Regulatory Report

Industry Report

Special Report:
Publisher's Revised 2005 E&S Market Growth And First Guess For 2006

For those of you who have been looking for a revised forecast of the foodservice equipment and supplies market, I'll give you an overview of what we've seen so far this year and how it looks for next. And we'll tie some rough numbers to the views. John Muldowney of Clarity Marketing and I will try to do a full percentage change revision for 2005 by our next FER Fortnightly mailing Aug. 9. We are still embargoed from using the North American Association of Food Equipment Manufacturers' new NAFEM Size and Shape study numbers until Sept. 1.

Business for most suppliers, both at the manufacturing and distribution levels, has been very good to date. I've heard double-digit good from a few of you through the first half. The publicly held equipment companies, as tracked by Muldowney, generally had a strong first quarter, though there were some soft pockets. The NAFEM Industry Index had first quarter gains of 11.8% for North America and 26.8% on export sales versus the same quarter in '04. Several of the large cooking equipment oriented publics posted double-digit first quarter gains.

But those makers with more diversified product mixes came in anywhere from 4% to 9%. Friends have also told me that American Refrigeration Institute shipment data has ice machine shipments year-to-date in negative territory through May, though I have a feeling the nationwide heat wave will reverse that picture. Still, John and I have both heard that second quarter gains may have not been quite so robust.

The public companies that specialize in supplies and tabletop are a somewhat different story, without the good news. They were essentially flat in the first quarter and one of them—we never cite names when the news is bad—has publicly said it will report a loss on second quarter sales that will be lower than expected. This is a bit worrisome because supplies sales usually track with operator sales quite closely. The latest Restaurant Performance Index from the National Restaurant Association, the May edition, sure enough showed a downturn in traffic and same-store sales and slightly lower expectations of future prospects.

Still, operator sales have held up remarkably well, given the rise in gasoline prices. And I've heard from a number of prominent dealers with a lot of supplies business that things generally are quite strong and continue to be so.

I also now have data on price increases, thanks to Kent Motes, president at AutoQuotes, as we reported two weeks ago. Blended list price increases for 334 manufacturers, covering more than 200,000 products, rose 5.38% from Sept. 1, '04 to June 1 of this year. It's lower than we thought it might be, given the intense pressure on manufacturers to raise prices to cover soaring materials costs. But, in fact, it's very close to the 4.8% overall industry price increase—remember Kent is tracking this—we forecast late last year. Remember too, so-called "deviated" pricing for specific chains and/or buying groups may be well below these numbers.

So how does all this info jibe with our '05 forecast, which we have not changed since October last year? Our total industry real growth forecast was 3.3% for a combined nominal growth rate of 8.0% (This doesn't add with the 4.8% price increase because of rounding). But we had supplies and tabletop growing 3.8% real and equipment "only" 3.1%. I think we'll end up low by at least a couple of points on equipment, if the market holds. But so far we're probably high on the supplies side. We'll guess that supplies will end with about 2% real growth for the year. Given that equipment accounts for more than three-quarters of the E&S market, it trumps the supplies slowdown. So I'd guess Muldowney and I will decide to edge up our overall forecast toward 4% real for the total industry. And price rises will come in at 4% to 5% overall for the year. So we're still pretty close to our original forecast for nominal. Maybe closer to 9% than 8%.

What about '06? I think, at this early date, it will continue to be good without being quite this strong. The nominal will certainly be lower because while manufacturers will try to raise prices again in the first quarter next year—they haven't caught up yet and stainless remains stubbornly high—they won't be nearly as aggressive. The outlook for the general economy and operator sales is similar: Decent, but not quite as good. I'll give you an E&S market guess for '06: 6% to 7% nominal, 3% real. Don't bet the farm on it. It's too early. But it's reasonable, given what we know now.

Put this together with the related stories on U.S. macroeconomic forecasts and commodities prices in this issue of FER Fortnightly and you should have some grist for your own forecast and budgeting mills.

Robin Ashton
Publisher
rashton@fermag.com