Restaurant industry: 'Big chains are definitely at an advantage now,' analyst says

Bank of America Global Research Restaurants Analyst Sara Senatore joins Yahoo Finance Live to discuss the inflation impacts on grocery and restaurant prices, restaurant stocks, and the outlook for the 2022 food industry.

Video transcript

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AKIKO FUJITA: Welcome back to "Yahoo Finance Live." Well, we have been tracking the price of food closely with inflation hitting a four year high. Obviously, looking at how that has been affecting spending as well. The restaurant industry remains one of the hardest hit sectors during the COVID pandemic. And with the rise in Omicron cases, that could mean a bumpy road ahead with inflation pushing grocery store prices even higher. Could it lead to more people actually eating out? Let's bring in Sara Senatore. She's BofA Global Research Senior Restaurants Analyst.

And Sara, it's good to talk to you today. You know, we've heard so much about how the restaurants, especially the smaller, you know, medium-sized businesses, have been affected during the pandemic, but this is an interesting take. Because I think the thinking is that when prices go up when, people feel the squeeze in their wallets, the first thing they do is pull back in terms of eating out. And you're saying that may not necessarily be the case.

SARA SENATORE: Yeah, that's right. I mean, I think when we think about pricing, we should really think about what I like to call a share of stomach. And what you see is that people really do trade between eating at home and eating away from home at restaurants. And, you know, in particular, when you think about some of these convenience occasions-- you know, breakfast at a fast food restaurant, for example-- you really are thinking about it in the context of, you know, I could be eating at home, but, you know, I'm pressed for time and I'm going out to eat. Now, as food prices go up, what you see is that, actually, the meal at the fast food restaurant may not be that much more expensive than what it would cost you to make the same at home, particularly if you take into consideration the cost of your time.

So that's why we say when food prices go up it actually somewhat improves the relative value proposition of going out to eat, because what you're seeing in the grocery store is probably going to be even higher in terms of the rate of inflation than the rate of inflation on the menu prices.

BRAD SMITH: And so what is this kind of setup for some of the larger chains, if you will-- a Darden that we continue to talk about and think about-- versus some of the smaller businesses in local markets?

SARA SENATORE: Yeah, and I think that's an important distinction because we definitely do see, and we have seen, particularly during COVID, that scale matters in this industry. And when you have a difficult operating environment, which I think we would all characterize the current environment as difficult, scale matters even more. You know, it's the big change that have the ability to negotiate with suppliers or have the ability to have signed contracts farther out so that they have some visibility into what they're paying.

They're the ones, also, that have the capability from a sort of an operational or digital perspective to really analyze their menu mix, to analyze their customers' preferences, and adapt accordingly. So, it has always been the case that the independent is at something of a disadvantage to the large chain.

But never more so, I don't think, than now, where you have this sort of, what I would call, kind of this one-two punch of a difficult demand environment with people trying to react to COVID, as well as a difficult supply environment where you have rising commodity prices and, frankly, also, you know, a tight labor market where people coming to work may be also affected by COVID the same way that customers are. So, big chains are definitely at an advantage now.

AKIKO FUJITA: Sara, what's been the impact of the broader sector in this latest COVID wave? You know, we've heard a lot about Omicron cases, because of its transmissibility, a lot of businesses struggling to keep staffing on board. But the other side is also how consumers have responded and whether, in fact, they've pulled back in spending, in going out in the same way that we've seen in previous waves during the pandemic.

SARA SENATORE: Yeah, I think the answer to the second question is, yes. And, in particular, that tends to be concentrated in dining in or in restaurants. So, where consumers make the biggest changes are, not surprisingly, in how often they go out to eat at sit down restaurant and actually eat in the restaurant as opposed to carrying food out. And so what you see is that, if you look at what happened during the Delta variant surge, what we saw was that it was roughly kind of a five to six weeks where there was some depressed spending, particularly on full service restaurants.

And I think that's what we're seeing now again, which is a temporary but visible impact, particularly on people's desire or willingness to go out to eat and sit in a restaurant for a long period of time. That being said, consumption at fast food restaurants, particularly the big chains, in some cases has never been better. If you look at the results that some of these restaurants were posting in the fourth quarter or even in the third quarter when you did see the Delta variant hit, you were seeing two-year growth trends that were better than, in some cases, we'd seen in, you know, over a decade.

You know, if you look at Starbucks, for example, as they exited their September quarter, they're talking about two year stacks of 14%. So, you know, we think about the same store sales versus 2019. That's a pretty impressive number under any circumstance, but certainly when you consider the impact on mobility that the pandemic has had. So I want to be kind of very thoughtful about distinguishing the different types of restaurants that we do see and the impact that these waves have had on them.

BRAD SMITH: And so, perhaps considering sitting at the center of this Venn diagram, if you will, is the delivery services that are out there that cater to some of the small business restaurants and have partnerships with many of the companies that we just mentioned and saw there on the screen a moment ago. And even on the grocery category, they deliver on that front too. And so, with all of that in mind, you know, where does this set up for some of the delivery services within this?

SARA SENATORE: Yeah, so, you know, while I don't cover the delivery services myself, I certainly pay close attention to what's happening because, to your point, the companies in my coverage, you know, are their customers. And what we do see is two things. One is, you know, we have credit card data at Bank of America that shows growth in delivery. So we are still seeing growth in what we call card not present sales.

So, these are essentially people who aren't there swiping their cards. And so even though we saw a massive increase last year as the pandemic really raged into 2020-- sorry, 2020 to 2021-- we are still seeing some growth. So it's telling you that there is still an increase in demand. We have not seen people return entirely to their pre-pandemic patterns of on-premise versus off premise.

And, you know, that being said, we are also seeing that that includes not just the delivery companies, but we're also seeing demand increase on the restaurants' own ordering platforms. So whether it's a Domino's app or Starbucks app or going online on one of their own ordering websites, you're also seeing that where people are ordering ahead and picking up. Either walking in and picking up their food or their beverage or going through the drive-thru and picking up. Or even curbside pickup where somebody runs it out to you.

So, there's no question in my mind that this has had been a tailwind to the delivery business, but we've also just seen it be a tailwind to off premise broadly and digital ordering broadly.

BRAD SMITH: That's really fascinating. On the card not present sales metrics, I'd love to hear more about that in the future and perhaps continue the conversation there. That is Sara Senatore who is the Bank of America Global Research Senior Restaurants Analyst joining us here today. Thanks so much for the time and the insights. Certainly do appreciate.