NEW YORK – Eating in is in and eating out is out.
That's the message that inflation-squeezed consumer s have been sending to fast-food companies and other restaurants. Meanwhile food producers are benefitting from more palatable prices in grocery store aisles.
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Inflation has been easing broadly for more than a year now, and it's been cooling faster for grocery items since the middle of the year. The current trend marks a reversal from previous years when grocery inflation outpaced restaurants as food producers raised prices, often fattening their profit margins.
The shift has been weighing on McDonald's, Olive Garden owner Darden Restaurants, and similar chains.
Orlando-based Darden reported a 1.1% sales drop at restaurants open for at least a year. The decline was a more severe 2.9% at the Olive Garden chain. July was especially weak.
McDonald's reported a 1.1% drop for that same sales measure during its second quarter, compared with an 11.7% jump a year prior.
“You are seeing consumers being much more discretionary as they treat restaurants,” said McDonald's CEO Christopher J. Kempczinski, in a call with analysts following the earnings report. “You’re seeing that the consumer is eating at home more often. You’re seeing more deal seeking from the consumer.”
Both Darden and McDonald's are offering more bargains to entice cautious consumers. Olive Garden has brought back its “never ending pasta bowl," while McDonald's introduced its $5 value meal deal.
Consumers have been focusing more on groceries and eating at home, and that's driving sales volumes for companies like General Mills, which makes Cheerios cereal, Progresso soups and Haagen-Dazs ice cream.
“We did anticipate that might be the case as we see consumers taking value,” said General Mills CEO Jeffrey L. Harmening in a call with analysts. “Consumers are still economically stressed, so that played out the way we thought.”
General Mills and other food producers had raised prices to offset rising inflation, resulting in profit margin boosts for many of them. Now they are among food producers trimming some prices to ease the squeeze on consumers.
Grocery stores have also reaped more of the benefits from consumers dining at home. Kroger reported a 1.2% rise in sales at stores open at least a year during its most recent quarter. Wall Street expects that measure to rise 1.8% during Kroger's current quarter and 2.1% during the final quarter of its fiscal year.
“We are cautiously optimistic about our sales outlook for the second half of the year and expect customers to continue prioritizing food and essentials,” said Kroger CEO Rodney McMullen.