While high material costs continue to drive price increases, we forecast ongoing expansion of the E&S market as operators continue to build and replace.

The foodservice equipment and supplies market should continue to expand for the third consecutive year in 2006, according to Foodservice Equipment Reports’ exclusive annual forecast.

The forecast is prepared by FER Publisher Robin Ashton with assistance from John Muldowney, president of Clarity Marketing, a leading consulting firm. It posits real growth of 2.1% in ’06, down slightly from estimated real growth of 2.5% in both ’05 and ’04. Boosted by continuing higher-than-normal price increases, nominal growth is expected to be 5.5% in the coming year, compared with 6.3% last year.

Equipment growth rates are predicted higher than those for smallwares and tabletop. Real growth for seven equipment and furnishing categories is forecast at 2.4% real and 6.1% nominal. Supplies sales, responding more quickly to a projected slowdown in operator sales, are expected to grow 1.3% real, 3.4% nominal.

Expansion Cycle Is Waning

Most E&S manufacturers in North America had a very good year in ’05, at least on the sales front. Still, reports from public companies and industry indices signal that a slowdown in growth rates began in the third and fourth quarters, though the numbers remain positive. Profits for manufacturers were something else, as high prices for key materials remained a problem and will do so well into ’06.

The foodservice and E&S cycles typically follow each other, with a six-month lag for E&S. A big operator sales and traffic falloff, such as we saw in ’01, can short-circuit the E&S cycles.

The cycles move in three phases: chains, street operators and the institutional/specification market. The chain expansion is long in the tooth, having begun in July ’03. Street operators were hit hard by the gasoline price run-ups, but they were spending for E&S in ’05, and if sales bounce back, they may have some unfulfilled capital needs. The spec market is still going strong, but the concern here is that if retail sales fall, it might lead to some public budget cuts.

Add it all up, and take into account that both Technomic Inc. and the National Restaurant Association predict continued though moderating real growth of operator sales in ’06, and it appears there is life left in this expansion cycle, though it is on a downward slope.

Prices Will Continue To Rise

Unfortunately, there’s also continuing upward pressure on many of the materials used to make foodservice equipment and supplies. Tom Stundza, executive editor of Purchasing magazine, which researches and forecasts transaction prices of more than 100 material commodities, says all the plastics will see price increases well into ’06 as the price of natural gas, from which most are made, is currently at prices nearly double what they were a couple years ago. Copper and aluminum prices are also forecast to remain at historically very high levels. And while the cost of stainless and other steels has seen a moderating trend that Stundza expects to continue through ’06, prices are still more than 50% higher than they were in early ’03.

Yet in spite of this, as data from Auto-Quotes makes clear, most manufacturers have yet to recover through price increases the dollars lost on cost run-ups. This means E&S manufacturers will continue to try to raise prices as much as the market will allow.

All in all, there are some downside risks in ’06, but our best guess is another year of positive real growth for the E&S market.

A more detailed version of this forecast is available in the Nov. 29 and Dec. 13, 2005, issues of FER Fortnightly.

To view the tables and charts for the special report, click here to download the story PDF.