January 2007
SPECIAL REPORT:
Operators Face Growth Challenges
By: Jennifer Hicks

The list of concerns is as long as your arm: a slowing general economy, rising energy costs, ongoing labor shortages, retreating discretionary income and advancing materials costs that threaten to drive equipment prices higher.

But foodservice operators have seen all of this before, to varying degrees, and this time around they’re generally optimistic about their prospects for 2007. Recent data from the National Restaurant Association shows that in addition to having a positive outlook for ’07 sales, a large number of operators are ramping up plans to buy equipment, expand or remodel over the next several months.

That’s good news, considering that last year was a struggle for some, particularly in the full-service segment. And moving beyond operator sentiment to hard forecast numbers, both Technomic Inc., Chicago, and the National Restaurant Association, Washington, D.C., predict moderate real growth in ’07, with fine print that recommends a focus on specific areas to make that forecast come to fruition.

Limited Service Shines, Full Service Struggles

As a group, limited- and full-service chains posted faster growth last fall than they had earlier in the year, says Technomic’s Joe Pawlak, senior v.p. and principal. However, looking at the numbers more closely, Technomic reports that limited service led that performance, while many full-service operators had a difficult year.

One obvious reason is the domino effect of higher gas prices and a resulting drop in discretionary income. But internal challenges plagued casual-dining operators in particular, says Pawlak, and will continue to do so this year.

“We think that, in many respects, casual dining is no longer a great value,” Pawlak explains. “Price increases have proliferated to the level that consumers are looking at other away-from-home choices, namely SIR and quick casual.

“We think that casual dining is going to need to reengineer itself to meet consumer demands for value and convenience,” Pawlak adds, “both of which are being served by SIR and quick casual today.”

Looking at these trends, Technomic estimates real growth for overall foodservice will settle at 1.1% for last year, and forecasts 1.0% for ’07. By segment, the organization predicts healthy real growth of 2.14% for limited-service restaurants and 0.29% real growth for full-service operations.

Among noncommercial segments, lodging and recreation should fare the best this year, with a predicted real-growth rise of 5.06% and 3.60%, respectively.

And while these forecasts were put together several months ago, Pawlak assures FER that there’s been no major change afoot that would warrant an adjustment in the Technomic forecast.

“Not much has changed trend-wise since September, so we haven’t changed our forecast,” Pawlak says. “We’re cautiously optimistic about foodservice this year. 

NRA Says Operators Are Optimistic

Meanwhile, NRA’s forecast looks comparatively upbeat. The restaurant industry should see its 16^th consecutive year of real growth, with national restaurant sales increasing 2.1% in real terms, says the operator association.

“We’re looking at another solid year for restaurant industry growth in ’07, boosted by a stable economy, increasing personal disposable income, and Americans’ hunger for the flavors, experiences and convenience that restaurants provide,” says Hudson Riehle, senior v.p. of research for the NRA.

Nationwide, restaurant sales are expected to reach a record $537 billion, says Riehle, and the industry will add another 2 million jobs in the next 10 years. NRA also that predicts the number of restaurant locations will grow to 935,000 this year.

Looking at NRA’s forecast by segment, we find the association predicting that full-service restaurant sales will increase by $181.6 billion, or 2.2% real. NRA says full-service operators will continue to focus on increasing productivity, expanding takeout options, and integrating more technology solutions in kitchens and dining rooms.

The quick-service segment should post annual sales of $150.1 billion this year, representing 2.1% real growth. Operators in this segment will focus on diversifying menus, promoting healthier food choices, and enhancing drive-through, takeout, delivery and catering options, says NRA.

Go Long

Finally, in broader terms, operators in all segments will need to differentiate their concepts and menus with better marketing efforts, product quality and pricing to remain competitive this year. Developing an ongoing strategy that sets them apart will require customer focus and cost management. And with proper execution, successful differentiation should set up operators for success even beyond ’07.