Eating In and Dining Out in 2023

Feb 9, 2023

Inflation, consumer sentiment and a shift from pandemic norms should define the year ahead for food-related businesses, with packaged foods and pizza delivery expected to fare better than restaurants overall.

Key Takeaways

  • Grocery stocks may struggle, but food brands are expected to fare well in 2023.
  • Specialty producers could benefit from historic price increase for eggs.

  • Analysts urge caution on restaurant stocks amidst a potential recession.

  • Higher prices and macroeconomic challenges may lead consumers to cheaper offerings.

U.S. consumers overall are expected to spend less and save more in 2023, as the impacts of slowing job growth, rising unemployment and stepped-up interest rates continue to weigh heavily. But everyone has to eat, and investors and policymakers alike are watching closely to see where consumers spend their food budgets. Morgan Stanley Research has identified some food trends likely to unfold in the year ahead.  


Guarded on Grocers 

Food retailers, like other companies that sell essentials, have seen resilient demand and solid profitability over the past couple of years, despite high food prices and costs for labor and freight.  “Grocers have successfully passed on higher prices to consumers without seeing demand suffer,” explains Simeon Gutman, Morgan Stanley Research’s equity analyst covering hardline, broadline and food retail. 


Demand is likely to remain steady, but food retailers may feel pressured to offer more discounts and promotions over the next year as their customers see commodity prices continue to moderate. Increased competition between grocery retailers to draw customers could eat into margins further. Additionally, stocks in this group could suffer as investors shift from defensive positions and favor cyclical stocks, which could happen as soon as mid-year. “As investors think about rotation among retail names, we would look to get more positive cyclical stocks that have higher sales and margins and are trading at discounted valuations,” says Gutman.


Packaged Foods Haven 

Packaged-foods companies had a strong year in 2022, as consumers continued to mind their pocketbooks and favor dining in. Recently market sentiment has clouded somewhat over concerns that results will suffer from shoppers trading down to cheaper choices, among other factors. 


Morgan Stanley Research, however, expects a stable fundamental outlook for the sector, offering investors a safe haven, particularly in the first half of the year. In fact, analysts believe the group should deliver low to single-digit earnings-per-share (EPS) growth in 2023, contrasting with expectations for a double-digit decline in EPS across the market


“We see the sector delivering another year of above-average topline growth in 2023, benefitting from consumers preferring to eat at home,” says tobacco and packaged food analyst Pamela Kaufman. “We expect solid pricing and improving supply chain conditions, offset somewhat by increasing promotions, to drive modest gross margin expansion in 2023.” Companies with robust offerings in snacks and healthy foods are best positioned for this shift.


The Upside in High Egg Prices  

Eggs are usually one of the most reliably cheap sources of protein for consumers to have at home and for eateries to fill out their menus. But supplies have been extremely limited due to an avian flu outbreak that has killed about 60 million chickens to date. As a result, prices for eggs have skyrocketed, increasing more than 200% in January compared with year-ago prices. 


Though prices have started to drop since the beginning of the year, Morgan Stanley Research expects elevated prices for eggs to continue through 2023, staying at about 150% higher than historical averages. “With prices and demand high, specialty egg purveyors, such as those producing pasture-raised varieties and sourcing from smaller farms, could see upside as the price premium against cheaper eggs narrows,” says Kaufman.  


Pizza Delivers Amid Challenges for Restaurants  

It follows that as budget-conscious consumers spend more on groceries, they will spend less on dining out—and history has shown that this trend holds up when the economy falters. Despite high inflation, pressures on disposable income and economic uncertainty in 2022, restaurants did better than expected as consumers expressed pent-up post-COVID demand. However, that trend is unlikely to hold for 2023.  


“We anticipate a broad earnings recession, which along with other macro factors leads us to favor a defensive posture to start 2023,” says Brian Harbour, who leads coverage of U.S. restaurants and food distributors. “As such, we forecast around 3.5% nominal growth in U.S. restaurant sales for 2023 and 5% in 2024.” Harbour notes, however, that pizza delivery could be a bright spot for the sector: “That said, pizza delivery still offers good value for a group over other third-party delivery, where there is a much higher per-person cost.”