This issue's Regulatory Report

Economic Report

  Industry Report

Special Focus: Are E&S Sales Beginning to Stall?
While most equipment and supplies makers saw significantly stronger sales in the first half of 2004 (see story on public company performance), some companies are now reporting a weaker third quarter, with the period now two-thirds on the books.

So, is the E&S market is beginning to slow? These early anecdotals of a weaker third quarter take on an urgency given news from both macro measures and industry events. It is now clear that the general economy slowed substantially in the second quarter, with GDP growth now estimated below 3%, following several quarters of plus-4% real growth. Consumers have cut back spending, and while confidence remains quite high, the cutbacks are worrisome for future commercial restaurant sales. (See related stories in EconomicReport). Most major chains are coming into a period of hard comparisons with strong growth last year.

In addition, a number of the major chains, including McDonald’s, Jack in the Box and Applebee’s, are paring back new unit growth plans for this year (see story in IndustryReport).

We think it quite possible third-quarter sales will be slower than those seen the first two quarters, but fundamentals for continued growth remain strong. While it’s possible the market will get blindsided by macro forces, the E&S market is really only a third of the way into a typical recovery. A close look at public-company performance shows those serving large and mid-sized chains have performed best, following strong performance by those segments since July ’03. Those with broad positions across chain, independent and spec markets have done moderately well. Those serving mostly spec markets are still struggling. Reps and manufacturers we’ve spoken with say the street market—smaller chains and independents—is just beginning to improve. On the spec side, the critical school market summer season was disappointing again for many. While colleges continue to renovate aggressively, B&I and health care are also just beginning to emerge.

Many operators have not yet replaced equipment they’ve nursed along through the four-year downturn. Emerging chains are finding it easier to find financing for growth after years of being capital-starved (though the meltdown of Krispy Kreme may undercut the positives a bit). And, from what we hear, renovation programs from the major chains have not been cut back. So while growth rates may slow in the third quarter, we see at least a year-and-a-half of this up cycle still ahead.

Robin Ashton
Publisher
rashton@fermag.com