Dual income families have had two important effects on our economy: increased inflation to adjust for higher household budgets, and increased outsourcing of what I call basic functions of existence (e.g., preparing meals, parenting from 8-6, cleaning clothes, cleaning one’s home, etc.). Of all the outsourced basic functions of existence, preparing meals seems to be the most widespread. Even single income families spend a significant portion of their food budget on packaged prepared meals, meals prepared by grocers, and meals prepared by restaurants.
Evidence of explosive demand for outsourced meal preparation is ubiquitous. Grocers’ shelves and freezers are overflowing with prepackaged meals, grocers have dedicated an increasing number of resources to preparing and selling meals onsite, and restaurants seem to outnumber all other businesses in every city and town across the US. Moreover, recently I have noticed specialty meal preparation businesses (i.e., niche businesses dedicated to selling clients a set of meals for a week or month) advertising more frequently and becoming more popular with the upper middle class dual income family.
Although you can outsource your meal preparation many ways, dining at restaurants seems to be the ultimate barometer for how wealthy a person or family feels. When times are good, most people I know eat out. When I get a bonus, my wife and I say, “Let’s go out for dinner.” Thus, when I see the casual dining sector warn about weak customer traffic, I know consumers do not feel wealthy (relatively speaking) and spending must be significantly slowing.
Last week Darden Restaurants (DRI), Ruby Tuesday (RT), Ruth’s Chris Steak House (RUTH), and McCormick & Schmick’s Seafood Restaurants (MSSR) all announced weaker guidance based on slower traffic and declining sales. In addition, shares of Brinker International (EAT) and Cheesecake Factory (CAKE) have also been under intense pressure since the summer. Although low-end eateries owned by Yum! Brands (YUM) and McDonald’s (MCD) have done well, growth has been fueled internationally while domestic sales have been tepid.
After the new year SGS will probably recommend a bearish play on one of the casual dining restaurants above. (We are waiting for the unpredictable tax selling and low volume holiday season to pass.) However, YUM and MCD will most likely benefit as people look for cheaper restaurant eats and international sales continue to grow like the guest list for a Platinum Wedding.
Grocers may be another primary beneficiary of less dining out. Grocers should see sales rise as more casual dining is crossed off the family budget, yet eating is not foregone completely (for a new Wii, $3 gas, or the highest household energy bill in history).
If less casual dining signals a slowdown, then be on the lookout for frequent casual diners who are suddenly learning how to do more in the kitchen than press numbers on the microwave or warm up dinner in the oven … at that point we will be in a full recession.
