Foodservice Equipment Reports Fortnightly
www.fermag.com

Welcome to FER Fortnightly Online Newsletter
January 3, 2008








Regulatory Report:
Sponsored by:
Enodis
Want A Squeeze Of Germs—Er, Lime—With That?
San Francisco Considers Calorie Posting On Menu Boards
New HET Toilet List, World Toilet Association Debut
Santa Monica Takes Out Polystyrene Takeout Packaging On Feb. 9
China Gets The Lead Out On Food Safety Law

Industry Report:
Sponsored by:
FHA2008
Arby's Goes Green With Solar Power
Upstart Cuppy's Coffee Takes On Starbucks
McDonald's Thinks 'Green' Globally, Acts Locally
Pollo Campero Plans For 120 More



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In This Section:
Special 2008 Forecast Report: FER Predicts 1.5% Real Growth For E&S Manufacturers Sales
NRA Index Falls To Lowest Level Since 2003
Operator Forecasts: Both NRA, Technomic Predict Real Growth
Mountain States Again To Lead Growth

This issue's Regulatory ReportSponsor: Enodis
Industry ReportSponsor: FHA2008

Economic Report Manitowoc Foodservice Group

Special 2008 Forecast Report

FER Predicts 1.5% Real Growth For E&S Manufacturers Sales
Often, when markets are about to change from up to down or down to up, the economic data "waffle." A bit of this is happening in the numbers we at Foodservice Equipment Reports and FER Fortnightly analyze to predict the direction of the foodservice industry's equipment and supplies market.

On the plus side: Strong growth continues among the large public E&S companies, many of which continued to report double-digit gains through the third quarter of 2007. While some of this growth is inflation—most manufacturers continue to raise their prices aggressively as they attempt to recover continuing increases in materials costs—a lot of it is real.

Blended sales for nine public E&S companies tracked by our forecasting partner, John Muldowney of Clarity Marketing, rose a whopping 17.9% for third-quarter '07 versus the same period a year earlier, and 14% total for the first three quarters of '07. Seven of the public companies sell equipment, and two offer supplies and tabletop items.

Even scrubbing out the effects of acquisitions and extraordinary gains by two of the equipment companies, Muldowney said he estimates "organic" growth by the remaining publics at about 6% for the nine months.

On the other side of the ledger are the numbers reported in the quarterly Business Barometer from the Manufacturers' Agents Association for the Foodservice Industry. These numbers, based on reps' reports of sales of like-for-like lines versus same period year earlier have bumped along at levels that seem to indicate unit sales are negative in real terms.

The overall MAFSI index rose 2.3% in the first quarter of '07, only slightly higher at 2.8% in the second quarter, and 2.9% in the third quarter. These numbers are nominal and include price increases. Sales in the Northeast and West were particularly hard hit.

In light of it all, here's the bottom line: Our '08 forecast calls for real growth of 1.5% in '08 versus 1.9% in '07.

QSR Segment Outperforms, Buys More Equipment
How does one account for the disparity between the supplier sales rise and the sluggish sales reported by the reps? One part of the answer may be found in looking at what parts of the customer base are doing the best, and which segments do how much business through manufacturers' reps.

Throughout this extended period of high gasoline prices and other consumer shocks, the large quick-service chains have clearly fared better than many other segments. These operators buy much of their equipment from the public equipment and supplies groups and other large private E&S companies showing the strongest growth. The public companies also dominate equipment categories that are growing particularly quickly, including multifunction fast-cooking technologies, combi ovens and energy-saving refrigeration technologies.

In addition, it is the large QSR chains, along with U.S.-based hotel brands, that are benefiting most significantly from rapid unit growth in the Pacific Rim, Europe and the Middle East.

Much of this growth—for both the largest QSRs and for export markets in general—is not reflected in MAFSI measurements.

On the flip side, lower-end casual dining and "midscale" concepts such as family dining have seen declines in traffic and same-store sales, and these sectors are very clearly reflected in independent-rep volumes, as are the sales of smaller suppliers who may not be growing as quickly as the big publicly held ones.

Price Increases All Around
What is consistent for all E&S manufacturers is the ongoing attempt to recoup rising materials costs through aggressive price increases. While there was finally some good news in the final quarter of '07 as the cost of nickel and 300 series stainless steels began to moderate, the reality is these materials were two-and-a-half times more expensive in the third quarter '07 than in first-quarter '06. There's still a lot of catching up to do.

According to AutoQuotes, overall list prices rose an average of 9.6% for the year ending June 30, 2007. The median increase was 6.9%. This is substantially higher than during the '05 to '06 period and even the period of '03 to '04, when increases were in the 3% range.

The outlook is challenging. While stainless costs are forecast by Purchasing magazine to decline, the predictions for other key materials used in foodservice E&S are not as rosy. As can be seen from our forecasts for '08, we expect price increases from manufacturers to continue at historically high levels.

Despite the uncertainties, we forecast continuing real growth this year for the E&S market. We see ongoing strength in the QSR and export markets, as well as demographic trends driving growth of key noncommercial segments such as schools, colleges and healthcare. Both major operator forecasts, from Technomic Inc. and the National Restaurant Association, predict continued real growth of operator sales.

As Muldowney put it, "We believe the industry will have a healthy 2008, barring a general economy convulsion due to energy or credit conditions."

Our complete Equipment & Supplies Market Forecast is available for $249. The forecast includes five PowerPoint decks with detailed data and analyses of the general economy, operator segments, materials pricing, historical E&S price info from AutoQuotes, as well as detailed forecasts of growth and price changes for nine categories of equipment and supplies. To order the forecast or for more information, contact Jessica Scurlock at jscurlock@fermag.com or call 800/986-9616.

Our four-year E&S market forecast time series, from the NAFEM Size & Shape of the Industry benchmark year of '05 through the '08 forecast is available by clicking here: forecast (PDF).

 


Section sponsored by Manitowoc Foodservice Group

NRA Index Falls To Lowest Level Since 2003
Despite the economic uncertainties and very real slowdown in the general economy, we are holding with our revised 2008 forecast of 1.5% real growth of manufacturers' sales of foodservice equipment and supplies.

The Restaurant Performance Index compiled by the National Restaurant Association fell a full point in November, to 99, its lowest level since the current expansion of foodservice operator sales began in the summer of 2003.

Any Index value below 100 signals contraction; above 100 marks expansion.

All eight components making up the total Index, four in the Current Situation Index and four in the Expectations Index, declined. The Current Situation Index now stands at 98.7, and the Expectations Index is at 99.2. It is the first time since NRA launched the trend study during late spring '02 that the Expectations Index fell below 100.

The survey registered big declines in same-store sales, down 1.2 points, and customer traffic, off 1.5. Expectations for same-store sales were also off 1.2. The component tracking expected business conditions in six months, another component of the Expectations Index, has recorded a strong two-month negative trend; it declined 0.4 point, to 97.5. It is the lowest single marker among the eight components. The percentage of those who think business conditions will be worse in six months virtually doubled over a two-month span, to 41% in November compared to 21% in the September survey.

Both capital expenditure components, purchases during the past three months and intended purchases during the next six, were lower by 0.9 and 0.8 point respectively. The good news is that the expected purchases Index value remains above 100.


Section sponsored by Manitowoc Foodservice Group

Operator Forecasts: Both NRA, Technomic Predict Real Growth
In case you missed it in the crush before the holidays, the National Restaurant Association's annual forecast, released Dec. 12, predicted real operator sales growth for the entire industry in '08, including noncommercial segments, of 0.9%. The nominal growth forecast is 4.4%. Menu-price inflation is forecast at 3.5%.

Those figures compare with a revised estimate of 0.8% real and 4.6% nominal growth for ? 07; and 1.5% real and 4.7% nominal for ? 06.

Last September, Technomic Inc., the other major foodservice forecasting group, predicted operator sales would rise 1.1% in real terms and 5% in nominal, or current dollars. Inflation is forecast to be 4% (the discrepancy is a result of rounding).

It's worth noting that Technomic often re-examines its forecast during the first quarter, and given the deterioration of the general economy as well as signs of softening operator sales, we might see a slight downward revision of the firm's '08 forecast coming soon.

The complete NRA '08 forecast, including detailed segment and state-by-state forecasts, as well as a wealth of trends data, is available from NRA for a nominal fee by calling 800/482-9122 or by going to NRA's Web site www.restaurant.org/forecast. For information on the Technomic forecast, which is produced annually for the International Foodservice Manufacturers Association, call Technomic at 847-867-0004 or go to the firm's Web site at www.technomic.com.


Section sponsored by Manitowoc Foodservice Group

Mountain States Again To Lead Growth
Despite the economic uncertainties and very real slowdown in the general economy, we are holding with our revised 2008 forecast of 1.5% real growth of manufacturers' sales of foodservice equipment and supplies.

There is a major reason water savings has become a major operator concern during the past few years: Foodservice is growing fastest in the most water-challenged states in the United States. Once again in 2008, states in the Mountain West will post foodservice growth well above the average, according to the National Restaurant Association's state-by-state and regional forecasts. And the three other states with the fastest forecast growth: Texas, Georgia and North Carolina, are all drought-affected.

Nevada and Arizona will again post the strongest growth, at 6.5% and 6.4% nominal growth respectively. Utah is next at 5.9%, followed by Texas at 5.8%, Colorado at 5.7% and Idaho at 5.5%. Overall, the Mountain states will post growth of 5.9%, NRA projects. The next fastest growing region is the East South Central, driven by Texas growth. The East North Central region—essentially the Great Lakes states, which are negatively affected by job losses and nearly flat population growth—is predicted to have the slowest growth in '08 at 3.5%, or essentially flat in real terms.

But growth rates are one thing, and market size another. Despite the slower growth rates, Illinois and Ohio, the two largest states within the East North Central region, remain the fifth and sixth largest state foodservice markets, following California, Texas, New York, and Florida.



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