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Cost gap between dining out, at home at all-time high: BofA

Consumers have been met with rising dining costs in and out of the home. However, a Bank of America note reports that the gap in the cost of food at home versus food away from home is now at an all-time high. Bank of America Securities Senior Food and Beverage Analyst Peter Galbo joins Market Domination to discuss the findings.

While Galbo notes that the cost of food away from home is typically always rising, the numbers tell a dramatic story: the analyst highlights that it is $10 more expensive to eat away from home in a quick service setting and $25 more in a sit-down environment per person. Respectively, that amounts to four and 6.5 times the cost of eating at home.

With price sensitivity a concern for many in the consumer market, Galbo underscores that upper-income consumers are currently driving more away-from-home spending.

As prices rise, Galbo notes that it is interesting to see promotional activity come out of restaurants as a response. Food companies like General Mills (GIS) and Hormel (HRL) are also starting to see a need to pick up promotional activity, the analyst says.

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For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This article was written by Gabriel Roy

Video transcript

Dying out is more expensive than ever.

The problem dinner at home is also pricier than it's ever been.

And joining us now with more is Peter Gabo Bank of America Security Senior Food and Beverage analyst, Peter, thanks for joining us.

So the note here, Peter, as you say, the gap in the cost of food at home versus food away from home is now at an all time high.

Just walk us through that trend.

Peter.

What, what are you seeing and, and what explains that?

Yeah, thanks.

Thanks Josh and Julian.

Good to be with both of you.

Look, I think uh what we're seeing in, in the data is that, you know, the cost of food away from home, I I it typically is always rising.

And so to, to say that on an absolute basis, you know, the cost of of eating away from home is at an all time high, maybe isn't the more relevant topic.

And, and the note, you know, the numbers we've laid out in the report, uh emphasize that it's about $10 more expensive to eat away from home in a, in a quick service or in a in a fast food setting and about 25 $26 more in a, in a more kind of sit down environment per person.

I think what's more interesting though that we pointed out is that the relative gap.

So on a, on a percentage basis is at an all time high.

And again, in that, you know, food, food, uh quick service channel, it's, it's almost four times more expensive and in the sit down channel about 6.5 times.

So that's the more alarming piece, that kind of we're calling out here.

Now, what's interesting, Josh, that kind of you you mentioned is uh we're starting to see a lot more promotional activity come out of the restaurants as a response.

And my colleague, Sarah San is our, you know, restaurants analyst.

I can definitely let her, you know, speak to those trends more, more fervently, but it's, it's notable that just given where the food companies are and they sell into all channels, kind of some of the trends that they're witnessing.

Well, what's interesting to me is that you also point out even as we see this price gap widen that the food away from home stomach share as you call it or share of stomach has still been increasing and, and you know, everywhere we go right now for the past month especially, we've seen an increasing drumbeat of concerns over price sensitivity over consumer spending, right?

And yet you see people eating out more.

What is that about?

Yeah, Julie II, I think it's a, it's a big question and, and certainly something we even debate internally here around, um, just the status of, you know, the lower income consumer and how that consumer is, is faring, particularly in that at home channel.

Why are they not able to, or, or not purchasing nearly as much while as, you know, the upper income consumer seems to still be doing ok. And they're driving probably more of that um away from home spend at this point.

I think what's particularly interesting and, and we're gonna see here, we have a couple of, of the off calendar, uh food companies reporting in the next few days.

Uh We've already gotten some commentary out of General Mills and out of Hormel that they're starting to see a need to kind of pick up promotional activity more.

So in the at home channel, we're gonna hear from Campbell's and smuckers this week as well.

And I'd expect that to be kind of more of the case.

A and Peter.

Another name I wanna get your take on.

I know you're bullish on is Lamb Weston french fries, Peter, right?

Which is interesting because I remember, um you know, when they last reported Peter, I remember we talked about this on the show and, and they reported Peter and they just got nailed, walk us through what happened at that point, Peter and why you're confident they've moved, moved past it.

Sure.

So look, II I think a few things, right?

You, you had the instance where the company was implementing a new enterprise resource planning system effectively across their entire North America network.

Um had some hiccups that, that went along with that and, and you know, had a volume disappointment in the quarter as a result, volume disappointments in, in food companies are being punished pretty dramatically at, at, at this rate.

And so I think that was a big driver of what we saw kind of coming out, out of out of the quarter.

On top of that, you know, Lamb Weston was kind of the first ones to, to call out the softening environment that we've been seeing in restaurants.

Uh They reported it about a month before you started hearing out of um again, some of the restaurant names, whether it be ad or a mcdonald's.

And so what I think we've seen as a response from, from that point is again, this promotional activity that is picked up and what's important in that Josh is that fries are being included in the bundles, fries are being included in the bundles at these various fast food places in order to, to uh have sort of value meals, so to speak.

I mean, what does this all say about pricing power or lack thereof of the food companies right now?

It, it's, it's a great question, Julie, I mean, if, if you go back.

Um And, and this is something we've looked at, you haven't had this level of pricing, um, over a cumulative kind of three year period in the US since like the 19 seventies.

Um, and, and that's really been, you know, the only historical example that we can really point to where you took this much pricing in a short amount of time.

Um I, I think, you know, typically we would think about a low single digit type price environment each year, we obviously saw north of 25% from the food companies between kind of 2021.

Uh And today and so look, I I think there's probably a breather that all these companies need to take from a pricing standpoint, potentially even some rollback on pricing.

Uh Here in the next, you know, call it 6 to 12 months.

Another name I want your take on Peter Utz brands, uh potato chips, correct me if I'm wrong Peter, but didn't you have a buy on that one as well?

That's right, Josh, we upgraded us back in March to buy.

Was that, is that in part Peter?

Um Why we do that thesis in part is that because you see them as a as an acquisition target?

So that's not our primary uh rationale there, Josh, but really what we see is as a distribution opportunity.

So they have relatively low market share.

They think about them more as a regional brand, that kind of started in the mid Atlantic.

They're starting to gain distribution nationally.

So that's not only, uh, throughout the southeast where they've had new wins with pubs, but some bigger pushes even into, uh, into the west coast.

What's interesting is we think Utz has really been a share gainer at the expense of some of the other salty stack companies particularly given.

They have called it a 15 to 20% price discount on shelf relative to some of the peers.

And so is there anybody else that kind of stands out to you that's gonna be able to benefit in this environment?

Yeah, it's, it's been challenging for a lot of the food companies again.

I I think um as we thought about, you know, lapping some of the the downturn in in snap allotments or the supplemental nutrition allotments that there would be sort of a tailwind that would lift up a lot of these companies as we got through April and May, we haven't really seen that come through in the data yet.

One name that we're still um positive on and feel good as we get into the back half is, is mccormick.

Um We like that they've kind of gone through uh the the iteration of solving some of the price gaps they have relative to private label and some of the new innovation and distribution opportunities that they have in the second half, particularly as we get through kind of the summer grilling season.