Why Amazon’s Ascent Spells Bad News for Mall Food Courts

Xconomy Seattle — 

The increasing popularity of Amazon’s annual Prime Day, Cyber Monday, and other online shopping-themed occasions is one of many indicators more Americans are relying on mobile devices and computers, not malls, to shop.

It’s no secret the so-called “Amazon effect,” a shift in retail buying patterns toward online shopping and away from brick-and-mortar locations, has negatively affected many stores that sell clothes and other consumer goods. But Amazon’s rise also affects restaurants near major shopping centers, according to research analysts and associates at Robert W. Baird & Co., a Milwaukee-based investment and advisory firm.

In a research note published this week, David Tarantino, Mary McNellis Hodes, and Drew North of Baird write that their analysis and survey data “suggest ongoing brick-and-mortar retail traffic declines are pressuring” restaurants that depend on nearby retail activity to bring in customers.

Diners are eating fewer meals at restaurants in or near shopping centers, and part of the explanation is that fewer consumers are going to such retail-heavy districts in the first place, according to the note.

Amazon (NASDAQ: AMZN) has of course been expanding its footprint in the grocery industry with its Amazon Fresh delivery service and 2017 purchase of Whole Foods. On one hand, Amazon is for now competing more directly with grocery store chains than it is with restaurant chains like Panera Bread and Noodles & Company (NASDAQ: NDLS), which operate lots of locations in dense retail settings. Still, Baird’s research suggests there’s a correlation between the growth of Amazon’s core e-commerce business and customer traffic at restaurants located in such settings.

Baird’s findings are based in part on the Prodco North American Retail Traffic Index, a measure of shoppers at retailers in the US, Canada, and Mexico. Other data cited in the note come from a survey Baird conducted of a “sizable sample” of private restaurant chains. Baird didn’t reveal the names of chains it surveyed, but says they have combined annual revenues of about $12 billion.

Restaurants that have had fewer people walking through their doors compared to the past are trying to offset the resulting decline in revenues by offering delivery. One model that has become popular is for chains to partner with online food ordering and delivery services, such as DoorDash and GrubHub (NASDAQ: GRUB).

Many North American restaurant chains now “offer delivery services in the majority of their locations, and are actively pursuing further growth of the service (through investments in delivery/technology operations or partnerships with third-party delivery apps),” according to the note. Not all restaurants are adopting the strategy. Baird notes that holdouts to the delivery trend include Texas Roadhouse (NASDAQ: TXRH) and Darden Restaurants (NYSE: DRI), whose brands include Olive Garden, LongHorn Steakhouse, and Bahama Breeze.

Despite efforts to adjust to changing consumer behavior, the authors, say, “trends in brick-and-mortar retail traffic only explain a portion of the softer-than-expected restaurant traffic” observed in recent months.

If there is a silver lining for restaurant chains with locations near commercial hubs, it’s that they haven’t felt as severe of a sting from Amazon’s continued ascent as retailers have as a whole, according to Baird.

“We continue to believe the headwind from the ‘Amazon Effect’ is measurable, but much less severe for the average restaurant company than the average retailer,” the researchers write.

It has nevertheless been a rough recent stretch for some of the chains Baird surveyed. Just over half of the restaurants in its sample that are located in or near a retail shopping center had worse sales than the chain’s average restaurant across all settings over the past year, according to the survey. Meanwhile, only 19 percent of restaurants in or near commercial centers reported sales that were better-than-average compared to others in the chain in the past 12 months, the researchers found.

“The impact on restaurants that rely on retail activity as a traffic generator likely has become more severe than in 2018,” according to researchers, who also noted the Amazon effect appears to have a bigger impact on casual dining chains than on fast food chains.