Retail and restaurant's middle ground is disappearing

The second half of 2026 will reward retailers and restaurants that commit to a clear market position, whether that is price credibility on the items customers watch most closely or an experience worth paying more for. As inflation eases, pricing power weakens and consumers become more selective, operators caught between those two strategies risk losing market share to competitors that offer either a lower price or a more compelling customer experience. The operators that navigate this successfully will not simply choose between value and premium positioning. They will define a specific, defensible position and align every pricing, assortment and capital decision behind it.

The forces reshaping competition

Aggregate retail and restaurant sales look serviceable: U.S. retail and food-service sales reached $768.6 billion, up 6.7% year over year, according to the U.S. Census Bureau, and the National Restaurant Association projects the sector will clear $1.55 trillion this year, an all-time high. But those averages obscure more than they reveal as that growth is almost entirely price driven. Restaurants will post record sales in a year when guest counts fell nearly every month. As disinflation removes the pricing tailwind through the end of the year, the volume trend underneath will surface, and operators positioned between value and premium will be the first to see deterioration.

According to Bloomberg Intelligence, retailer mentions of trade-down shoppers have reached their highest level in two decades; more than 70% of consumers say promotions influence their purchases; and brand loyalty is proving more durable than retailer loyalty. These shifts create a structural risk for retailers whose advantage rests on location rather than on what they sell.

For middle market operators, the question is not how to position themselves for a recovery but what specific position they can defend and what they will stop doing to protect it.

Restaurants: A traffic recession behind a record sales number

Price-led growth is easiest to see in restaurants. According to Black Box Intelligence, same-store traffic fell 2% in May, the 15th consecutive monthly drop of the previous 16 months, even as same-store sales rose 1.8%. Growth is coming entirely from check size, not consumer traffic. Consumers are dining out less frequently, but they still value the experience.

That model is self-limiting, and with 66% of consumers reporting tightened dining budgets, according to SmartSense by Digi, additional menu price increases could produce diminishing returns.

Continued dips in traffic are expected to put growing pressure on balance sheets, making solvency, not just profitability, a primary concern. Black Box Intelligence found 9% of full-service restaurants and 4% of limited-service units lost 30% or more of their peak sales in 2025, putting them at high risk of closure. Several large restaurant groups have already filed for bankruptcy protection in 2026, while others have restructured debt, closed locations outright or have seen franchisee operators file. Expect continued filings and franchisee failures into 2027, concentrated in full service and midtier concepts without a defensible position.

The pressure will remain uneven.

• Quick service will likely remain squeezed by lower-income consumers, with drive-thru frequency remaining dependent on gasoline prices.
• Fast casual is no longer performing uniformly. Concepts built on authentic ingredients and disciplined pricing are taking share from those relying on discounting.
• Casual dining has held up on tax-refund flows and quality-per-dollar positioning, but that support is expected to fade in the fourth quarter of 2026, a test of whether its resilience is positional or merely seasonal.

It may seem contradictory that quick-service restaurants are struggling even while value-seeking behavior among consumers is on the rise. It is not. That value-seeking has migrated out of restaurants altogether, toward grocery delis and convenience stores, and that migration is expected to continue. Restaurant growth will instead favor middle market brands that increase customer frequency through loyalty and personalization, rather than those competing primarily on discount.

Grocery: Value-seeking hardens as growth decelerates

Grocery growth is estimated near 1.9%, down from roughly 3.5% in 2025, with food inflation falling toward 1.5%, according to Bloomberg Intelligence. As that pricing support fades, comparable sales will slow further, exposing a negative volume trend that inflation had been hiding. Absent meaningful cost relief, margin pressure is expected to intensify, leading to a more promotional holiday season to stimulate demand.

The recent divergence between the food-at-home consumer price index and producer price index is expected to create a margin tailwind for retailers as the spread normalizes. Store-brand unit share hit an all-time high of 23.8% in the first half of 2026, per Circana, and private-label dollar sales grew 3.3% in 2025 against 1.2% for national brands, reaching a record $282.8 billion, according to PLMA.

Shoppers have historically bought more store brands when money is tight, then returned to national brands once budgets recover. This cycle is behaving differently. Store-brand unit share has risen every year since 2021, climbing from 21.6% to a record 23.5% in 2025, according to PLMA and Circana, and reaching a further high of 23.8% in the first half of 2026 as food inflation moderated, per Circana. The cyclical pattern would predict share beginning to give way by now. Purchase reasons have changed, too: 39% of shoppers now cite quality as a reason for buying private brands, up from 30% in 2023, according to FMI. That points to preference rather than sacrifice, which is why share should hold through 2027 even as incomes improve.

Grocery will also continue to win meals that would have been restaurant visits. Twenty-eight percent of grocery shoppers now buy deli-prepared foods instead of visiting a restaurant, more than double the 12% recorded in 2017, according to FMI. That increase is expected to keep climbing through 2027.

For middle market grocers, this is the clearest growth opportunity available—one where scale confers little advantage, because fresh and prepared food execution is local, labor-intensive and difficult to centralize.

The performance gap among grocers is widening. At least one national value grocer has closed dozens of underperforming stores and booked nine-figure impairment charges, while independents improved gross margin from 27.4% to 27.9%, per the National Grocers Association. Operators competing primarily on price occupy the most contested ground in the sector and should expect further footprint reduction. Those with a defensible local position, particularly in fresh and prepared food, will likely continue to gain margin even as category volumes stay soft. Scale alone is not the advantage. Clear positioning is.

Two disruptions to plan around

One disruption is the adoption of GLP-1 weight loss medications, a factor linked to measurable declines in sales of confectionery products, baked goods, salty snacks, beer, spirits and wine, as well as reduced dining-out frequency, according to Bloomberg Intelligence. This is a permanent shift in the category mix, not a demand dip, and operators that pivot to protein-forward, functional and clean-label offerings stand to benefit. The same categories face a second headwind: 23 states now bar soda and snacks from Supplemental Nutrition Assistance Program purchases, removing a source of demand from low-income households.

The second disruption is agentic commerce. Some 53% of U.S. consumers already use artificial intelligence in shopping, according to Bloomberg Intelligence. Grocery stores are particularly exposed because their standardized inventory and homogeneous assortments make products easy for autonomous purchasing agents to compare on price alone. A shopper in an aisle weighs brand, packaging and placement. An agent weighs the number. Personalization is one defense against shopper reliance on price-based comparisons, but most retailers aren’t ready. Only 24% of organizations rate their personalization capabilities as highly mature, according to Medallia. The gap between current maturity and the expected rise in promotional personalization, from roughly 35% to 55% over the next two to three years, represents a substantial runway for retailers that can operationalize these capabilities at scale.

The consolidation window is opening

Cost structure will decide which middle market operators drive consolidation and which are absorbed by it. By the end of 2025, food costs were up 38% and labor costs 35% compared with 2019 levels, according to the National Restaurant Association. Recently imposed tariffs will continue pushing costs through supply chains for another six to 12 months, which means margin pressure will persist even if trade conditions stabilize.

Large operators dilute these costs across a bigger revenue base and can fund labor-saving technology. Middle market operators are typically unable to do either; without deliberate repositioning, they can expect to keep losing share to larger competitors.

Cost pressure is only half the picture. Capital availability works in the well-positioned middle market’s favor, and it is where the most consequential decisions of the next two quarters will be made. With uninvested capital at $1.3 trillion, according to Bain & Co., operators with clean unit economics will find financing, refranchising and exit windows opening in the coming months. Unit-level performance now determines strategic optionality, not just profitability.

Defining a defensible position

Few middle market operators can win on price alone, given national discounters’ structural cost advantages, or compete in the luxury segment. The achievable position is narrower: Serve a specific customer group and occasion exceptionally well, then align pricing, assortment and capital with that focus. Four questions help define this position:

1. What occasion do you uniquely own? The question is not who your customers are, but which specific need you serve better than anyone else in your market: for example, the weekday family dinner, the premium weekend basket, or lunch within a mile of the office.
2. Where must you be price-competitive? Not everywhere. Shoppers anchor their perception of value to a handful of known-value items, and operators that price those competitively earn credibility across the basket. The rest of the assortment does not carry the same burden.
3. What earns loyalty or a premium? Which part of your assortment or experience is differentiated enough that customers will pay more or return more often? For many middle market grocers, that is fresh and prepared food. For restaurants, it is hospitality, atmosphere or a signature item a deli case cannot replicate.
4. What should you stop doing? Which stores, products, day parts or concepts do not support the occasion you own, the prices you must maintain or the experience you charge for? Those are the candidates to fix, sell or close.

What middle market operators should do now

For middle market operators, moderate quality at moderate prices was a sound position when consumers rewarded it. That approach now loses to discounters on price and to premium operators on experience. Middle market businesses can no longer blame weak results on market conditions and simply wait for a recovery. Competitors facing the same conditions are already gaining share. For those seeking to do the same, the priorities are clear:

• Define a defensible position using the four questions above. Moderate prices with moderate differentiation is not a position, and it is where the current consumer has stopped spending.
• Treat price-pack architecture (the engineering of price, size and format across entry, mainstream and premium tiers) as a standing capability rather than a periodic exercise.
• Use promotions deliberately to drive trial of a new item, clear slow inventory or defend a key value item rather than as a reflex when sales disappoint.
• Close stores that do not support the position instead of subsidizing them.
• Direct scarce capital toward private-label, fresh and prepared food capabilities—areas where middle market operators have a structural edge over national chains—as well as first-party loyalty and AI-ready data systems. Avoid discount cycles that train customers to wait.

The months ahead will likely reward operators that decide where they compete—at the value end or the premium end—and then build the organization to deliver it. That means permanent roles, budgets and executive accountability for pricing, customer loyalty programs and data, rather than initiatives that fade once attention shifts. For middle market retailers and restaurants, success will depend less on waiting for demand to improve than on building a position that customers clearly understand and value.