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January 2008
Growth To Continue For E&S Industry
By: Robin Ashton

Despite the new reality of higher materials costs and challenging price increases, we predict real growth of 1.5% this year.

Often, when markets are about to change from up to down or down to up, the economic data "waffle." A bit of this is happening in the numbers we at Foodservice Equipment Reports analyze to predict the direction of the foodservice equipment and supplies market.

On the plus side: strong growth by the large public E&S companies, many of which continued to report double-digit gains through the third quarter of 2007. While some of this growth is inflation—most manufacturers continue to raise prices aggressively as they attempt to cover continuing materials price gains—a lot of it is real.

Blended sales for nine public E&S companies tracked by our forecasting partner, John Muldowney of Clarity Marketing, rose a whopping 17.9% for the third quarter '07 versus the same quarter '06, and 14% total for the first three quarters of '07. Seven of the public companies sell equipment and two offer supplies and tabletop items.

Even scrubbing out the effects of acquisitions and extraordinary gains by two of the equipment companies, Muldowney estimates "organic" growth by the remaining publics of about 6% for the nine months.

On the other side of the ledger are the numbers reported in the quarterly Business Barometer from the Manufacturers' Agents Association for the Foodservice Industry. These numbers, based on reps' reports of sales of like-for-like lines versus the quarter of the year before, have bumped along at levels that seem to indicate unit sales are negative in real terms.

The overall MAFSI index rose 2.3% in the first quarter of '07, only slightly at 2.8% in the second quarter, and 2.9% in the third quarter. These numbers are nominal and include price increases. Sales in the Northeast and West were particularly hard hit.

In light of it all, here's the bottom line: Our '08 forecast calls for real growth of 1.5% in '08 versus 1.9% in '07.

QSR Segment Outperforms, Buys More Equipment
How does one account for the disparity between the supplier sales rise and the sluggish sales reported by the reps? One part of the answer may be found in looking at what parts of the customer base are doing the best. Throughout this extended period of high gasoline prices and other consumer shocks, the large quick-service chains, led by McDonald's, have outperformed other operator segments.

These operators buy much of their equipment from the public equipment and supplies groups and other large private E&S companies. The public companies also dominate equipment categories that are growing particularly fast, including multifunction fast-cooking technologies, combi ovens and energy-saving refrigeration technologies.

In addition, it is the large QSR chains, along with U.S.-based hotel brands, that are benefiting most significantly from rapid unit growth in the Pacific Rim, Europe and the Middle East.

Meanwhile lower-end casual dining and so-called "midscale"concepts such as family dining have seen declines in traffic and same-store sales. These segments include significantly more small chains and independent operators. And these customer segments have apparently curbed some of their spending for capital goods. Plus, the MAFSI numbers do not pick up all chain activity or any of the export market growth.

Price Increases All Around
What is consistent for all E&S manufacturers is the ongoing attempt to recoup rising materials costs through aggressive price increases. While there was finally some good news in the final quarter of '07 as the cost of nickel and 300 series stainless steels began to moderate, the reality is these materials were two-and-a-half times more expensive in the third quarter '07 than in the first quarter '06. There's still a lot of catching up to do.

According to AutoQuotes, overall list prices rose an average of 9.6% for the year ending June 30, 2007. The median increase was 6.9%. This is substantially higher than during the '05 to '06 period and even the period of '03 to '04, when increases were in the 3% range.

The outlook is challenging. While stainless costs are forecast by Purchasing magazine to decline, the predictions for other key materials used in foodservice E&S are not as rosy. As can be seen from our forecasts for this year, we expect price increases from manufacturers to continue at historically high levels.

Despite the uncertainties, we forecast continuing real growth this year for the E&S market. We see ongoing strength in the QSR and export markets, as well as demographic trends driving growth of key noncommercial segments such as schools, colleges and healthcare.

As Muldowney puts it, "We believe the industry will have a healthy 2008, barring a general economy convulsion due to energy or credit conditions."

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