Consumer spending continues to shift in favor of services

Article by Rachel Wolff | Mar 24, 2023

The trend: Shoppers may be pulling back on discretionary purchases like electronics and furniture, but they’re spending enthusiastically on restaurant meals and fitness memberships, underscoring the spending shift from goods to services.

Darden Restaurants’ Q3 earnings topped Wall Street estimates for both revenues and earnings per share (EPS); the Olive Garden owner said all its brands set sales records during the quarter ended February 26, 2023.
Membership at gym operators including Planet Fitness and Xponential Fitness is currently above prepandemic levels as consumers prioritize physical and mental wellbeing.

An affordable luxury: Same-restaurant sales grew by double digits across all Darden’s brands, ranging from lower-priced Olive Garden to fine dining destinations like The Capital Grill.

Overall same-restaurant sales increased by 11.7% year-over-year (YoY), with Olive Garden slightly outperforming the other brands with 12.3% YoY growth.
As a result of the strong quarter, the company raised its outlook for the rest of the fiscal year. Darden now expects total sales of $10.45 billion to $10.50 billion, and same-restaurant sales growth ranging from 6.5% to 7.0%.
While CEO Rick Cardenas attributed growth to the company’s ability to enhance value by keeping price increases below inflation, Darden’s better-than-expected Q3 earnings reflect heightened demand for dining out even as inflation erodes spending power.
In January, US consumers spent 22.4% more YoY on dining and accommodations, per the Commerce Department. And restaurant sales are expected to grow 6.4% this year to $997 billion, the National Restaurant Association estimates.

Getting back into shape: Gym memberships are also proving to be non-negotiable for many as COVID-19 fears subside and interest in wellness and healthy living grows.

Planet Fitness added 400,000 members to its rolls in Q4, bringing its total membership base to roughly 17 million.
Anthony Geisler, CEO of boutique operator Xponential Fitness, told Reuters that the gym has “more members today than we’ve ever had, paying more than they ever have.”
The renewed interest in gyms has come at the expense of home fitness companies like Peloton and Tonal—the latter of which could see its valuation fall by 90% as it tries to raise enough cash to stay alive, per The Information.

The big takeaway: Despite being the beneficiaries of pent-up demand now that more people’s coronavirus fears have subsided, both restaurants and gyms are relatively easy targets to pull back on should inflation prove too great a burden on household budgets.