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January 2008
Operators To See Modest Gains
By: Jennifer Hicks

A stew of higher food costs, increasing gas prices and more expensive energy confronts operators looking for growth in 2008.

The broad economic scene, with its challenging gasoline prices, upended mortgage market, tighter credit and declining housing values, looks less than inviting as we head into 2008.

On up side, we're just 10 months away from Deci-sion 2008, which may stimulate optimism in some sectors. Plus, consumers likely to moderate their foodservice habits probably have already done so, which means our industry is less likely to see more slowing in operator traffic and sales, say industry experts.

Thus both Technomic Inc. and the National Restau-rant Association predict moderate real growth this year for total foodservice sales.

Full-Service Falters, Quick-Service Booms
Looking at the segments, full-service chains con-tinue to struggle as pricey gasoline and poorly financed mortgages take their toll on consumer spending. The National Restaurant Association's Restaurant Performance Index showed QSR outperforming FSR throughout much of '07.

Meanwhile, the largest quick-service chains are having a field day, racking up record sales and opening new units both here and overseas. Examples include McDonald's Corp., which posted sales gains every quarter of last year, and Yum! Brands, which is building new units faster than we can count them.

On the noncommercial side, four segments are keeping busy these days with renovations and new construction: schools, colleges, healthcare and corrections. Theme parks and sports facilities are also still expanding, and U.S. hotel chains have been building aggressively overseas.

So the news is good in some quarters. Yet food prices, driven in part by more expensive diesel fuel, pose challenges for all segments. In a Technomic survey of operators done in '07, 82% mentioned food costs as a major concern, up from 73% in '06. Energy costs were also cited by 77% of operators surveyed.

A domino effect has pushed up menu pricing across the board. Of those operators who raised prices in '07—more than 60% of all commercial operators surveyed by Technomic—the average increase was 7%. But that may not be sustainable. "Higher commodity costs in staples and produce are resulting in lower operating margins, but it is increasingly difficult to pass along price increases to consumers," says Joe Pawlak, Technomic senior v.p. and principal.

Despite a slowing in operator sales and traffic, there's no sign of a dramatic downturn ahead, says the firm. It expects real growth for total foodservice to come in at 1.4% in '08 following 1.9% in '07. Inflation likely will come in at 4%, Technomic projects, the highest level since 1990.

"Operator growth prospects remain pretty solid despite the higher costs of energy," says Pawlak. "Consumers have already made adjustments to their spending to account for higher gas prices, and the impact on restaurants has already happened."

NRA Anticipates Moderate Growth
The NRA forecast suggests a similar story. Restau-rant industry sales should advance by 0.9% in real terms, with the nation's 945,000 restaurants and foodservice outlets generating $558 billion this year, predicts the Washington, D.C., association.

"This more modest growth forecast compared to earlier years is due to higher food and energy prices," explains Hudson Riehle, senior v.p. of research for the NRA. "Recruiting and retaining employees remain the top challenges for both full- and limited-service operators, with competition, food and labor costs, and the economy also rating high on the list of issues."

Riehle says the trends NRA expects to see in '08 include an increased emphasis on off-premise options and technology, as well as environmental initiatives and nutrition.

And this year full-service operators are expected to adjust menus as needed to entice and retain customers. Watch for more small plates and bite-size desserts, and more alternative-source ingredients such as organics, local produce, sustainable seafood, and grass-fed and free-range products.

New Ways Of Doing Business
Industry observers say casual-dining restaurants in particular should look at reinventing themselves this year to maintain sales. New menus or concept designs will become the key to future sales, provided the changes don't eat too far into profits.

Finally, in this challenging climate all operators can benefit from what some have called "experiential branding," creating a customer experience that extends from food and service to décor and follow-up interaction. Enticing customers to return is as important as getting them in the door the first time.

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