This issue's Regulatory Report

Industry Report

Technomic Forecasts Moderating Operator Sales Growth In 2006 Concerns about the effect of high prices for gasoline and other commodities underlies a forecast of moderating real growth for foodservice operators in 2006, according to Technomic Inc., the Chicago-based foodservice research firm. The firm predicts nominal growth of 4.6% in total industry sales next year, 1.4% real. That is compared with 5.2% and 2.0% real growth in the current year. The moderating pattern is forecast across nearly all foodservice segments. Overall inflation for foodservice is forecast at 3.2% both this year and next. "We think next year we will finally see the effects of higher prices on the industry. As inflation in the general economy emerges, this will cause consumers to re-evaluate their foodservice purchasing habits," said Technomic Senior V.P. Joe Pawlak. As inflation cuts into disposable income, the firm believes the result may well be "trading down," the phenomenon seen in past inflationary periods in which consumers move away from full-service toward quick-service options. "We don't think consumers will stop going out to eat," he said. "Rather they will watch their dollars more closely by spending less when they go out to eat by cutting back on extras and trading down from higher price venues to more value priced operations. In this scenario, limited service restaurants will be beneficiaries." This view is reflected in the segment forecasts. Quick service is expected to grow 2.6% in real terms next year versus full-service growth of 1.4%. That spread was smaller this year, Technomic estimates, at 2.8% for quick service and 2.7% for full service. Overall "Restaurants and Bars" sales are forecast to grow 2% real next year compared with an estimate of 2.7% this year. "Beyond Restaurants" categories will hold up better overall, with equal or better performance from such key segments as schools, colleges and health care. Nominal growth for all the "Beyond Restaurants" categories is forecast at 3.6% '06 versus 3.8% this year. (Technomic employs different deflators for some noncommercial segments, making real growth comparisons difficult.)

Businesses Find It Easier To Raise Prices
More major American businesses are raising prices and finding it easier to do so, according to a survey fielded by the National Association of Business Economics and reported Oct. 25 by Reuters.

Of the 101 businesses responding to the survey, 40% raised prices in the third quarter of 2005, with only 2% lowering them. The NABE said the difference between the two, 38, is the second highest "index" in the survey' s 24-year history.

In addition, 46% of companies reported they expect to raise prices in the fourth quarter compared with 4% anticipating cuts. Businesses also reported they were finding it easier to raise prices.

While those surveyed represent large companies, the information corroborates anecdotal reports from foodservice equipment and supplies companies. With continued upward pressure on prices of key commodities such as plastics and stainless steel, those we've spoken with have said they will probably seek a bigger increase than they were planning only a few months ago.

Michigan's Consumer Sentiment Index Hits 13-Year Low
As if to underscore Technomic's concerns about inflation's impact on foodservice operators, the news from the University of Michigan on consumer confidence is not good.

"The current outlook for higher costs of home heating, higher interest rates, and falling real incomes will cause cutbacks in consumer spending in the coming months," said Richard Curtin, director of the University's Survey of Consumers.

His statement came as part of the release of the latest numbers on consumer sentiment and expectations last Friday. Following September's nearly 20-point decline in the Sentiment Index, October's reading shows another decline, to 74.2. The three-month decline of 22.3 points is the second largest on record. Only the decline before the 1990 recession was larger. And ominously, the three-month declines in front of the 2001 and 1980 recessions were smaller.

The Expectations Index fell only 0.1 point to 63.2, but is also off 22.3 points since three months ago.

Curtin said his organization's models forecast real growth of personal consumption expenditures (PCE) will fall to about 1% in both in the fourth quarter 2005 and first quarter '06. The Blue Chip Economic Indicators consensus predicted in October real PCE growth of 1.8% in the fourth quarter and 2.9% in first-quarter '06.

But Wall Street Rallies On Higher Than Expected GDP Growth
While the future looks a bit dimmer, the past appears a little brighter. The Federal Commerce Department's first estimate of real growth in gross domestic product for the third quarter came in at 3.8%, it announced Oct. 28. This was higher than most economists had forecast. The latest Blue Chip Economic Indicator consensus, Oct. 10, predicted third-quarter growth of 3.4%.

The news cheered Wall Street. The Dow stock index jumped 1.7% last Friday on the news. The broad measure of economic growth was pushed higher by robust spending on automobiles and higher than expected business spending on capital goods.