Regulatory Report

Industry Report

Moderate E&S Growth But Big Price Increases On Tap For 2005
The foodservice equipment and supplies market grew in 2004, and we forecast ’05 will see even better growth. But the gathering recovery has not reached everyone, and challenges, particularly of costs and pricing, abound. Operators can expect suppliers to raise prices aggressively at least through midyear.

For a detailed breakout of forecasted segment growth rates and price increases, see the January 2005 issue of Foodservice Equipment Reports, or for the numbers-crunching table, click here for downloading.

Still, even with rapidly increasing costs for core materials and components eating into margins, ’04 was a vast improvement over ’03, when the market declined in real terms. That recession in our world was caused by a cutback in new-unit construction, other capital programs and even critical replacement purchasing as operators large and small, commercial and noncommercial, dealt with the most sustained downturn in customer traffic—five straight quarters—in recent history.

In this mostly mature U.S. foodservice market, a change in operator fortunes is also behind the change to positive real growth in ’04. Starting just after the July ’03 Federal tax cuts, big U.S. chain sales began growing rapidly and consistently. This recovery has continued without interruption.

And suppliers to the big folks have reaped the benefits. Companies supplying major chains saw quarterly sales jump 6% to even as high as 10% or more over year earlier periods in the first half of ’04. While the rate of growth moderated in the third quarter, most such companies have had a successful sales year, according to John Muldowney, president of Clarity Marketing in Tipp City, Ohio, which tracks performance of public E&S companies.

Several other industry measurements all show an improved environment for most suppliers. The North American Association of Food Equipment Manufacturers’ quarterly Sales Index, the Manufacturers’ Agents Association for the Food Service Industry’s Business Barometer and economic surveys from the Foodservice Equipment Distributors Association all point to improved conditions.

We expect this recovery to become broader and deeper in ’05. Smaller operators are only just beginning to see improved sales. And many noncommercial segments that have been stymied by strapped public budgets may gain strength as taxing bodies work their way out of deficits.

But in addition to the improving market for E&S, the big story of ’04 was the dramatic rise in the cost of materials such as stainless and other steels, copper, aluminum, plastics and even corrugated for shipping containers. Prices for components such as motors, controls, electrical assemblies and the like have also jumped as a worldwide recovery strains supplies.

And while many manufacturers raised prices twice in ’04, the total increase since mid-year ’03 has been in the 3% to 5% range. According to new numbers from Kent Motes, president of AutoQuotes, which publishes price increase for 278 suppliers, the "blended" price increase for 170,000 products from May ’03 through early October ’04 was only 4.72%. The median was only 2.91%. Since materials can comprise as much as 35% of the total cost of E&S products, manufacturers have seen their margins slashed and are trying to catch up.

Tom Stundza, executive editor at Purchasing magazine, says some of the pressure should come off many materials as the year progresses, but not all. Purchasing forecasts prices for stainless will remain nearly 65% higher in the last quarter of 2005 than in the first quarter of ’03.

This is a concern for operators, who will see the most aggressive attempts to raise E&S prices in more than two decades. Some manufacturers have quietly told Foodservice Equipment Reports and FER Fortnightly they plan increases of as much as 15% early this year. How much of such increases operators—particularly the major chains—are willing to buy will be the major story of ’05, along with tracking to see if smaller operators and noncommercial segments do indeed buy more E&S.

Robin Ashton
Publisher
rashton@fermag.com