifarious, but some possible drivers include changes in consumers’ preferred experiences combined with LSRs compatibility with off-premise dining.
Lastly, it should also be noted that the topics discussed in this article are macro trends. The food industry is inherently checkered with micro markets and dynamics may differ vastly from one operator to the next. In fact, a study conducted by the CDC from 2009 to 2011 revealed that the average distance from a food establishment to a home is only 2.6 miles. In addition, consumers tend to have diverging perceptions regarding chains and independents, with the latter often being viewed more positively than the former.
However, as a whole, it does look like the way Americans spend money on food is undergoing a fundamental transformation that isn’t going to revert any time soon. If the dominance of foodservice spending is the new reality, it’s worth asking if we’re upside down anymore. We might actually be right side up.
About the author:
Jonathan DeVito is a market research expert and food industry analyst. He works with clients to help them develop product, growth, and corporate development strategies. Jonathan maintains tactical industry expertise by spending weekends picking up restaurant shifts in Chicago.