Inflation Eases, Diners Favor Grocery Stores

Eating in is in and eating out is out. That’s the message consumers have been sending to fast-food companies and other restaurants as they shift to making more meals at home. Meanwhile, food producers are benefitting from more palatable prices in grocery store aisles.

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 restaurant prices as food producers raised prices, often fattening their profit margins. This shift has been weighing on companies like McDonald’s and Olive Garden owner Darden Restaurants.

Orlando-based Darden reported a 1.1% sales drop at restaurants open for at least a year. McDonald’s also 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.

“You’re seeing that the consumer is eating at home more often.

Consumers turn to grocery stores

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 value menus again. Consumers have been focusing more on grocery store items, 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.

“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 benefited from this trend.

Kroger, for example, reported a 1.2% rise in sales at stores open for 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.