Aside from creepypasta-eyes Mario I don't see the nightmare fuel here.
I guess it's the fact that Mario is actually Doopliss, the group being unaware that their friend has been replaced by a doppelganger. Another potential factor would be the fact that they're eating a pig, something the people of the town got turned into by Doopliss, implying that they're eating a person, and also the fact that the mayor is just watching while they do so.
