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January 2009
SPECIAL REPORT

E&S Industry: Girding For A Challenging Year

With the economy roiling and E&S sales declining, one bright spot is bubbling to the surface: falling materials prices.

By: Robin Ashton

For a number of years, we at Foodservice Equipment Reports have argued that the U.S. foodservice equipment and supplies market has become increasingly noncyclical. The size and maturity of the market makes it more dependent on renovation and replacement sales and less dependent on new construction. This in turn mitigates the volatility of the market.

Or so the theory goes. The coming year or two will test that theory, as the industry faces the most daunting economic conditions in decades.

Most economists believe this country is in recession and that it may be deeper and longer than any downturn since the early 1980s. In that downturn, which was fueled by chronic inflation, soaring interest rates and dismal unemployment, manufacturer sales of E&S are estimated to have fallen 25% or more in real terms. We don't forecast anything like such a decline this year. Our current forecast calls for a 3.8% drop in real sales in 2009, which follows on the heels of an estimated 3.5% decline in '08.

Not that things couldn't get worse. Several major suppliers have told FER that they expect heavy equipment sales to fall 10% this year, matching the decline of the recession of '90. Many we spoke with also said the market was quite negative in October and early November.

The Business Barometer maintained by the Manufacturers' Agents Association for the Foodservice Industry fell 2.8% in the third quarter of '08. Equipment sales were off 3.1% in the quarter. And as MAFSI numbers are based on current dollars, the real declines are two to three points lower.

Meanwhile, the economy as a whole is forecast to post falling real gross domestic product numbers for '09, pegged at -0.4% according to the consensus forecast published by the Blue Chip Economic Indicators newsletter. Consumers are forecast to spend less in real terms as well, the first real decline since '80.

The economy shed more than half a million jobs in September and October alone. Consumers are shell-shocked by the job prospects, falling home prices and the constant drumbeat of negative news. Consumer confidence fell off the table in October, despite free-falling gasoline prices. For that month, the Reuters/University of Michigan Consumer Sentiment Index posted its largest one-month drop in the more than 50-year history of the Index.

"Consumers held the least favorable assessments of their finances in more than a half century and viewed their job prospects more negatively than at any other time since the end of 1980," according to Richard Curtin, director of the University of Michigan consumer surveys.

Operators Hunkering Down
Nearly all operators, other than large quick-service chains, are feeling the pain from consumers' new "climate of frugality," as Joe Pawlak, v.p. of research firm Technomic Inc., calls it.

Many operators, from casual-dining chains to mom-and-pops to publicly financed institutions, are cutting back or holding off on capital expenditures. The cutbacks have been particularly apparent in the casual-dining sector, which has seen the largest drops in customer traffic and same-store sales.

The so-called spec markets—public and private noncommercial segments that feature large, consultant-specified facilities and long lead times—have been a bright spot in the market the past few years. But the publicly funded segments will most likely be squeezed this year as tax revenues plummet at the state and local levels. Even private college and universities are being affected as the value of endowments falls with the stock markets.

So What's the Good News?
There are the beginnings of one favorable result from the downturn: Prices for core materials and commodities used in foodservice equipment and supplies are beginning to fall. Prices for 304 stainless sheet were nearly 27% lower in the third quarter of '08 compared with the record peak reached in the same quarter of '07.

Prices for carbon steels, which saw huge jumps early last year, are falling dramatically as auto manufacturers suffer plunging sales. Nonferrous metals, such as aluminum and copper, are also experiencing price moderation.

This materials moderation, combined with a soft market, should lead, we forecast, to moderating price increases for equipment and supplies. According to blended list-price data from hundreds of companies in the AutoQuotes Inc. data base, list prices increased an average 6.1% for the year ended June 30, 2008. And that followed a whopping 9.6% average increase for the same period in'06-'07.

Still, '09 will be a challenging year without question. We can only be grateful that Americans still eat away from home.

Want The Complete FER E&S Forecast?
FER's 2009 forecast of the E&S market includes detailed data and analysis of general economic factors, operator trends, and materials and E&S pricing, plus hard-number forecasts of E&S market growth. To purchase in print or electronic format, call the FER office at 800/986-9616, or e-mail Jessica Scurlock at jscurlock@fermag.com.

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