Competition | October 2010 | By Daniel Smith

The Ultimate Food Fight

Are you losing business to the grocery store down the street? Don’t worry. You’re not alone.

Matt Loney isn’t taking anything for granted or ignoring any competitor. He insists he knows better, a product of an early professional education on the restaurant industry’s ebbs and flows.

The youthful president of Stevi B’s, an Atlanta-based pizza-buffet franchise that has earned acclaim for its specialty pizzas, Loney has witnessed grocery stores gain a larger slice of the restaurant pizzeria world’s business.

“Our data shows that people eat pizza six times a month and, on average, they’re getting that pizza from a grocery store well over two of those times, a full point rise from just three years ago,” Loney says. “The grocery store is now almost accounting for half of all pizza consumption.”

Such a reality compelled Loney and his Stevi B’s team to fashion a response that includes highlighting the brand’s specialty pizzas and rethinking the restaurant’s to-go business. At pizzeria offices throughout the nation, similar conversations are occurring as operators seek to regain fleeing business.

“In the last two years, we’ve seen an entire night of pizza consumption shift to the grocery store category,” Loney says. “That alone is reason to be aware and cognizant of the retail sector.”

Yet, this is not pizza’s battle alone.

In grocery stores across America, prepared and ready-to-eat meals are gobbling up share—not at a breakneck pace, but at enough of a clip to spark trepidation. From chicken to Chinese egg rolls, macaroni and cheese to meat loaf, pasta to pot roast, America’s grocery stores are expanding their culinary horizons, directly pursuing the foodservice dollar while touting the convenience of retail for other personal purchases.

A recent report from market research firm Packaged Facts titled “Prepared Foods and Ready-to-Eat Foods at Retail: The New Competition to Foodservice” noted grocery’s gain amid the restaurant industry’s recessionary struggles. As consumers shifted from spending at restaurants to saving dollars and dining at home, supermarkets pounced with more diverse ready-to-eat offerings, competitive prices, and one-stop-shop positioning.

Half of the report’s nearly 1,900 U.S. respondents said they were more likely to eat dinner at home today than three months ago—with nearly one-third doing so “a lot more.” Meanwhile, 64 percent said they purchased a prepared meal from a grocery store within the last month.

“Prepared foods are a retail offering that’s come into its own,” says David Morris, the report’s chief analyst. “It’s definitely entered the mainstream from the foodservice perspective and achieved great strides in terms of quality, breadth of offerings, and major players to make it more competitive.”

The study’s findings highlight the grocery channel’s direct assault on quick service, an onslaught that’s gaining momentum. Projections are that prepared meal sales will reach $14 billion in 2011, a 7 percent jump over 2010.

“I don’t think there’s reason to panic, because to some extent we’ve always competed with grocery for a share of the stomach,” Loney says. “At the same time, we can’t deny that the grocery stores are competition and the quick-service segment has to be willing to evolve. If quick-service leaders aren’t aware of grocery stores’ efforts, they certainly should be.”

The intensifying competition has inspired confidence in grocery channels, many of whom tout the segment’s vast potential and continue to experiment in the relatively young field. Although not a new battle, it’s surely an escalating one.

“The grocery store is now almost accounting for half of all pizza consumption.”

“Retail should definitely be on the radar of any restaurant operator,” Morris says. “It’s a competitor that can, will, and is stealing share, as consumers use prepared food as a substitute for the restaurant meal.”

Competition Heats Up

Although grocery stores began flirting with prepared meals as early as the 1970s, the last decade witnessed the most intense and rapid growth. Well before the recent economic shift, grocers activated more robust and attractive prepared meal programs to lure in consumers craving convenience, value, variety, and healthier choices. In many cases, grocers altered their deli service models and renovated stores to reflect their new focus on consumers claiming neither the time nor interest to cook.

“The grocers saw restaurants taking more market share and people turning away from their retail stores, so they made an aggressive play to get back in the game by championing convenience, which is what these prepared meals are all about,” says Suzanne Long, a retail practice leader with New York–based SSA & Company.

Publix, a grocery chain based in the South, is one such player. Focusing on two-career families and time-starved customers, the supermarket upped its investment in ready-to-eat meals a decade ago, creating a variety of prepared food offerings, such as steaks, seafood, chicken, and sandwiches.

“Over time, we grew the category based on trends and diversified our offerings to meet consumer desires,” Publix spokeswoman Dwaine Stevens says.

With positive consumer response, the movement accelerated at grocery stores—big and small, private and public—across the country. Even amid recessionary pressures, the play has been a positive one for the grocery segment. From February 2009 to February 2010, grocery stores, long mired in decline, welcomed 4 percent sales growth.

“Today, the grocery channel embraces the prepared meals idea precisely because it has driven sales in a positive direction,” says Steve Johnson, the head of Foodservice Solutions in Tacoma, Washington. “Even more, they’ve realized that they can build consumer loyalty by serving fresh food.”

Johnson, who blogs about the so-called “grocerant” segment and serves as an industry consultant, says grocery stores have done a strong job of positioning their ready-to-eat products as healthier alternatives to restaurant fare.