The Foodservice Turnaround
By Joe Pawlak
In March and April of this year, a number of Wall Street and other industry analysts boldly pronounced that the recession is over for the restaurant industry and that we are now officially in a recovery phase.
They pointed to news from major chains of improved same-store sales and traffic performance as the basis for their belief that a turnaround had begun. These prognostications were touted in the general press along with other positive economic news that perhaps the bottom had been reached and smooth sailing lies ahead.
Whether one believes a recovery has begun in foodservice or not, we still must proceed very cautiously when we talk about the health of the industry. Although some turnaround may be occurring, it is still premature to state that a return to normalcy is just around the corner.
Is This Recovery?
In its simplest sense, recovery can be defined as a rapid return to normalcy. Looking at foodservice, a full recovery of the industry could probably be defined as a situation that was present prior to 2008, when industry real growth was positive, and niche sectors enjoyed very strong prospects.
Optimism now being expressed about the industry falls considerably short of a recovery. Here are the facts:
• Although the employment situation (a critical industry driver) has moved into growth territory, it is still very tenuous. Unemployment rates continue to hover near double digits, with no short-term end in sight.
• Although same-store sales are improving, for many chains, this “improvement” is simply a slowing in the rate of decline, rather than a return to growth. For other chains same-store sales growth is coming from weak comparisons.
• Looking forward, Technomic predicts that 2010 will be a better year for the industry than 2009, not because the industry will return to growth, but rather, the rate of decline has slowed.
Based on these facts, it might be more accurate to describe this recovery as moving a patient from critical to serious condition: things are looking better, but we are hardly out of the woods.
One must look at the longer term in the industry to get a clearer picture of what has happened and what a true recovery must entail.
• On a real dollar basis, the foodservice industry lost just under 10 percent of its real value in 2008 and 2009. If the industry grew at a 1.1 percent real annual rate (the average over the past 20 years), it would take 9 years for the industry to regain the losses from the past two years. To reach the 2007 peak in as little as three years would require the industry to grow at a 3 percent annual real rate. This rate, however, has only been achieved four times in the past 30 years.
• Major chains have lost significant sales volume from existing units. Comparing the 1Q of 2007 to the 1Q of 2010, average unit volumes are down considerably for a number of chains: Morton’s, Capital Grille, and Ruby Tuesday are down around 20 percent; Outback down 13 percent; Chili’s down 9 percent; and Starbucks down 6 percent, despite a very strong 1Q-2010 result. Even with traffic gains, it will take some time for these chains to return to the unit sales level experienced before the industry recession.
Looking Forward
Technomic is asked when foodservice will recover from the recent downturn. There is no one answer because recovery has two dimensions. First, the beginning of a recovery is defined as achieving real growth. That said, we will once again see declines in the real growth rate this year, meaning that 2010 will be slightly worse than 2009.
In layman’s terms, using our growth data, a typical operator that experienced a volume of “100” in 2007, followed by “97” in 2008 and “91” in 2009, would expect a volume of "90" in 2010. In my opinion, that isn’t a recovery. The industry is not expected to achieve real growth until at least 2011, when that operator will be able to reach “91” again.
The second dimension regarding recovery deals with when a full recovery will be achieved. I would define this as reaching the same levels where the industry was in 2007, prior to the recession. As seen from the aforementioned points, it will be quite some time before the industry recovers fully and normalcy returns. In other words, our patient is still in serious condition, with improvement expected to come slowly.
Joseph Pawlak, Vice President and a veteran of Technomic for over 20 years, has conducted a
wide variety of food industry studies involving market planning,
customer satisfaction benchmarking, new product development, food
trends, opportunity analyses, acquisition evaluations, concept testing
and analyses of distribution systems. Notably, Pawlak has expertise in
the areas of food technology, distribution, and brand equity analysis.
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