Serving Up a Positive Train of Thought: 2006 E&E Industry Forecast

Serving Up a Positive Train of Thought: 2006 E&S Industry Forecast
With the economy remaining stable, the foodservice industry greeted the New Year with a healthy dose of optimism.

By Joseph M. Carbonara, Editor in Chief

Like the title character in Watty Piper’s infamous children’s tale, the U.S. economy continued to chug along throughout 2005 under the motto “I think I can! I think I can!” Much like the Little Engine That Could, the U.S. economy steamed upward despite having to overcome seemingly insurmountable odds. And as the calendar rolls over to 2006, the economy has seemingly reached a plane that will allow it to coast along for a while.

Indeed, the list of factors conspiring against economic stability, much less growth, seemed ever growing in 2005. President George W. Bush’s approval rating plummeted to an all-time low. The U.S. war in Iraq marched into its third year. A pair of catastrophic hurricanes forever changed the face of the Southeast. And gas prices rose to record levels before inching downward. Based on these factors alone, one might expect the economy to be a little fatigued and want to take a break. Rather, it seemingly enters 2006 rubbed and scoured and ready to make another run at growth.

A variety of indicators offer evidence to support this new-found economic confidence. For example, the economy grew at an annual rate of 4.3 percent in the third quarter, according to the preliminary results published by the Department of Commerce’s Bureau of Economic Analysis. In addition, consumer confidence levels continued to rebound after Hurricanes Katrina and Wilma, according to the Conference Board.

And closer to home, the outlook for the restaurant industry improved as the NRA’s Restaurant Performance Index, which measures restaurant activity, registered a solid gain. The NRA’s RPI stood at 101.5 in October, up a strong 1.2 percent from a level of 100.2 in September. In addition, October represented the 30th consecutive month above 100 — a level that represents expansion in the NRA’s composite index of eight key industry indicators.

Factor still low interest rates into the mix and you have the basis for why the foodservice professionals participating in FE&S’ 2006 Industry Forecast Survey are greeting the new year with a healthy dose of optimism. Approximately the same percentage of dealers (88 percent) and manufacturers (85 percent) enter 2006 expecting to increase their annual sales. And, just as importantly, approximately two-thirds of operators anticipate higher sales over the next 12 months.

The following pages provide a summary of the results from our annual Industry Forecast Survey by segment. Additional information is available by visiting foodservice411.com.

Operators
Last year was a successful one for operators, which is why they enter 2006 hungry for more. A solid 64 percent of operators surveyed by FE&S expect their revenues to increase during the next 12 months with the average growth matching last year’s levels.

Drilling down a bit further, commercial operators enter the year with a slightly brighter outlook than their non-commercial peers. Among commercial operators, 69 percent anticipate higher sales levels for 2006 compared to a still strong 55 percent for the non-commercial universe. Approximately 38 percent of non-commercial operators project sales to remain the same as 2005 compared to 24 percent of commercial operators. Fueling operator optimism are anticipated new products and menu items they plan to offer clients, enhanced marketing and advertising efforts, higher customer levels and growth in the areas they serve.

Only 7 percent of both segments projected a decrease in sales, the average of which was 12 percent. Among those anticipating flat to lower sales volumes, the reasons cited include a fixed or steady customer base, higher fuel prices and a flat economy that could feature growing unemployment.

Taking a look at gross profits, 56 percent of commercial operators anticipate higher gross profits in 2006, while another 31 percent expect to maintain 2005 levels. Among non-commercial operators, 39 percent project an increase in gross profits, while another 48 percent expect to maintain 2005 levels. For those operators anticipating higher gross profits, the average increase expected is 11 percent. Fueling this anticipated growth are better cost controls and lower expenses, which means operators are planning to function in a leaner manner than 2005.

While their outlook for growing their business may not be as bright as their peers in the commercial section, 78 percent of the non-commercial operators surveyed plan to maintain 2005 levels or increase their equipment and supplies budgets in 2006. For their part, 29 percent of commercial operators plan to increase E&S expenditures, while 51 percent anticipate this portion of their budget to remain consistent with 2005 levels.

For all operators planning to increase their E&S budgets, the average amount is nearly 14 percent. In contrast, among the 20 percent of all the operators anticipating lower expenditures, the average amount is a deep 22 percent.

Among operators planning to increase their E&S expenditures in the coming year, the primary driver is the need to replace old equipment. Another factor cited includes anticipated higher food costs that require them to operate more efficiently and minimize waste. Still others are planning to purchase equipment as a means of keeping up with customer demand or are planning to remodel/renovate their operations.

Chart 1 on page 22 provides an overview of the types of products operators plan to purchase in the year ahead. Taking a more detailed look at primary cooking equipment purchases, the products operators plan to buy include toasters (41 percent), ovens (33 percent), fryers (34 percent), griddles/grills (26 percent), braising pans/tilting skillets (27 percent), steamers (26 percent) and ranges (22 percent). In addition, operators are most likely to increase their purchases of combi ovens and steam-jacketed kettles.

In the area of refrigeration and ice machine purchases, walk-in and reach-in refrigerators (51 percent) are the products most likely to be purchased. Other leading items from this category include ice makers (38 percent), undercounter refrigeration (35 percent), refrigerated prep tables (34 percent) and worktops (31 percent).

Looking back at 2005, sales volume met (47 percent) or exceeded expectations (34 percent) for a vast majority of operators. And from 2004 to 2005, sales volume increased for 59 percent of operators, with the average increase reported being approximately 11 percent. Operators attribute their strong showing to higher customer levels and better advertising efforts.

Among operators reporting lower than expected revenues (19 percent), some of the factors cited include high gas prices (45 percent), economic conditions (36 percent), and weather conditions (29 percent) such as hurricanes, storms and a hotter than normal summer.

By and large, gross profit levels improved (49 percent) or at least held steady at 2004 levels (31 percent), according to the participating operators. Taking a closer look at commercial operators, 52 percent reported an increase in gross profit and 26 percent indicated this area maintained 2004 levels. Looking at gross profits among non-commercial operators, 41 percent reported an increase and 41 percent also reported that they stayed the same.

With respect to technology investments made in 2005, food safety (59 percent) was the most popular among operators, followed by point-of-sale systems (47 percent), food production (37 percent) and laptop computers (31 percent).

Dealers
For dealers, 2005 lived up to its expectations as 41 percent of those surveyed recorded sales higher than anticipated and 41 percent notched sales that met their expectations. As part of last year’s survey, 78 percent of dealers indicated they expected 2005 sales to remain equal to or greater than 2004 levels.

Dealers cite two key factors as fueling their success during the course of the past year: increased sales from existing customers and an expanding client base. From 2004 to 2005, 73 percent of dealers reported that sales volume increased. And among those dealers reporting an increase, the average amount was 14 percent.

Dealers enter 2006 with a positive outlook, as witnessed by the 88 percent who expect sales to increase over 2005 levels, which were healthier than 2004’s expectations. And among those expecting an increase, the average bump is expected to be 14 percent on the strength of heavy and light equipment sales.

With respect to which portions of the commercial segment of the industry will drive growth, dealers are almost evenly split, with multi-unit chains (51 percent) holding a slight edge over independent restaurants (49 percent). A more detailed breakdown of which commercial segments hold the most promise in dealer eyes is seen in Chart 4 on this page.

An impressive 95 percent of dealers surveyed anticipate gross profits will increase (71 percent) or, at the very least, maintain 2005 levels (24 percent). The average increase expected is 12 percent, which is identical to 2005 levels.

Among those firms anticipating an increase in sales, heavy equipment (73 percent) and light equipment (71 percent) were the two product categories anticipated to fuel this growth. They also expect strong sales from smallwares (50 percent).

According to our study, approximately 49 percent of dealer sales will come from design/ build projects, 41 percent from replacement sales and 10 percent from renovations.

At the same time, more than 75 percent of dealers surveyed plan to impose a price increase on light and heavy equipment some time during the next year. In contrast, less than 10 percent do not anticipate raising prices at all. The anticipated increases are a direct result of those the dealers are experiencing from the factories, who are raising prices to offset higher costs of doing business. (See the next section on manufacturers for more detailed information.)

In addition, rising fuel costs will play a role in dealer pricing strategy, with 86 percent indicating they will pass along this expense to their clients. Only 3 percent reported that rising fuel costs did not have an impact on their profitability, while 11 percent plan to absorb it into their cost of doing business.

For 2005, 62 percent of dealers reported an increase in gross profit and another 22 percent indicated gross profits remained consistent with 2004 levels. For those companies reporting an increase in gross profit, the average amount is approximately 12 percent. Only 16 percent of participating dealers reported a decline in gross profits. And among this group, the average decline was 10.5 percent.

Product categories dealers cite as fueling their 2005 growth include light equipment (85 percent), heavy equipment (82 percent), smallwares (55 percent) and tabletop items (45 percent). Some of the leading product categories identified by dealers include refrigeration and ice machines (51 percent), primary cooking equipment (37 percent), smallwares (28 percent) and tabletop (21 percent).

Looking ahead to their 2006 marketing goals, dealers listed their top three objectives as wanting to:

Build market share (61 percent)
Develop the sales force (49 percent)
Improve customer service (49 percent).

Next in line for dealers was to develop an internet strategy, which was interesting given the fact that 43 percent of the dealers surveyed reported that the internet did not generate any portion of their sales. And only 16 percent indicated their web site was responsible for 10 percent or more of their corporate sales.

In general, online sales as a percent of overall sales started to increase over the past year, but remains a relatively small slice of a typical dealer’s revenue. Approximately 34 percent reported that their online sales increased from 2004 to 2005, while only 3 percent indicated a decline in online sales.

The industry continues to show signs of maturation, which naturally means that the competition continues to stiffen. Two specific symptoms of this are tighter pricing and margins among dealers. The dealers surveyed cited the fact that the competition offers lower prices due to factory discounts as the single greatest obstacle to generating new and profitable sales. Other obstacles dealers listed include being able to find and retain good employees and training their sales force to communicate the firm’s strengths to customers.

Manufacturers
Based on a solid 2005 performance, manufacturers rang in the new year with a positive frame of mind, as witnessed by the fact that 85 percent expect an increase in 2006 sales compared to 2005 levels and another 12 percent expect to maintain their levels from the previous year. And the increase they anticipate is a healthy 13 percent, according to our survey. Following suit, 68 percent of the participating manufacturers anticipate an increase in gross profit for 2006 at an average of 8 percent.

Manufacturers plan to achieve this growth by offering new and/or improved products and by expanding the markets they serve. They also plan to cast a wider net through marketing and promotional efforts as well as by hiring more salespeople. In addition, more than half of the manufacturers surveyed plan to impose price increases some time during the coming year. The main reason they cite for increasing prices is climbing manufacturing and material costs. They also mentioned economic factors, such as inflation, rising energy costs, insurance and cost of living increases, will drive prices higher.

In terms of customer demand, manufacturers predict that serving equipment, primary cooking equipment, refrigeration/ice machines and warewashing remain the highest selling items, as they were in 2005.

For manufacturers, 2005 lived up to their expectations and then some. Of the participating manufacturers, 50 percent said sales volume met their expectations and an impressive 40 percent indicated that it surpassed theirs. This falls right in line with FE&S’ projections as 91 percent of the manufacturers surveyed for last year’s forecast called for 2005 to meet or exceed 2004’s levels.

Our forecast indicates that the primary reason for the positive outcome in 2005 was due to the simple fact the sales volume increased for 70 percent of the participating manufacturers and remained steady for another 19 percent. Among those companies reporting higher sales volumes, the average increase was 12 percent. Manufacturers also cited a strong economy and higher customer awareness as reasons influencing their success.

In addition, slightly more than half of the participating manufacturers reported an increase in gross profit from sales and 29 percent reported similar to ’04 levels. For those companies reporting an increase in gross profits, the average was 9 percent.

Of course, the news was not good for all manufacturers, as 11 percent reported that their sales volume decreased in 2005 from 2004. And for the manufacturers surveyed, product distribution patterns remained relatively unchanged. (See Chart 2.)