2004 Forecast - A Future in Flux

The foodservice industry will meet an uncertain economy with healthy resolve

By Allison Perlik, Senior Editor -- Restaurants & Institutions, 1/1/2004

In noncommercial and commercial foodservice operations alike, the central questions being asked are how much confidence and how aggressive a growth strategy are warranted as the new year begins. The answers may not be revealed quickly.

The nation’s economy is teasingly unpredictable— showing promise and signs of improvement but still more than capable of dashing hopes—making it hard for foodservice operators to decide how much optimism is warranted.

The U.S. Department of Commerce’s report that the nation’s gross domestic product rose at a stunning annualized rate of 8.2% for the third quarter of 2003 was a strong positive. Consumer spending increased at a 6.4% annual rate, and at year’s end manufacturing was at a 20-year high. The 21,000 jobs added in the leisure-and-hospitality segment in November accounted for more than one-third of the month’s net private-sector job increase, according to the U.S. Department of Labor, reflecting continued new-store openings by major quick-service and casual-dining chains during 2003’s second half. Yet the agency’s November count of unemployed persons in the industry stood at 990,000, up from 978,000 in November 2002.

Many companies spent the last year waiting for economic indicators to sort themselves out. It never happened, and projections of a robust recovery in the first half of 2004 aren’t forthcoming. That leaves foodservice to grapple with the challenges that confront commercial and noncommercial sectors: rising costs of doing business (overhead, labor and food); shaky consumer confidence undermining acceptance of menu-price increases; potentially damaging fallout from obesity-related issues; and lingering uncertainties about economic and social effects of a drawn-out military engagement overseas.

The industry has its own indicators: actions taken that respond to and anticipate change, that attack costs and yield successes despite reduced resources. These indicators hint that 2004 will be a year not for patient optimism but instead one of hard-nosed pragmatism.

Lynne Jacoby, food and beverage practice leader for Pricewaterhouse-Coopers in New York City admits to being an optimist. “The major indicators say the economy is slowly getting better, although not at the rate we would like,” she says. Based on that, 2004 looks to be a year for cautious advance.

Paying the Piper
Planning for future growth is difficult when key variables won’t stay steady. That has been—and is projected to remain—true of rising commodity prices and employee-benefit costs that squeeze profit margins across all sectors.

Escalating beef prices are the result of rising consumer demand, the popularity of protein-rich diets and last year’s Canadian livestock ban resulting from mad cow disease occurrences. Chains, including Smith & Wollensky, Ryan’s Family Steak Houses, Back Yard Burgers and Landry’s Seafood Restaurants, cited beef pricing as a factor in declining earnings in late 2003 or as a pressing concern for coming quarters. Independent restaurants, which typically pay higher spot costs rather than contracted rates for beef, can expect even greater volatility.

Several operators—Denny’s, Brinker International and Landry’s among them—have announced menu price hikes for 2004. Others are likely to bite that bullet—a risk in uncertain times—and follow suit.

“The major chains are likely to move in lockstep with respect to price increases,” says Dennis Parrott, national industry director for restaurants at New York City-based KPMG LLP. “I think you’ll see commodity costs passed on through pricing of new menu offerings.”

If consumer price sensitivity is strong, operators may look at lower-food-cost items for new product introductions or shift to marketing communications that steer consumers away from higher-cost items, says Rod Guinn, managing director of the food and beverage group at FleetBoston Financial Corp. in Boston.

Overhead inflation is a tougher nut. Healthcare costs for all employers are expected to increase 12% in 2004, marking the fifth consecutive year of double-digit increases, according to the 2004 Health Care Cost Survey conducted by New York City-based consultancy Towers Perrin.

Menu-price increases may balance some of these added costs of doing business, but operators also will weigh other measures to protect margins.

Companies can budget and account for these rising costs, looking for offsets through general and administrative leverage or corporate reductions, says Matt DiFrisco, restaurant analyst at New York City-based Gerard Klauer Mattison. “Growth gives companies better leverage. In an election year I doubt you’ll see too much done to help businesses reduce labor costs,” he says.

Instead, the tide is turning in the other direction, DiFrisco notes, with growing state and federal demands for an increased minimum wage and full benefits for all employees.

For these reasons, Peter Napolitano, director of dining services at California State University-San Bernardino, says he values good hourly employees more than ever. This year’s president of the East Lansing, Mich.-based National Association of College & University Food Services, Napolitano fears that foodservice workers will move to other departments on campuses for quality-of-life reasons.

“If we can’t offer better wages and benefits and more job flexibility for full-time employees, why [would employees] stay in foodservice?” he asks. He worries that the industry will lose “some very talented and experienced people at a time when campuses face the enormous challenges of tuition hikes, rising enrollments and expansion.”

Trimming the Fat
Nutritionists’, social critics’ and legislators’ expressions of concern about the nation’s rising obesity rates pose a challenge with more far-reaching implications than does any fluctuating economic indicator. At risk is the trust consumers have in the foods they are served away from home.

While it’s difficult to speculate how long obesity will remain center stage, current signs point to a protracted battle. Recognizing the risk, many operators are taking measures to draw health-conscious consumers and to heed calls for change.

Rising commodity prices and employee-benefit costs continue to squeeze profit margins across all sectors.

Among chains, moves to provide new menu options have been made by Boston-based Au Bon Pain (trans-fat-free muffins), Thousand Oaks, Calif.-based Baja Fresh (high-protein entrées) and Kenner, La.-based Smoothie King (low-carb smoothies) to name a few.

Independents at all price points also are listening and responding to customer concerns. Bobby Dubin, owner of quick-service spots Stash’s Restaurant and Guido’s Pastaria in Highland Park, Ill., worked with a registered dietitian to create menus adhering to popular diets such as The Zone and Atkins. Upscale Bluepointe restaurant in Atlanta offers a daily Six-Pack Stomach lunch menu of low-carb, low-sodium options.

School foodservice directors are reviewing menus with an eye to trim higher-fat or -calorie foods and to increase availability of fresh fruits and vegetables in cafeterias and vending machines. Donna Wittrock, president of the Alexandria, Va.-based American School Food Service Association, says the group intends to play a more proactive role in the development of national nutritional policies in 2004. This will include lobbying Congress to eliminate reduced-price meals in favor of greater free-meal availability and to increase funding for nutrition education for teachers, coaches, principals and community leaders.

“School meals are a critical part of the solution” to childhood health problems, Wittrock says.

For all industry segments, 2004 will be a year that seeks to find practical solutions to common challenges.