Foodservice Equipment Reports Fortnightly

Welcome to FER Fortnightly Online Newsletter
July 29, 2008

Regulatory Report:
Sponsored by:
Lincoln Foodservice Products/Enodis
L.A. Takes Fat Fight Directly To Chains
NYC Calorie Cops Cut Loose; SF Restaurants Fight Similar Law There
London, Ont., Drives Around Drive-Through Dilemma
Dutch Say No To 'Tabacky' Unless It's Wacky

Industry Report:
Sponsored by:
Server Products
You Still Have Chance To Get Into Hot Water
Survey Says: LEED Buildings Outperform Status Quo
Subway Sees No Signs Of Slowing, Expects 800 New Stores
Supermarket Chain In India To Open 100 Au Bon Pain Stores

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In This Section:
Want A Sneak Peek At Our E&S Market Forecast? Read On
Consumer, Wholesale Inflation Soar In June
Operator, Consumer Confidence Bad, But Should They Be?

This issue's Regulatory ReportSponsor: Lincoln Foodservice Products/Enodis
Industry ReportSponsor: Server Products
Economic Report Manitowoc Foodservice Group

Want A Sneak Peek At Our E&S Market Forecast? Read On
If you want to know what we think will happen in the foodservice equipment and supplies market the rest of this year and next, by now you've likely missed your first chance. Our annual President's Preview Equipment & Supplies Market Forecast meeting is being held tomorrow, July 30, at the Eaglewood Resort and Spa in Itasca, Ill. At the meeting we'll release our exclusive forecasts for E&S market growth in 2008 and '09, as well as forecasts for the general economy, the operator market and materials and E&S prices.

On the bright side, you'll be able to buy the forecast after tomorrow (see details below). And you'll have another shot at the information when we present a forecast update at our Oct. 25 Webinar.

In the meantime, though, some trends we see affecting the market over the next 18 months: Overall, we see the market slowing substantially. As our forecasting partner, John Muldowney, principal of Clarity Marketing, Tipp City, Ohio, said while we were preparing the forecast, "Every single one of the general economic and operator indictors that drive the E&S market is on a softening trend or is actually negative."

The same goes for forecasts for growth of disposable income and consumer spending. High fuel and food prices are absorbing billions of dollars of consumer income. Business spending is also slowing. Consumer confidence and expectations are at levels not seen since the recessions of the early 1980s despite unemployment and inflation at levels only half as bad as they were then.

On the operator side, sales have been sliding for a year or more, especially for full-service operators. This has a big ripple effect for E&S suppliers, as full-service ops have larger kitchens and buy more durable supplies and tabletop products per unit than quick-service operators. Interestingly, customer traffic has not fallen significantly. Customers are just "trading down" to lower-priced concepts.

The result is a squeeze on operator profits, which also are under pressure from rapidly rising food, energy and labor costs. And the E&S industry is adding to the strain. Prices for core materials used in foodservice E&S are continuing to increase, leading manufacturers to continue raising prices for their products. For this reason, among others, operator expectations and plans to make capital purchases are at record lows.

It's not a pretty picture, but there are positives. Big quick-service chains continue to do well, not only in the United States but worldwide. It is also remarkable that given strains on average consumers, they continue to eat away from home almost as much as they did during the good times a couple years ago. For these reasons and others, we do not think this downturn will affect the industry as severely as past downturns and recessions.

After tomorrow, you can purchase the entire six-section forecast—including an overview of growth by the Top 150 equipment and supplies manufacturers from Muldowney and Clarity Marketing and data on E&S prices increases from AutoQuotes Inc.—for $449. Past attendees of our forecast seminars or other meetings qualify for a discount. To order, e-mail Robin Ashton at or call the magazine's office at 800/986-9616.

If you're interested in participating in the Forecast Update webinar Oct. 25, e-mail and we'll send you details. This update will include revisions of our forecasts based on new data as well as recalculations of our market estimates and forecast using new benchmark data from the soon to be released "NAFEM Size & Shape of the Industry" market numbers.


Section sponsored by Manitowoc Foodservice Group

Consumer, Wholesale Inflation Soar In June
As you might recall, in our July 15 edition we discussed how prices for materials used by foodservice equipment and supplies manufacturers are still rising steeply. Well, according to data on consumer and wholesale prices, things aren't any better in the broader wholesale- and consumer-price arenas.

Both the monthly Producer Price Index and Consumer Price Index, released in mid-July, shot up at annualized rates not seen in decades. Food and energy costs were the culprits in both measures.

The overall Producer Price Index, which includes the costs that impact foodservice operators and E&S industry participants, rose 1.8% in June according to the Bureau of Labor Statistics. This followed a strong gain in May. The seasonally adjusted annual rate for all finished goods rose 12.4% for the first six months of 2008. Finished foods—processed foods, produce, meat, etc.—were up 1.5%, energy 6% for the month. Food costs at the wholesale level tracked by this finished measure have risen 9.8% since the first of the year. And this follows a 7.1% increase for the six months ended December 2007. Energy costs have jumped 38.1% on an annualized basis since January, following a 16.7% gain for the second half of '07. Even the so-called "core" rate for finished goods, which pulls out food and energy, rose 0.2% in June and is up a still-worrisome 4.5% annualized for the first six months.

For foodservice operators and those who supply them, these price increases are adding to rapid increases in core costs and thus pressure on profit margins.

The Consumer Price Index data fared no better, jumping 1.1% in June. Two-thirds of the increase was due to soaring energy and food costs. Energy rose 6.6% and food 0.8%. Energy prices have risen 53.6% on an annualized basis just in the last three months. Food has jumped 8.5% during that period.

Not surprisingly, given the cost-increase impact on operators, the food-away-from-home index, a measure of menu-price increases, also rose 0.5%. The index is running ahead of 4% annualized for the year so far.

Section sponsored by Manitowoc Foodservice Group

Operator, Consumer Confidence Bad, But Should They Be?
Foodservice operators, especially commercial ones, and their customers are feeling so blue, they are indigo. We reported last issue that the Expectations component of the National Restaurant Association's Restaurant Performance Index hit a record low in May. Meanwhile, major gauges of general consumer sentiment, confidence and expectations have also been at or near record lows.

But should they be? Are things really this bad? Well no, not really. But does that matter?

According to NRA's Restaurant Trendmapper research, which expands the detail of the survey behind the RPI, only 14% of operators surveyed in May thought business conditions would improve in six months. Those who think conditions will be even worse rose to 44%. And this disparity affected all five operator segments NRA breaks out.

Surprisingly, it's quick-service operators who showed the largest gap between those who thought things will be better, only 10%, and those who thought worse, 54%. This is surprising because QSR operators, particularly the major chains, have performed much better than most operators during this slowdown in sales. Perhaps they were indicating they believe still-deteriorating market conditions will finally catch up with them. But then again, McDonald's reported July 23 that June and second-quarter same-store sales remained positive in the United States and even more positive overseas.

Casual-dining operators were the next most pessimistic, followed by quick casual and family dining. Fine-dining operators were still pessimistic, but the gap between those who thought things will be better, 18%, and those who thought worse, 33%, was by far the smallest.

This lack of optimism has affected plans to make capital purchases during the next six months. On that measure, the survey in May hit its lowest level since NRA began the RPI in '02. But still, 54% of casual-dining and quick-service and 52% of quick-casual operators indicated they do plan to make such a purchase.

The major consumer confidence tracking surveys, The University of Michigan's Surveys of Consumers and the U.S. Conference Board's consumer surveys all have confidence and expectations measures at or near record lows. The Michigan Sentiment Index matched a record low in June, before it ticked up an insignificant 0.2 point in the preliminary reading for July. Its Expectations Index is at the second-lowest level. The Conference Board's Confidence Index hit its fifth-lowest level in June. Its Expectations Index reached a record low.

So is all this doom and gloominess justified? The last time the Michigan indices reached these levels was May 1980. Both unemployment and inflation were more than twice as high then as they are now. On the operator side, there are lots of negatives, but the reality is overall traffic has not dropped significantly, at least according to NPD Group's CREST reports, the best traffic gauge out there. And while operators are being pounded by higher costs and somewhat slumping same-store sales, Technomic Inc. is still forecasting total foodservice sales will rise more than 2% in current dollars this year, which hardly seems like the end of the world. But regardless of the actual figures, the reality is when operators and consumers feel this uncertain, they normally hunker down and spend less. So it could well be a gloomy next six months for operators and those who supply them.

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