E&S Sales: Moderate Growth To Continue

What’s remarkable about the foodservice equipment and supplies market in the U.S. and Canada in the years since the Great Recession is the durability of moderate year-on-year growth throughout the recovery. Since the industry clawed its way out of a 15% two-year decline in 2010, no year has seen nominal sales growth higher than 4.8% or lower than 3.8%. Real gains averaged more than 2.3% annually from ’11 through ’16. If, as Foodservice Equipment Reports forecasts, the market grows again in ’17, it will be an expansion stretching eight years. And though we see a gradual slowing of market growth in the following years, we see no negatives out through ’20.

We estimate the market peaked in ’15 with nominal growth at the manufacturers’ level of 4.8% and real growth, after factoring out E&S price increases, of 2.5%. While ’16 fourth-quarter data is still unavailable, we estimate market growth of 4.6% in current dollars with real growth of 2.1%. For ’17, we forecast nominal growth will slow to 4.1% with real growth of 1.8%. A factor underlying the slowing real growth numbers are higher-than-expected manufacturer list-price increases.

Big Chain Slowdown Hurts Public E&S Companies
This doesn’t mean there aren’t some worrisome aspects to the market outlook and certainly some downside risks facing the E&S industry. Larger chains saw same-store sales and traffi c slide throughout ’16, especially among full-service concepts, but also at traditional quick-service and even fast-casual concepts. Such trends are typically the leading indicator for the foodservice and E&S markets.

The NRA’s Restaurant Performance Index slid into contraction territory in August, the second time the index has dipped below the 100-level tipping point in the last nine months. Current same-store sales and customer traffi c were especially weak. Both indicators were in contraction territory for four consecutive months before rebounding back to positive territory in the September survey. Before December ’15, the overall index had been in expansion territory for 34 consecutive months.

Some of the reported slowdown in restaurant sales and traffi c may be overstated. The NPD Group, whose CREST consumer studies are the broadest measure of foodservice activity, reported restaurant traffi c was flat, not negative, in the fi rst two quarters of ’16. While chains are struggling, both Technomic Inc. and NPD report smaller full-service chains and independents continue to do well.

Many observers believe part of the problem is simply over-expansion, with too many seats chasing too few customers. In the very mature U.S. foodservice market, where net units have actually been declining for two years according to NPD’s ReCount census data, new unit openings help equipment sales, but siphon customers away from established operators. The rapid growth of delivery service may also be a factor.

Still, this chain slowdown has been a key factor in deteriorating growth for several of the big, publicly reporting E&S companies. In the third quarter ’16, combined sales of the six equipment-oriented and two suppliesoriented companies we follow fell into negative territory for the first time in years.

Market Fundamentals Remain Strong
But most other factors that drive operators and E&S markets remain very positive. Jobs growth trends, disposable income forecasts, and consumer confi dence levels all portend continuing growth of foodservice sales. Gasoline prices remain at very low levels and are forecast to remain low through ’17. Wholesale food prices continue to fall, boosting operator margins and consumer household income. A forecast of wholesale food price trends from supply chain management consulting fi rm SpenDifference expects continuing declines in prices for beef, pork, poultry and other proteins again in ’17. This helps offset pressure from increasing labor and healthcare costs for operators, freeing up money for capital spending.

This may explain in part continued strong capital spending activity by operators as tracked by the RPI.

Despite the slide in same-store sales and traffic, operators continued to spend and planned to spend for capital goods throughout ’16. While the levels of activity slowed slightly from the record levels seen in ’15, they remain at historically very high levels.

The broad-market MAFSI Business Barometer, which tracks sales trends for manufacturers’ reps, refl ects this high level of activity. Until it slowed somewhat to a 3.6% increase in the third quarter ’16 versus the same quarter of the prior year, the Barometer averaged 4.9% gains for the six prior quarters, a record. And looking to the future, quotation and consultant activity as reported by the reps remains strong, though the positive gap also narrowed third quarter.

E&S Prices Rose More Than Expected In ’15-’16
One thing operators and channel partners can expect in ’17 is higher prices for equipment and supplies. According to data from AutoQuotes Inc., average list prices for E&S products rose 4% for the 12-month period ended June ’16. This compares with a 3.3% average increase for the same period in ’14-’15 and 3.1% in ’13-’14. It was the largest annual increase since the commodities infl ation days of ’07-’08. And these price increases were put through before prices of carbon steels and stainless surged in ’16, in the case of carbon steels by as much as 40%.

The unexpectedly large increases led FER to boost its estimates of price increases in both ’16 and ’17, which in turn led to a reduction in real growth rates for both years.

We do expect the growth rate of the E&S market to slow this year and out through ’20. And with restaurant same-store sales and traffic slowing, there is a bit more risk this year than we’ve seen recently. But the general economy remains strong with all the factors that drive foodservice positive. Operators continue to spend for equipment and facilities improvements. And the outlook for the spec market remains positive for at least another two years. In other words, we think ’17 will be another good year for the E&S market.

FER’s complete ’17 forecast of the E&S market includes detailed data and analysis of general economic factors, operator trends, and materials and E&S pricing, rankings of top E&S manufacturers and distributors, plus hard-number forecasts of E&S market growth for nine categories of equipment and supplies out through ’20. To purchase the complete forecast, e-mail Christine Palmer at cpalmer@fermag.com.