It's A Little Ridiculous to Blame Netflix for the Restaurant Industry's Decline
If the Pokemon Go phenomenon could be blamed for poor retail sales this summer as people were reportedly too busy chasing after Pikachu to go shopping, is it so fanciful to think Netflix (NASDAQ: NFLX) is now to blame for falling restaurant sales?
Some believe there's just not enough money to go around for a nice meal out and to stream movies afterwards. Image source: Getty Images.
According to Olive Garden owner Darden Restaurants (NYSE: DRI), which actually reported same-restaurant sales above the industry average in the third quarter and beat analyst expectations on earnings, casual dining chains are having a more difficult time these days competing against the movie streaming service.
Industry watchers MillerPulse and Black Box Intelligence indicate that restaurant comparable sales posted another poor quarter, with chains averaging a 0.4% decline for the period. While the fast-casual segment performed the worst, brought down in large part by Chipotle Mexican Grill, which saw comps tumble once again, down 22% in the third quarter (excluding Chipotle, comps were actually up 0.7%), the casual dining segment was down 1.2% on average.
When you're here, you're family
That makes the achievement at Darden's Olive Garden chain all the more remarkable, since it had at one time been written off because supposedly, no one was eating carb-heavy food anymore. Comparable sales were up 2.6% at the Italian eatery in the fiscal 2017 second quarter that ended in November, and they are 2.3% higher year to date. It's still having trouble getting more customers in the door, as traffic was flat for the period, but it's a positive development that Olive Garden looks as though it has turned the corner.
Netflix has enjoyed its own gains, too, saying recently it expects to add 1.45 million U.S. subscribers to its rolls in the fourth quarter, well ahead of the 1.27 million analysts were anticipating. That means it's closing in on 100 million subscribers worldwide, and though other online video serviceshave about a billion people a day tuning in, consumers continue to access their Netflix accounts regularly.
Divided loyalties
There is some sense to the notion that consumers are eschewing eating out because they're finding their discretionary funds limited. And in fairness, Darden CEO Gene Lee said it's people competing against the "new necessities today, whether smartphones, whether your cable bill, your Netflix bill, those all have increased significantly over the years and I think that people are making choices."
Image source: Getty Images.
So, he wasn't saying the streaming service itself was to blame, but rather as part of a mix of distractions consuming customer attention, it was a contributing factor.
Certainly, although a smartphone purchase might cost a few hundred dollars and is a one-time cost, the ongoing monthly bill including data plans can easily run $100. And the cable TV bill can be pricey, particularly if you have one of those triple-play packages combining TV, internet, and landline service.
Still it's hard to include Netflix dinging you $10 a month for streaming movies (maybe another $10 or so if you still get a DVD, too). Sure, all these monthly expenses add up, but it's not as though they're new expenses consumers didn't have before. Restaurants need to look somewhere other than Netflix for a villain to blame.
Cleanup in aisle 7
And there is one: price deflation. Grocery store prices are tumbling. The Bureau of Labor Statistics reported earlier this month that food-at-home prices fell 0.1% in November, the seventh straight month they've declined, and over the past 12 months, they're down 2.2% from the same time last year with meats, poultry, fish, and eggs posting the biggest drops and now sitting 6% below the year-ago figure. Eating out, on the other hand, is more expensive, with food away from home rising 0.1% last month and 2.3% over the last 12 months.
Image source: Getty Images.
Grocery stores' earnings are getting dented as a result. The largest supermarket chain Kroger (NYSE: KR) continues to feel pressure from lower prices, and after reporting third-quarter earnings on Dec. 1, it lowered its per-share earnings guidance from $2.10 to $2.20 down to $2.10 to $2.15, blaming "persistent and increasing deflation." SUPERVALU (NYSE: SVU)has called it "sustained and deepening levels of deflation."
Further, the proliferation of prepared foods is now a thing. According to a study by NPD Group, in-store dining and grocery store prepared foods takeout has grown nearly 30% since 2008. They account for 2.4 billion food service visits, market researchers estimate, but more importantly, some $10 billion in consumer spending in 2015.
If Darden Restaurants and the rest of the industry are looking for a culprit for their flagging sales, they shouldn't blame Netflix for their woes, but rather grocery store competition. Consumers feel it's just easier -- and cheaper -- to eat at home than to load the kids in the car to go out to a restaurant.
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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.