Dinner on Aisle Six: Why Supermarkets Are Opening Restaurants

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Wharton's Jason Riis and Boston University's Christopher Muller discuss the rise of 'grocer-raunts.'

Numerous studies in the last few years indicate that Americans don’t want to cook much anymore. Busy lifestyles and an abundance of economical dining options — from fast-casual chains and cheap takeout to online sales and doorbell delivery — have nudged many home cooks out of the kitchen in search of prepared foods. While eating out is a great way to keep your stove sparkling clean, the trend is not so great for grocery stores. The supermarket industry has long struggled with razor-thin profit margins, so the shift away from cooking creates added pressure. Many grocers are responding to that pressure by opening restaurants inside their stores, spaces where customers can sit down and enjoy a bite before rolling their carts through the aisles.

The model is already in place at Whole Foods and Wegmans, and stores including Kroger have announced plans to follow suit. The idea seems like a solid way to drum up more business and perhaps inspire foodies to fix more meals at home using ingredients they purchase in the stores. But will it work in the long run to keep supermarket sales from slumping? Knowledge@Wharton turned to the experts for answers. Jason Riis, marketing lecturer at Wharton, and Christopher Muller, professor at Boston University’s School of Hospitality Administration, spoke on the Knowledge@Wharton show, which airs on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.) The following are key points from their discussion with additional comments from Wharton marketing professor Barbara Kahn, whose specialty includes the changing supermarket industry.

Will the restaurant strategy bridge the gap?

The move to open restaurants inside supermarkets is no surprise to Muller, who predicted the possibility 20 years ago. It’s a way for restaurants and grocery stores to meet in the middle space.

“Both sides have been trying to figure out how to do this, and not with a lot of success,” Muller said. “It’s an interesting problem because the supermarket people come from a place where logistics and production is their mindset. They want the consumer to have a high production knowledge. You have to know what to do with a raw chicken to be able to buy a raw chicken. The restaurant side comes with a high connoisseurship or finished product. It’s less about logistics and more about experience management. We need to know that you know what a chicken cordon bleu is before you buy it. Those two mindsets are so diametrically opposed that neither of them has been able to figure out how to make that middle range, that conversion space, work very well.”

Stores such as Wegmans and Whole Foods know how to provide fast-casual type choices like pizza or a hot foods bar, but full-service dining has been more elusive for them. For Whole Foods, which was recently purchased by Amazon, there’s an added layer of complexity as the online retailer expands its Amazon Fresh service.

“There’s very little profit margin in a supermarket. The average is around 1%,” Muller said. “Restaurants, while they are not the most profitable places, generally are between 8% and 12%. So, the supermarket guys say, ‘Hey we can be in that and make so much more money on the prepared foods side.’ They’re using that prepared foods piece to entice people into the store, where Amazon is looking at Whole Foods as a distribution system.”

“As [supermarkets] move into cities, they’re looking to take a smaller footprint. They may evolve into something that’s much more like a showroom….”–Jason Riis

Kahn said the dine-in supermarket strategy is clearly a response to customer demand.

“These restaurants have the advantage of using fresh ingredients and can produce high quality food in a convenient setting,” she said. “Also, there are synergies. If there is a restaurant connected to a grocery, produce and other fresh foods can be cooked before they spoil, which makes it easier for groceries to manage this kind of inventory. Third, as the threat from online retailers intensifies, many retailers are looking for ways to make their stores more experiential to encourage consumers to frequent them and to spend more time in the stores.”

If you build it, will they come?

Establishing restaurants inside grocery stores requires a significant investment of both cash and square footage. Stores are banking on brand cachet to bring in foot traffic. But as Riis pointed out, “It’s not just about the food, it’s about the experience. And experience is a very difficult thing to get right.”

Riis shared an example of one of the Whole Foods locations in Philadelphia, which brought in local restaurants to open old-fashioned lunch counter-style eateries in the store. There are so many choices to make when designing the ambience for such spaces.

“It’s hard to make a supermarket cozy, and sometimes that’s what you want in a restaurant,” he said. “But they are still experimenting with formats, and I do think there’s a piece here that maybe has not been figured out yet. As [supermarkets] move into cities, they’re looking to take a smaller footprint. They may evolve into something that’s much more like a showroom where you can go in and see a bunch of different products and then have it delivered to your home later.”

Muller said it’s important for supermarkets not to forget the impact that good merchandising has on consumer behavior.

“One of the things from a consumer behavior psychology standpoint is if you think, ‘Where’s the freshest food?’ We think it’s in the supermarket. Logically, we say, ‘If I want the freshest fish, I should go where I can see it.’ There is that natural consumer desire to do that. But at the same time, the fight against that is, ‘Why would I go to where I buy my food to have dinner?’ There’s this push-pull. It’s a paradox,” he said.

Muller mentioned the success of Italian marketplace Eataly, which switched from mainly retail with some restaurants to a restaurant focus with some retail.

“The Eataly in New York City is basically an $80 million food hall that you happen to buy some specialty Italian food products in,” he said. “It’s a place I’ll go for lunch, for dinner, for breakfast, for coffee, and I’ll also bring some groceries home. But I’m not doing my grocery shopping there.”

“As this group of people who are now 24 and under come into the market, they’re looking for a very different kind of dining experience, and one of it is delivery.”–Christopher Muller

What about millennials?

Millennials, generally defined as the generation born in the 1980s and 1990s, are a critical part of the customer base in the food industry, the professors said.

“They drove the cocktail business. They drove the craft beer business. They were very big in helping move us into the fast-casual business,” Muller said. But as that cohort ages, their dining habits will change dramatically. That’s why food purveyors of all types should be focusing on the future, which is Generation Z.

“As this group of people who are now 24 and under come into the market, they’re looking for a very different kind of dining experience, and one of it is delivery,” Muller said, noting that 100% of his students get food delivered to their dorms, which typically adds 40% to 50% to the cost of the items.

He added, “That’s going to be a challenge for restaurants that we’re not seeing. Up until about three years ago, since World War II, the restaurant business ate into the dining dollars of supermarkets. For the last three or four years, supermarkets have finally switched that and they’re taking some of it back. This is an enormously impactful middle ground. We’re talking $800 billion in restaurants and another $800 billion in supermarkets, and fighting over who gets the [middle range] is an enormous amount of business that they all want.”

Riis said millennials and the generation behind them are trending toward healthier food and an increased consumption of vegetables. Responding to that consumption curve will be tough for restaurants that serve fat- and calorie-laden dishes. Riis pointed to Red Lobster as a positive example. The chain has managed to capture a younger customer base because of the perception of seafood as healthy.

“There is a general trend for healthier food, and as people’s lives get busier with more demands from work and leisure activities, some people will certainly look to outsource cooking.”–Barbara Kahn

What’s next for the supermarket industry?

Shoppers typically flock to something new, like restaurants inside their favorite grocery store. But will they abandon these services once the novelty wears off? Kahn thinks the strategy will have some shelf life because it follows consumer behavior.

“I think it does have shelf life because people visit supermarkets frequently, so the convenience of having food there will not necessitate a separate trip,” she said. “There is a general trend for healthier food, and as people’s lives get busier with more demands from work and leisure activities, some people will certainly look to outsource cooking.”

Riis agreed that prepared food is the future, so it makes sense for supermarkets to dive into that pool.

“We just hope for them that it’s not sort of a Hail Mary, low-probability way of getting revenue in. We hope there’s a real model there,” he said.

Muller said he thinks stores will continue to focus on prepared foods, meals that can be reheated at home and buffets where consumers can buy by the pound. He also thinks online shopping and delivery of nonperishable items will skyrocket as urbanization increases.

“What everybody’s starting to realize is why should I go to the supermarket and lug home heavy boxes of stuff when Amazon is much more efficient? I’ll bring home the specialty foods, the stuff that I want, the stuff that I know is perishable,” he said. “That’s where the magic is going to happen. The prepared foods side is going to grow. Everything’s blurring in the middle here. There are so many drivers, and the consumer behavior piece of this is who is going to come up with the magic here to both drive foot traffic and change the distribution system.”

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