Many operators are experiencing slowing traffic and sales. Will this trend accelerate as costs continue to rise?

The good news: If the forecasts for the general economy come through, foodservice operators should see their third consecutive year of positive real growth in 2006.

The challenge: With the expansion of the commercial operator market now in its third year, signs of a slowdown are beginning to appear. And if that trend continues, and operator costs rise at higher rates than expected, the market could find itself in the classic squeeze of flat or declining revenues and squeezed margins. And that could undermine the current positive trends in spending for capital goods such as foodservice equipment, supplies and furnishings.

Taking into account all these forces, both organizations that forecast operator sales, Technomic Inc. and the National Restaurant Association, predict positive real growth in operator sales in ’06.

2005 Operator Sales Hold, But Margins Slip

Foodservice operators have had two good years on the sales front, the best since ’01. In spite of two gasoline-price spikes, hurricanesand floods, tanking consumer confidence and other macroeconomic forces that usually crimp away-from-home eating, most operators saw sales and traffic grow moderately last year.

Still, while many major quick-service restaurant chains continued to report positive traffic and same-store sales growth in late ’05, casual-dining operators began to see some falloff. Joe Pawlak, senior v.p. and principal at Technomic, says that while sales held up through most of ’05, margins did not. Rising fuel costs, weather disruptions and their impact on food costs, and even the rising costs of equipment and supplies took their toll.

Others saw faltering on the revenue side as well. According to data through mid-’05 from NPD Foodworld, large chains continued to take share from independents last year, as they have throughout this current recovery. At the large QSR chains in particular, menu diversification and quality improvements are credited for gaining share from mid-scale concepts and even some lower-end casual-dining chains, as well as independents.

Technomic’s Pawlak says his data suggest some “trading down” in the second half of ’05, to both QSR and so-called “fast-casual” concepts such as Panera, Atlanta Bread, Qdoba and the like. This is usually a sign of distress in household income, particularly in lower-income households.

Looking at all this, Technomic estimates real growth for overall foodservice will come in at 1.9% in ’05. This compares with 2.3% in ’04 and flat or slightly negative readings from ’01 through ’03.

More specifically, Technomic figures total “Restaurants and Bars” at 2.7% real growth in ’05, compared with 4% in ’04 and 0.7% to 1.25% from ’01 through ’03.

The Technomic forecasts for ’06, released in September, stand at 1.4% real growth for the total industry and 2% for “Restaurants and Bars.” “Primarily Noncommercial” foodservice is forecast at -1% real, its sixth straight year of negative performance, but the best showing since ’01.

Since those forecasts were made several months ago, Pawlak says he’s become a bit more concerned, though the bounce-back in consumer confidence and falling gasoline prices bode well. It’s the cost outlook, combined with slowing sales, that has his attention. “It’s going to be very interesting to see what happens in the first few months of the year,” he says.

NRA Predicts Sales, Traffic Both Up This Year

As it often is, the National Restaurant Association’s forecast is likely to be a bit more optimistic, according to Hudson Riehle, senior v.p. of research and information services. Riehle says he sees a number of positive developments for ’06, including federal government and economist forecasts for lower wholesale food costs and higher real disposable personal income. These forces will likely improve margins on one side and help sales and traffic remain positive on the other, Riehle says.

“I expect we’ll see a dramatic improvement in food costs, after two years of historically high food cost inflation in ’03 and ’04 and another moderate gain in ’05,” he says. “The USDA forecasts show real declines for ’06. Overall, we expect operators will see real margin gains,” he adds, suggesting that this should have a positive impact on purchases of equipment and supplies.

When the NRA ’06 forecast is released, we’ll cover the details in FER Fortnightly, our e-mail newsletter.

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