Technomic's Paul predicts nominal growth for foodservice in 2003

Feb. 10, 2003

Research shows Americans like to eat -- especially when their meals are prepared away from home. And despite recessionary and unemployment woes, recent findings indicate they have an increasing amount of cash available to pay for those meals.

Those factors, according to industry researcher Ron Paul, will push U.S. foodservice industry sales slightly upward in 2003.

During a Jan. 23 teleconference and slide presentation hosted on the Web site of supply chain distribution consultant Instill Corporation, Paul, who is president of Chicago-based restaurant industry trend tracker Technomic Inc., said the numbers he's seeing indicate modest but positive growth for foodservice this year.

"While the economic signals are mixed, restaurants are definitely growing," said Paul. "That points out great resiliency, and to some extent, consumer loyalty to the patterns of eating and picking up prepared foods. So in a sense, restaurants have been operating above the economic fray."

If only slightly above. Though all the 2002 financial results for every restaurant company that reports its figures publicly aren't in, Paul is confident that over the course of 2002, the industry grew at a modest pace of 2.9 percent.

Fueling that rise, he said, is a slight drop in inflation from 2.6 percent in June to 2.3 percent in December.

Additionally, he believes consumers have become better money managers by refinancing their debts and lowering their monthly payments. That has freed up disposable income, and Paul believes some of that is being spent on foodservice meals.

"Real disposable personal income is strong," increasing as much as 6.1 percent in November, according to U.S. government figures, he said. Historically, he added, growth in disposable income boosts foodservice sales, though not sales in every other economic sector. "This is probably the most important (reason) why foodservice continues to do so well, while retailing is not doing that well."

Changes, challenges for 2003

While Technomic's research paints a positive near-term outlook, Paul warned operators still face operational hurdles such as high turnover and increasing labor costs, as well as unknowns, like the potential war between the U.S. and Iraq.

"I think the convenience-store industry is the sleeping giant within the foodservice industry," he said. "The opportunity is huge. There are more than 100,000 total outlets that are a potential point for foodservice distribution."

Ron Paul
President, Technomic

Consumer confidence also remains low, and he said that can form a mind-set that leads consumers to "trade down" in their menu selections, i.e., order less-expensive entrees, skip appetizers and desserts or forego premium beverages.

Stock market volatility, he predicted, will keep consumers on edge, and the possibility of the country enduring another recession is real, "though our point of view on that is we doubt it," he said.

Ironically, restaurant operators don't appear to be concerned about the ongoing turmoil. A recent Technomic survey of operators showed that a majority of them are optimistic about the coming months. Sixty-four percent expect to grow sales this year, while only 3 percent expect they'll decline. Sixty-one percent of operators believe they'll be profitable this year, while just 5 percent think they'll lose money.

Paul attributes much of their buoyant outlook to the mix of entrepreneurial positive thinking and a willingness to adjust operationally -- qualities he said are common to successful restaurant operators. They know that increasing top-line sales helps most every area of the balance sheet, and they're good at developing marketing ideas that achieve that.

Paul said these same operators also know they must continue reducing food and labor costs. Nearly 40 percent of those surveyed said that doing this in both areas was even more important to profitability than growing sales.

The good news, Paul added, is research that shows Americans appear eager to help operators achieve their sales aims. Customers' reduced discretionary time, waning interest in the preparation of everyday meals for themselves -- plus a lack of basic cooking knowledge -- is steering them to restaurants for relief.

"We're interested in (recreational cooking)," Paul said, referring to cooking styles taught on networks such as FoodTV, "but on the other hand, we're not going to do it very frequently."

He added that research clearly shows consumers are spending less at the grocery and more in restaurants.

"All the growth in the food industry over the last 15 years has been growth from foodservice rather than from retail (i.e. groceries)," Paul said. "A telling number is from the Food Institute, which reported that restaurant sales were up 3 percent, while grocery store sales were actually negative 0.3 percent." The bottom line for consumers, he added, is "foodservice is basically the solution to less time, interest and experience in cooking."

What's hot, what's not

Overall in 2003, Technomic predicts the foodservice industry (which includes not only restaurants, but contract foodservice, business and industry feeders, etc.) will see nominal growth of about 3 percent. Paul said his researchers are forecasting relatively flat performance in the quick-service category, which includes pizza, burger, fish and chicken concepts, versus strong growth in quick-casual concepts, such as the "fresh-Mex" chain Chipotle and the fast-growing sandwich chain Panera.

The casual dining segment, which grew an average 9.1 percent in the first nine months of 2002, will remain strong in 2003. Chain outlets such as Chili's Grill & Bar and the Cheesecake Factory will enjoy solid growth as consumers seek their broad menu offerings. Unique casual concepts, such as P.F. Chang's (Chinese) and Chevy's (Mexican), also are expected to enjoy steady growth relative to repeat visits and expansion.

In both segments, the perception of freshly prepared food -- often assembled in front of the customer -- will remain a key driver of repeat sales.

"The customer can see more of the preparation, so they don't feel they're dealing with frozen foods or foods prepared well in advance," he said. "Focus groups say they believe it's healthier."

"Real disposable personal income is strong ... This is probably the most important (reason) why foodservice continues to do so well, while retailing is not doing that well."

Ron Paul
President, Technomic

Paul predicts the bloody and ongoing price war in the burger category is near a truce because the discounts are not driving repeat sales.

The most profound damage done in the battle, he added, was an $800 million reduction in the sale price of Burger King by Diaego to a U.S. investor group and the widening of McDonald's first-ever loss since going public four decades ago.

Still, he doesn't believe the burger boys suffered permanent damage. "I don't think it has any major long-term impact."

The crystal ball

Despite what may appear to be a restaurant market flooded with an exhaustive array of food offerings, Paul believes otherwise. He believes the quick-casual segment will grow at a five-year compounded rate of 15 to 20 percent and be fueled an "entrepreneurial rush" to open restaurants focusing on niche foods and lesser-known cuisines.

This growth, he predicted, will make up just a few percentage points of the overall foodservice picture, but it will correctly meet customer desire for new and innovative offerings.

He also believes these emerging concepts will grow to regional chains of 10 to 30 stores that will become ripe for sale to multi-brand juggernauts like Yum! Brands and McDonald's Corp.

"There's a whole group of players below the radar screen ... that are still going to grow," Paul said. "I don't think all the buying has been done at all, nor have all the start-ups been started."

He also predicts chain operators will continue growing incremental sales through increased partnerships with convenience stores. C-store operators, he said, are smarting from sales declines amid increased competition and decreased tobacco consumption. Those operators are searching for new revenue streams, he added, and are increasingly willing to experiment with foodservice.

"I think the convenience-store industry is the sleeping giant within the foodservice industry," he said. "The opportunity is huge. There are more than 100,000 total outlets that are a potential point for foodservice distribution."

What will make those partnerships work, he added, is building an attractive foodservice atmosphere within the c-store.

"What they've got to do is work on their image and make it the kind of place that consumers -- and particularly women -- will go to," Paul said. "The key is to get the franchisees and employees to function in a clean foodservice-type environment."

Topics: Independent Operation , Operations Management

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