Grocery stores are becoming the fast-food industry's biggest threat

The fast-food industry has a growing threat: grocery stores.

Grocery prices are dropping due to lower commodity costs, and people are eating at home more often as a result.

Wendy’s on Wednesday became the latest latest fast-food restaurant to report slowing sales growth.

Same-store sales in North America rose 0.4% in the second quarter, missing the 1.9% rise that analysts had expected.

Wendy’s CEO Todd Penegor blamed the weak growth on the fact that more people are eating at home.

McDonald’s has also blamed falling grocery prices for the company’s recent sales slowdown.

“If I’m not mistaken, it’s the biggest gap we’ve seen [between food at home and food away from home] in the last 10 years,”McDonald’s USA President Mike Andres said last week. “This is clearly impacting the whole eating out industry.”

Burger King, Yum Brands, and Sonic have also reported sales slowdowns.

In fact, restaurant sales have been so lacklustre this year that one Wall Street analyst thinks that they may be a “harbinger” for a US recession next year.

In a recent note to clients, Stifel analyst Paul Westra said that the slowdown “reflects the start of a US restaurant recession,” and that it “may also represent a harbinger to a U.S. recession in early 2017.”
“Restaurants have historically led the market lower during the three-to-six-month periods prior to the start of the prior three US recessions,” he wrote.

Restaurant chains have been discounting like crazy to draw in customers.

Habit Burger CEO Russ Bendel called the promotional activity “unprecedented” in a call with analysts this week.

“Without question the amount of discounting and aggressive promotional offers both below us and above us… feels like it’s heavier than it was in 2008 and 2009,” he said.

Despite the promotional activity, it’s still cheaper to eat at home.

To make things even more difficult for the fast-food industry, grocery stores are now starting to offer restaurant-quality food.

Many grocery stores are morphing into so-called “grocerants” and devoting a larger part of their space to prepared foods in a bid to attract more millennials.
Whole Foods’ new chain of stores, 365 by Whole Foods Markets, is a perfect example of this trend. Most of the store is devoted to fresh food buffets and a variety of in-store restaurants.

The grocerant strategy is working, according to industry research firm NPD Group.

“Restaurant-quality and fresh food, chef-driven menus, and in-store experiences have given rise to the grocerant and inspiration to millennials to visit and spend,” NPD wrote in a recent report.

In-store dining and take-out of prepared foods from grocers has grown nearly 30% since 2008, and accounted for 2.4 billion food-service visits and $10 billion of consumer spending in 2015, according to the report.

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