Onsite Outlook 2010: Rebuilding the Business Model

Last January, a well-known consultant interviewed for this annual feature observed, “I wish 2009 was already over.” That prescient thought became an almost universal sentiment over the course of the following 12 months.

It was a year in which nearly every business, household and piece of conventional wisdom was tested by an economic tsunami that only now appears to be slowly receding. In its wake: record unemployment and economic dislocation, as well as declining or lost margin, profits, savings and optimism.

The foodservice industry, an historically stalwart market even in difficult economic times, declined 3.5 percent overall, the worst performance in at least 25 years. Travel and leisure and B&I segments fared the worst, down by 11.3 percent and 10 percent, respectively, followed by full service restaurants, down by eight percent. (These numbers are from the annual Technomic forecast, revised in January).

In contrast, many onsite segments fared much better: Technomic's estimate of foodservice sales in Higher Education managed to grow 3.5 percent; K-12 and Corrections were up 3.0 percent and Healthcare was up 1.7 percent.

Still, the businesses and institutions in which onsite directors operate took one financial hit after another: dramatic declines in endowment balances … slashed state funding for education … new, stricter and more expensive nutritional recommendations for schools… absolute uncertainty about the future of healthcare reform. And as these factors took hold, dining departments found their own financial and operational models stressed by the widespread budget cutting and workforce reductions taken by their host organizations in response.

The impact has been game-changing and, in some cases, structurally weakening.

Looking ahead, most directors now are struggling with business models that must be rebuilt to cope with tighter margins, to make increased general fund contributions, to absorb additional indirect costs that are often unrelated to foodservice, and to compete for customer dollars in an environment that has become more competitive than ever before.

In short, despite projected onsite growth similar to last year's (see chart, below), most of our readers can plan on spending significant time in the coming months re-thinking and restructuring their operations. They will be looking for new ways of doing business to match the changed realities of a business environment in which it is harder than ever to obtain capital investment funds, labor efficiency, customer loyalty and bottom line dollars.

Those who succeed will focus closely on the basics: finding ways to improve participation, customer satisfaction and efficiency while focusing ever more intently on the components of value most important to existing and prospective customers (see sidebar).

In the pages that follow, we've interviewed experts with specific insights into the business trends and strategies of most significance to operators in the core onsite segments. For their insights, read on…

Competing on the Value Playing Field Average consumer scores of the relative “importance”of what they identify as the top three value attributes, by segment. Green bars shows how a combined score of five food-specific attributes varies by segment. Select table to enlarge. If there was a single lesson from 2009 for foodservice operators, it was that meal value — as perceived by the customer — was central to most successful foodservice promotions. At the same time, analysts at NPD Group, a leading international provider of consumer research, point out that consumers tend to define value differently in different meal occasion contexts, a tendency underscored in some recently completed NPD research, Consumers Speak Out About Value. 5,351 adults who had a food/snack away from home in the past three months were surveyed “to find out what value means to consumers once you go beyond price,” says Bonnie Riggs, NPD's restaurant industry analyst. Each was given 100 points to use in scoring ten value-related attributes of their visit and were also asked the type of location where it had occurred. (If a respondent scored each of the ten attributes equally, he or she would assign ten points to each. In fact, however, respondents demonstrated clear differences in which attributes they found most important, and also scored them differently depending on the location). “We found clearly that in the context of perceived value, ‘price of a meal’ doesn't necessarily mean cheapest,” says Riggs. “It means an affordable price that is seen as reasonable given how the food's quality and other attributes of value are perceived.” Another finding: “We know that, with the exception of fine dining, convenience always plays a key role in how value is perceived,” adds Kyle Olund, the senior product manager for NPD's CREST OnDite data service. “But there is no other segment where convenience shows up with the prominence you find in onsite dining. “That means restaurant concepts outside of onsite have created value propositions in which other components of value become more significant than convenience in the context of the choice to visit them. Convenience will always be core to onsite, but it doesn't have to overshadow the other aspects.” Olund acknowledges that “onsite operators sometimes are challenged to convince customers of their value proposition when those customers, consciously or unconsciously, expect the food to cost less than it would in a comparable street envrionment. The answer is better communication of multiple messages: the quality of the food; the value of convenience; the freshness of ingredients and so on.”