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Industry Outlook -- Services: FOOD

FOOD

As Americans eat more food prepared away from home, restaurants, fast-food outlets, and supermarkets are fighting for a share of your stomach

It's 10:30 a.m. on Chicago's North Side, and the food court at a Dominick's Finer Foods supermarket is swarming with teens. On lunch break from school, they pack the store's stylish coffee bar and dig into pizza, burritos, and kung-pao chicken at tables next to the produce aisle. "I go out to eat a lot," says Elsie Soto, an 18-year-old college student, clutching a white carton of stir-fried veggies.

Corporate America has its eye on trendsetters like Soto. As Americans eat more food prepared away from home, more players are going after their business. Supermarket chains are cutting back grocery offerings to make room for take-out meals. Food manufacturers are stepping up their food-service business. And restaurant chains are spending billions on expansion.

PITCHED BATTLE. But the expansion comes amid a slowdown in the growth of food-service revenues. The business includes restaurants, cafeterias, and supermarket delis. Inflation-adjusted revenues will rise 1.4% in 1997, down from a 1.7% gain in '96, says the National Restaurant Assn. Meanwhile, the number of chain food-service outlets will expand by 4.5%, predicts Technomic Inc., a restaurant consulting group. So a pitched battle for market share looms. "It's going to be ugly," predicts Damon Brundage, analyst at NatWest Securities Corp.

Nowhere is the drive for market share more pronounced than at McDonald's Corp. The No.1 burger chain opened 2,000 U.S. outlets in '95 and '96. But in the past year, McDonald's has seen comparable-store sales drop some 3%, partly because new stores are cannibalizing old ones. Jack Greenberg, who took over McDonald's 12,200-unit U.S. operation in October, pledges to build at least 800 more in '97. But Brundage predicts McDonald's will ease off soon: "They need to slow down."

The same goes for casual-dining chains. In the last half of '96, investors started bailing out of Darden Restaurants, Lone Star Steakhouse & Saloon, and other key stocks as competition heated up. Independent operators and small chains will suffer most in 1997. But even big chains can't be sure they'll outlast rivals.

This year should answer questions about whether consumers will pay more for higher-quality offerings. McDonald's Deluxe sandwich line is putting that idea to the test, with no conclusive results yet. Foodmakers will keep experimenting: Sara Lee Corp. is running coffee bars in Europe and take-out joints in U.S. grocery stores. Supermarkets will continue competing against warehouse clubs and take-out chains.

Ultimately, customers such as Soto will determine the winners. The key to success could be surprisingly simple: "It's good food," Soto says of her $2.99 meal. Thriving in a tough environment will mean dishing out plenty of that.By Greg Burns in ChicagoReturn to top

TABLE

Prognosis 1997

POSITIVES

-- Consumers are buying more ready-to-eat meals instead of doing their own cooking

-- Diners may step up to better fare and innovative restaurant concepts

-- Food manufacturers see profits in food service

NEGATIVES

-- Purveyors have added outlets at a faster rate than sales growth can sustain

-- Food-service sales growth is slowing

-- Consumers may resist higher prices in spite of beefed-up marketingReturn to top

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