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January 2010
SPECIAL REPORT

Operators Brace For Slow Recovery

Bright spots appear for big chains with expansion in mind.

By Brian Ward

Even the world's greatest spin doctors couldn't do a thing with 2009. No matter what you included or excluded or played up or down, '09 was ugly. It was awful every which way.

Reasons? The list is long, and you've spent the past 24 months reading about it, so we can dispense with a lot of the paralyzing datapoints.

But a few biggies are key for foodservice, as well as for much of the economy in general. At deadline for this story, the U.S. Department of Labor had just reported the nation's unemployment rate hit 10.2% in October, its highest level since April 1983. Other sources, accounting for underemployment and unemployed workers who'd fallen out of traditional definitions, figure real unemployment is more like 17%.

It's Unemployment Above 10%
And the joblessness is widespread. Reuters reported 15 states had official unemployment rates above 10% in October, and they tended to be big states with lots of people. Among them, Michigan's rate improved but remained worst in the nation, at 15.1%. Nevada, Rhode Island and California all were above 12.5%. Another populous industrial state, Illinois, reported October unemployment of 11%.

All of which, needless to say, takes dollars out of consumers' pockets, which in turn kills consumer sentiment. Add in credit markets that refuse to loosen up, and confidence is hard to find. People stop spending. And in foodservice, that means customers do three things. They reduce dining occasions. And when they do go out, they trade down to lower-priced concepts and/or spend less on nonessentials such as cocktails and desserts.

You can see the results in the operator-sales table in this story. Technomic Inc., the Chicago-based foodservice research and consulting group, puts '09 operator sales (both commercial and noncommercial) at $588.465 billion, a real decline of 6.1%, the largest in decades.

Among the key items to note: Full-service restaurants, the second-largest category at 28% of foodservice sales, took a huge hit, with real revenue declines of 10.2%. When a quarter of your industry drops like that, it's pretty hard for the industry overall to put up any decent numbers.

And full service wasn't the only group that took a body slam. Lodging, a $31-billion segment, took a 14.1% beating. Vending, which includes office coffee service, is a $22-billion segment that fell 14.1%. Other big segments: recreation, nearly $20 billion; business & industry, $13.5 billion; and the airlines, at $$2.6 billion, all got clobbered for more than 12% real declines.

Even the limited-service category, which benefited enormously from the trade-down effect, saw a real decline of 2.4%.

But Yes, Some Good News
If there's an encouraging word to be said for '10, it's that some (relatively) hopeful signs are emerging. Car sales are improving. Most states have reported their rates of job losses have slowed. In October, the Labor Department reported, nonfarm payroll actually rose in 28 states and held steady in another. Homes sales are showing some strength, although improvements in the "affordability" index—how many homes in a market are selling for monthly payments at or below 28% of median take-home income—suggests housing is selling because prices have dropped through the floor. Still, it means home lending is on the upswing, and it means those choosing to buy homes are feeling some slightly improved confidence.

Other measures, productivity and so on, also are improving, but those indicators are further removed from consumer spending on foodservice.

Still, with all that in mind, foodservice might heave a small sigh of semi-relief for '10. The slide is expected to slow, and though most categories will still see red ink, the declines will only be about a third of what they were in '09. The market is generally expected to gather some strength throughout the year, softer in the beginning and firmer toward the end.

"We still are seeing softness in the overall foodservice market," says Joe Pawlak at Technomic. "Consumers just aren't spending yet, especially as more bad news on the job front continues.

"Even though gross domestic product was up in the third quarter, most of that came from cash-for-clunkers and government spending," Pawlak says.

Big Chains Fare Best
For all the boo-hoo and wringing of hands—warranted as it might be—there are still bright spots. Smart operators can find their openings. And economic clout helps, too, of course. As the pie charts with this story show, big chains continue to do better than the market. In '08, the most recent year for completed data, Technomic's Top 500 grew revenues 3.4% real while the industry could do no better than eke out a 0.4% growth.

Unit expansion told a similar story. While the industry had a small negative net for store counts, the Top 500 kept expanding (see the pie charts). And average unit volumes continued to run at roughly twice the industry average.

It pays to have clout.

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