Foodservice Equipment Reports Fortnightly

Welcome to FER Fortnightly Online Newsletter
December 13, 2005

Regulatory Report:
Sponsored by:
APW Wyott
Pennsylvania Restaurant Inspections To Get Overhaul
Who's On Which FDA Food Code?
High School Soda Vending Machines Come Under Fire
Lord Of The (Smoke) Rings Trilogy:
Pt. I: Chicago Snuffs Public Smoking, With Important Exception
Pt. II: And Your Little Dog, Too
Part III: Westin Jumps On Smoking Ban Wagon

Industry Report:
Sponsored by:
MUFES '06,
Feb. 11-13, 2006

IH&RA Names Huckestein New President
Enodis USA Opens Equipment-Purchasing Web Program
Two Bid On Dunkin' Donuts

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In This Section:
Pt II: The 2006 FER E&S Market Forecast

This issue's Regulatory ReportSponsor: APW Wyott Innovations Industry ReportSponsor: MUFES '06, Feb. 11-13, 2006

Economic Report Hatco Corporation

Pt. II: The 2006 FER E&S Market Forecast

Note: For those of you who missed it in the Nov. 29 FER Fortnightly, we published Part I of our 2006 forecast of foodservice equipment, supplies and furnishings manufacturer sales, with an extended discussion of the rationales for the forecast. It is available by clicking here:

This week we add to the discussion—and it's more discussion than report—with in-depth analyses of the outlooks for operators and for materials and E&S pricing, and a brief look at the macroeconomic environment.

Short-Term Operator Outlook Improves,
But Some Question Legs of This Expansion
Both of the major groups that forecast the foodservice operator market, Technomic Inc. and the National Restaurant Association, expect positive real growth in the broad foodservice market next year. Technomic forecasts real growth of 1.4% in '06, compared with 1.9% this year and 2.3% in '04. NRA won't release its forecast until the end of this week, but Hudson Riehle, senior v.p. of research and information services, tells us the association's outlook is a bit more optimistic.

Still, it's always useful to be aware of downside risks. And both Riehle and Joe Pawlak, senior v.p. at Technomic Inc., whom we also interviewed this week for our Operator Forecast article in the January issue of Foodservice Equipment Reports, acknowledge some trends and factors could undermine the expansion of the foodservice market that started in July '03.

On the plus side, however, the short-term outlook actually has improved. Consumer sentiment has rebounded as gasoline prices have receded (see the macroeconomic overview below). And this alone probably led to a marked improvement in operator mood as tracked by NRA's Restaurant Performance Index. The composite Index bounced back a full 1.2 points in the October survey, reported late November. This is a significant gain given the declines during the past few months as the hurricane impact, high energy prices, and other forces depressed operator sales and traffic. Both the Current Situation and Expectations Index surged, and all eight components rose. Usually at this time of year, expectations begin to edge downwards, as operators anticipate the normally slow winter traffic patterns.

The worrisome news comes from several fronts. Most important in our view is the length of the current expansion cycle. Big chain traffic and sales ramped robustly upward beginning July '03, and they've had a remarkable run since. Almost two-and-a-half years later, the really big guys are still reporting same-store sales gains week-on-week versus year prior. It won't last forever, and we're already seeing nearly every other key restaurant segment begin to fall by the wayside in terms of traffic. Pawlak points out that several major casual dining chains reported same store sales numbers in November that made it clear their traffic is negative; it's only menu-price increases that have them in positive like-sales territory. "We're certainly seeing some trading down," he said, not just to QSR but to fast casual chains such as Panera and others.

What worries Pawlak and Riehle, and us, in addition to the above factors, is the continuing run-up in food, energy and other key operator costs, including equipment and supplies, at a time when traffic is stagnating. This could put operators in the old ugly bind: falling revenues, rising costs, squeezed margins.

These are concerns, not givens. Riehle is more optimistic, Pawlak somewhat less so. They're both very experienced forecasters, and that's why we include their views. Riehle points out that operators had unprecedented run-ups in core food costs in '03 and '04. Food costs moderated this year, but were still inflationary. So he thinks the big margin squeeze has already occurred. The U.S. Department of Agriculture appears to agree, forecasting declining wholesale food costs next year. This could offset the projected rise in energy, particularly natural gas, and other costs.

Pawlak worries that while fresh food costs will moderate, prepared foods, energy and other key costs linked to natural gas, such as most plastics including those used in disposables, will eat into margins. He told us this week, "The first few months of 2006 will be very interesting from an operator margin perspective. If margins get squeezed further while traffic and same-store-sales hit a wall, it will change the outlook."

And if operators hit another margin squeeze, it could begin to affect their capital spending plans. Simple as that.

We could go on for paragraphs, but the job of any forecaster is to be balanced, since all forecasters are just making informed guesses. We discuss the downsides here to make sure everyone understands the risks. But NRA, Technomic and Foodservice Equipment Reports all forecast positive real growth in '06 for the operator market and the equipment and supplies market. Our bets are still on the positive side.

Materials Costs Issues To Linger Through 2006,
Keeping Upward Price Pressure On Equipment & Supplies
The outlook for the cost of stainless and other steels has improved during the past couple months, but that good news is offset by the forecast for rising prices of other key metals and all plastics, according to Tom Stundza, executive editor of Purchasing magazine, which researches transaction prices and forecasts trends for more than 100 key commodities. (The reports are available for purchase at This material price environment will undoubtedly lead many equipment and supplies suppliers, who managed to raise list prices an average of only 4% to 5.5% in '05, according to AutoQuotes data, to continue to try to increase prices.

Purchasing's quarterly "Purchasing Transaction Forecasts" won't be released until the end of this month, but Stundza offered a bit of a preview on materials widely used in E&S during an interview with Foodservice Equipment Reports for its January issue's E&S industry forecast.

In broad terms, the outlook is better, he said, but still not good, for steels, including stainless. It's not so good for copper and aluminum, whose prices are at historically very high levels with little sign of a fall off. Meanwhile, the forecast is dreadful for the pricing of natural gas and all plastic resins, most of which are made from natural gas.

"Stainless prices began moderating in the third quarter '05," Stundza told us. "What's surprising is that the moderate fall-off is continuing into the fourth quarter." This change is a result of simple supply and demand. "Use of stainless in North America has declined 6% so far in '05," he said, "while supply is way up." After reaching a peak of $2,557 a ton with surcharges in the second quarter of '05, transaction prices fell to an average of $2,480 in the third quarter. In the Sept. 30 forecast, Purchasing projected the price at $2,350 in the fourth quarter, but Stundza said it now appears that may be closer to $2,340.

And he thinks this trend will continue into '06. "I think we'll see a modest 5% to 10% decline over the next year," he said, suggesting the price per ton in fourth quarter '06 could be around $2,225 a ton.

What's behind the moderate declines? The same factors that sent the price of stainless soaring in '04 and the first half of '05. "The Chinese are backing off on some of their aggressive purchasing of stainless, for political as much as demand reasons," Stundza said. And the availability of nickel, a key component of stainless that had been in short supply, has improved.

The outlook for cold-rolled and other steels used in foodservice equipment and supplies looks to be following a similar moderating pattern.

On the other hand, the outlook for natural gas and the plastics based on it is heading the other way. The average transaction price of natural gas in the second quarter of '05 was $7.13 a thousand cubic feet (mcf). With the destruction of derricks, pipelines and other production and transport facilities during Katrina and other hurricanes, the average price soared almost 40% to $9.93 a mfc in the third quarter. Purchasing's Sept. 30 forecast projected a peak price in the second quarter '06 at $10.74 a mfc. And Stundza said he sees no dramatic moderating influence after that.

This will affect not only the price of nearly all plastic resins throughout '06, but will also hit foodservice operators who use natural gas for cooking and heating.

Of the resins, for example, extrusion-grade LDPE, used in beverage and tote and bus boxes among other foodservice products, was 65 cents a pound (c/lb.) during the first quarter '04. It reached a first peak during second quarter '05 at 84 c/lb. before moderating somewhat in the third quarter. Purchasing forecasts the material will range in price from 89 c/lb. to 91 c/lb. through '06. The pattern is similar with nearly every other widely used plastic resin. The forecast is even worse for styrenes, widely used in disposables.

All of which will put great pressure on supplies manufacturers, and others that use plastics, to raise prices throughout '06.

Price increases of other key materials, such as aluminum and copper, have been equally dramatic over the past three years. Aluminum sheet costs 44% more now than it did in early '03. Copper sheet, often used in such things as refrigeration tubing, is up 70% over the same period.

Unfortunately, while Purchasing foresees relative stability in the prices of both those metals through '06, it forecasts no significant decline in either by the end of the year.

All of this means the margin gap that struck manufacturers dramatically in '04 and continued well into '05 will continue into '06. And most makers will have little choice but to try to raise prices aggressively again. Whether the market will accept those attempts is another question.

Blue Chip GDP Growth And Other Forecasts Creep Higher;
Growth To Moderate, But Recession Risk Low
We hoped we would get the latest 2006 macroeconomic forecasts from Blue Chip Economic Indicator before we had to close the file this issue, and we just this minute received them.

The outlook is for continued, though moderating real growth in the general economy, with slowing through the coming year. Inflation is likely to moderate somewhat from '05 but remain higher than in previous years. The group also foresees higher disposable income, but lower personal consumption expenditures (mostly because of lower auto vehicle purchases). Consumer spending, overall, will increase. The economists surveyed believe the Federal funds rate will peak at 4.75% to 5% next year and that the Fed will begin lowering rates before year-end.

None of this is different from the assumptions we used making our '06 forecasts. The American economy is a remarkable engine.

Hope this all helps. Have a healthy and successful 2006!


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