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How the E&S Market Works Special Features

FER EXCLUSIVE: How the Great Recession Changed E&S Spec/Purchasing

If you’re old enough to vote, you’ve already seen a couple recessions. They cycle every decade or so. Not to shrug them off, but generally speaking, they are a part of the landscape. Not a good part, but a familiar part.

This most recent one, though, was a doozie. It was steeper, more pervasive and more persistent than any downturn we’ve seen since The Great Depression, according to everyone who keeps track. Data crunchers can point out that the unemployment rate technically peaked higher in 1982, but this time around, the speed and depth of job losses and the lingering weakness of the recovery were and are much worse. There’s a reason history has tagged this one The Great Recession.

For those who were too busy bailing to look at the calendar, officially the recession began in December 2007, according to the National Bureau of Economic Research. Then ’08 saw a cascade of failures. Several Wall Street institutions unraveled. General Motors and Chrysler went down. Government bailouts ensued. Home values plummeted. Unemployment rose to double digits. The litany of complications went on.

June ’09, The Great Recession technically was over, according to the NBER. The 18-month dive, the longest since World War II, had ended. Not that any meaningful rebound was in the offing. It still isn’t.

Foodservice Takes A Double-Digit Hit

For foodservice, the storm began to register clearly in late ’07, and in some segments, earlier. Casual and family dining, which had been struggling with overcapacity and pricing issues anyway, felt the full brunt early on as most diners traded down and some traded <i>out<i/>. According to Technomic Inc., overall foodservice sales dropped slightly more than 10 points in real terms during the recession. NPD Group’s Recount project figures the number of U.S. foodservice outlets declined by 1% from September of ’09 to September of ’10. Independent locations declined by 2%, while chains lost just a handful of locations.

In short order, operators had found the money had dried up. Cashflow dropped, and lending disappeared.

Careful numbers management was crucial to chain survival, says Michael Stack, chairman at Eat Here Brands (Five Guys, Babalu, Table 100 and Interim) and former chairman and current director at Quaker Steak and Lube. 

“In the franchise business, to create a win-win for franchisee and franchisor, you have to have a restaurant that produces a minimum of 25% operating profit,” he says. “That’s the number you need to service rent, supervision, general admin.” He also notes keeping enough cash to franchise and to service debt is key, too. When the numbers drop, things have to go. Quickly.

In the case of Quaker Steak, Stack says, the company had outsourced many development and real estate functions and didn’t have to tear down departments when the recession hit. Similarly, Eat Here Now had been pretty lean, “running as few head count in G&A as possible,” he says. Real estate and accounting are all outsourced, so again, big cuts were not needed. But for most chains, that wasn’t the case. 

Soon equipment and supplies suppliers were seeing the changes hitting their customers. “We started seeing [signs of recession] before the stock market crash in late 2008,” recalls Dean Landeche, sr. v.p. of marketing at Manitowoc Foodservice Group. “Enough markers were in the red zone earlier that year. It seemed to be apparent outside the equipment and supplies industry too.” He mentions symptoms in HVAC industries among the early signs.

“When the loss of discretionary income started to affect the chains, it wasn’t all at once for everyone. Really it was late ’08 and into ’09 when it impacted the restaurant business,” Landeche says. He notes the National Restaurant Association’s Restaurant Performance Index showed when sales, capital expenditures and future outlooks began to go bad. (The RPI first began subtly nosing down in November ’07—although at first it was difficult to detect on the street—and kept losing altitude until an unsteady leveling off during ’10, which was many months after The Great Recession officially ended.) 

The first sign of belt-tightening at the chains, Landeche says, was that project timelines were pushed out. Chains that might’ve planned 20 new stores per quarter slowed the pipeline to 10, for example. Remodel and rollout plans were stretched out.

“The second thing you saw was almost wholesale cancellations. Anything discretionary got whacked,” he says. “The third thing was internal restructuring. Some things they had done [in-house in the past] were not going to be recovered. Chains asked themselves whether they needed purchasing, spec, engineering—that swath of supplier-related type groups.” 

Michael Whiteley, v.p. of sales and marketing at Hatco Corp., describes the same sequence of events. “The street business dried up right away,” he says. “The spec pipeline, the large bid jobs, public money projects, etc., took about six months to work their way through the pipeline. After that things dried up hard in late ’09,” Whiteley says. He also says he thinks the bulk of the pain in the industry has passed. “For us, the ‘new norm’ is steady growth but at a lower, single-digit pace than what we saw pre-recession.”

Like Landeche, Whiteley says a lot of engineering and spec/purchase people at the chains got cut. “With no money to fund new projects, there was no need to have them around. A lot of support purchasing people left also, as companies reduced head counts to a bare minimum. If a chain had two or three purchasing people/managers, suddenly there was only one.” 

Whitely notes one particular multi-concept chain corporation that used to have “dozens of projects going on at once. In the space of about 18 months they let more than 75% of the people go. They stopped all development, got rid of half the people in purchasing at the co-op. We got to the point where we had nothing to talk about, save replacement business.”

As tough as it was for bigger, healthier chains, it was worse for the smaller or wobblier ones that had branding or menu problems or financial weakness before the recession hit. 

Enter The Outsources

As chains shed in-house departments, the functions had to go to various outsources/consultants, and where E&S is concerned, most functions were pushed upstream in the existing supply chain to dealers and manufacturers. The process has been fairly orderly, according to most, but not without incident. There’s always a learning curve and a certain confusion about who’s doing what. 

Smallwares have been less affected than the equipment side, says Chuck Quinn, director of national accounts at Cambro Mfg., partly because smallwares replacement business carries on, and also because the recent trend to using menu changes to drive traffic often involves new smallwares. But still, he’s seen changes on the smallwares side.

“We’ve seen a consolidation of [purchasing and spec] personnel at the chains, with those remaining left with more responsibilities,” he says. Some chains have consolidated both equipment and smallwares duties at the same desk, he says, meaning someone’s tasked with learning whole new categories very quickly under tough conditions. “We’re also seeing equipment and supplies dealers taking more of the layout-design-spec responsibility,” he says. 

Rick McCaffrey, longtime corporate architect at Brinker Int’l. who is now at GHA Architects, says a lot of chains want to retain some of their own development functions, while spinning out others.

One byproduct: “We now have to get 20 [smaller] accounts where we used to get two,” he says. “One client will need site plans; one will need floorplans and elevations.” All of which drives down margins, he notes. 

Rick Ellingson, COO at dealer Bargreen Ellingson Inc., confirms dealers are picking up many formerly in-house chain functions, and the market remains difficult. “The restaurants we’re doing are only happening because the landlord is paying for it,” he says. “In 2007 the first thing GE Capital cut was foodservice loans. I think the Louisiana Purchase was done with less hassle than what’s required now.

“Our core competency—regional chains—can’t get money.” The upshot of which is a lot of price pressure, and a lot of work for limited margins. Ellingson says one good-sized chain customer, with more than 100 stores and its own in-house test kitchen, recently asked Bargreen Ellingson to use the dealer’s test kitchen and its people. “They spent a whole month here. It went very well,” Ellingson says. 

“Another [chain] guy needed to cut three people. And he said to us, ‘What I need you to do is raise your prices a little, and I want a full-time embedded employee on your payroll.’” Somewhat ironically, amid this arrangement, the chain has had to pull back quite a bit over the past couple years and is a much smaller customer now.

At The Wasserstrom Company, which tends to serve a lot of major national chains, President Brad Wasserstrom confirms many similar dealer experiences. “Large chains have demanded more of us in service than ever before,” he says, noting they’ve been asking more in reporting, for example. “Chains have been more aggressive with pricing, and they’ve put more accounts out to bid,” he says. 

“In smallwares, we’ve dealt with direct pricing. We’ve seen trading out brands to lower-priced ones.”Wasserstrom says he’s seen a lot of consolidation in purchasing and development departments at the chains, and he’s seen a lot of consolidation of food and equipment purchasing—again, creating challenges in workloads and learning curves.

The Past Is Not Coming Back 

And what of the future? Will chains restaff as they stabilize? Nobody we talked with seems to think so.

Aramark isn’t going back. As fortune would have it, the contract management company, which also is a franchisee of numerous commercial concepts, had been moving toward streamlining just before the recession. And if the downturn didn’t actually trigger Aramark’s plan, it certainly pushed it along. 

“We are smaller and more nimble than a couple years ago,” says Duane Clark, associate v.p. of capital projects and procurement. And to emphasize the point, he notes the project count rose from 192 projects in ’09 to more than 500 this year. Over the past few years, Clark says, Aramark has created standardized specs and reduced the list of equipment manufacturers it buys from. “Now we have focused on a handful of major brands,” he says, and generally have shed non-core tasks. “We no longer do project management,” he notes. “We hire that.” Aramark continues to pursue a “partner-network model,” moving duties outward to suppliers better suited to perform them. A distribution partner today performs more logistics support, for example.

“I think chains will look to outsource noncritical functions,” Wasserstrom echoes. “If they want to cut four of five purchasers, then they’ll go out to a consultant or outsource.” 

Part of what’s different about this era is that technology offers alternatives that were not available in the past. Ten or 20 years ago, when the economy opened up, chains wanted to restaff. But today, laptops, video conferences and partner relationships mean a lot of work can be completed virtually anywhere, including at home. So why staff up, increasing head counts, G&A, T&E, office space and equipment?

Stack says he’ll continue to spin out functions. “In the future we will outsource construction management,” he notes, on top of the other services he outsources now. “There’s enough expertise out there, you can hire it when you need it.” 

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