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Whole Foods Market, Inc. (WFM), The Kroger Co. (KR), Safeway Inc. (SWY): Why Grocery Stores Will Threaten Restaurants

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The American food landscape is changing. Earlier this week, I discussed the rise of both the organic and local food movements. Today, let’s focus on another trend that’s tangentially related, and could mean big changes for both grocery stores and restaurants: the proliferation of freshly prepared food — or FPF.

Source: Whole Foods

The future of FPF

Food that’s freshly prepared for consumption has been around as long as grocery stores. However, when TV dinners and fast food became popular following the end of World War II, a lot less attention was paid to this part of the shopping experience.

Though it never disappeared, the section of a grocery store devoted to FPFs became less and less important. Folks who really cared about freshly prepared food would simply go to a restaurant, the thinking went.

According to two different studies, however, that trend is reversing itself.

NPD Crest came out with a report saying that “instances of prepared food purchased at retailers for at-home consumption will increase by ten percent over the next decade compared to a four percent increase forecast for restaurant traffic.” According to NPD, both baby boomers as well as the next generation to enter the workforce will be relying more on FPF than previous generations. FPF prices are usually lower than restaurants, while still providing a time benefit in an otherwise busy schedule.

Concurrently, Technomic released a paper (link opens a PDF) with almost identical findings. The writers argued that any food-service company that wants to remain relevant cannot ignore the FPF segment, and offered four different models for FPF offerings:

1). In-store preparation: While the most aesthetically and nutritionally pleasing, having a kitchen within a store can be a major undertaking.
2). In-store finish: Frozen products are shipped into the store, where they are then heated. Though less wholesome, they’re much easier to pull off than in-store preparation.
3). Commissary model: Multiple independent kitchens provide differentiated offerings. This requires a careful build-out of network relationships.
4). Food processor model: The least labor-intensive of all four, this involves one major company providing ready-to-eat, prepackaged meals for customers.

The potential big winners

Make no mistake about it: When it comes to FPFs, Whole Foods Market, Inc. (NASDAQ:WFM) is the runaway winner. The company started breaking out the percentage of revenues from this segment back in its 2008 annual report. As far as I could find, it is the only major grocer publishing this information. Over the past seven years, the segment’s growth has hovered around 12% per year, and it has consistently accounted for about 20% of all company revenues.

Source: SEC filings; revenue figures in billions.

The Technomic study authors even refer to Whole Foods Market, Inc. (NASDAQ:WFM) by name, stating, “The ‘Whole Foods Market, Inc. (NASDAQ:WFM) effect’ is deeply ingrained in discussions about contemporizing the segment.”

But the winners don’t need to stop there. Any patron to some of the major grocery chains in the United States have noticed that the food court’s role is becoming far more central. Earlier this year, The Kroger Co. (NYSE:KR) announced that it was buying Harris Teeter Supermarkets Inc (NYSE:HTSI), a company known for its in-store selection of fresh breads, cheeses, and sub sandwiches. And Safeway Inc. (NYSE:SWY) has also been gaining traction with its “Signature Cafe” brand of ready-to-eat soups, sandwiches, and other items.

The potential losers

While it’s easy to highlight companies that have already made strides to benefit from this trend, predicting the losers is a bit more difficult. It’s no secret that fast food companies have felt a pinch from the health-conscious movement — but those who would favor FPFs are unlikely customers at such chains.

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