Technomic Forecast: Industry Sales to Weaken, Still Grow in ’08

Economic slowdown, higher costs will prove greatest challenges for foodservice operators and consumers in the year ahead.

By Allison Perlik, Senior Editor -- Restaurants & Institutions, 1/17/2008

Despite a near-recession economy, rising food costs and the still-unfolding repercussions of the sub-prime mortgage collapse, Technomic Inc. predicts 3% to 4% growth in the $540 billion U.S. foodservice market this year, Technomic Vice President Joe Pawlak told participants in the Chicago-based consultancy’s 2008 Foodservice Industry Outlook webinar Thursday.

“Those numbers are lower than the 5% to 6% growth of past years, but it’s still in the positive range, and the industry will be positioned well to grow once the economy turns around,” said Pawlak, who detailed the negative and positive factors driving this moderate outlook during the hour-long presentation.

Weighing in on the negative side are significant drags on the economy that translate into reduced discretionary spending:

•Consumer confidence: The Consumer Confidence Index reached 88.6 in December, a slight uptick from 87.8 in November but notably lower than October (95.2) and September (99.5).

•The housing crisis: U.S. foreclosure rates have doubled.

•The rising price of gas: Fuel prices remain near all-time highs, averaging $3.07 per gallon nationally in December. Traditionally, fuel prices have declined in winter months, but higher crude-oil costs are preventing the emergence of such relief. Consequently, Pawlak warned, prices could near $4 per gallon this summer.

Regarding industry-specific issues, critical challenges on operators’ plates in 2008 include:

•Higher prices: Almost four in five operators (78%) report seeing higher food-and-beverage costs, with the average increase at 8%. They’re not the only ones feeling the heat, either—the Consumer Price Index (CPI) for food purchased away from home (i.e., restaurant meals) grew 4% in 2007, the biggest jump since 1990, while the CPI for retail-bought eat-at-home foods increased 5.6%. Increased demand for corn has meant higher corn prices and less farmland being devoted to crops other than corn; this has helped boost costs for meat and poultry, among other items, Pawlak said. Higher fuel costs are pushing up prices as well.

•Social responsibility: Nearly 9 in 10 consumers say it’s important for Americans to be environmentally conscious, according to Technomic data. Consumers’ interest in social consciousness also extends to issues such as animal welfare and living wages, making corporate social responsibility a concept operators must address in 2008 and beyond. “It’s become more of a must-have than a nice-to-have or differentiating factor,” Pawlak said.

•Slowing industry growth: When purse strings tighten, Americans trade down but not out of foodservice, Pawlak said, noting that 61% of consumers said they chose to some degree to eat at less-expensive eating establishments in December. Such trends pose a particular challenge for casual-dining operators. In the fourth quarter of 2007, quick-service same-store sales grew 0.4% compared with the same period in 2005, whereas casual-dining same-store sales dropped 2.5%. Pawlak said he predicts this industry softness will yield less new-unit construction in 2008 as capital and credit becomes less available.

Not all the news from Technomic’s report was pessimistic. Disposable personal income, a strong correlator for foodservice’s performance, rose 2.7% in October 2007. Although disposable-income growth is slowing, the mere presence of growth will help stymie a more-significant industry slowdown, Pawlak said. Additionally, the dollar’s weak performance is enticing overseas visitors to visit the United States. “That has propped up foodservice, and we think it will prop it up again in 2008 as we see more foreign travelers coming in and eating at restaurants,” Pawlak said.