Markets — and business cycles — have never been anything but brutally honest. Over the past year, just about every given in the financial world has been forced under review. Profit margins, cash flow ratios, acquisition multiples, interest rates, real estate and stock market valuations — all have been re-examined in light of economic realities that lack, in the parlance of Wall Street, medium or long-term “clarity.”
If there has been one overriding message, it has been that the relative values of many things in our lives are less stable than many of us once thought.
What is an hour of a Wall Street executive's or a Detroit auto worker's time really worth? What is the value of a 2,000 sq.ft. home in northern California? Of a bushel of corn or a gallon of gasoline? Of a share of Citibank or General Electric stock? A mid-sized sedan or Medicaid-reimbursable hospital procedure?
For that matter, what is the value of a 12-inch sub sandwich or a 16-oz. cup of hot coffee?
In the context of this great, ongoing re-calibration of value, the good news for onsite operators is that schoolchildren, hospital patients, college students, and government and private sector workers still must eat every day. And for many of them, the best meal values going will remain those available onsite. The challenges our readers will face in their business models will be more easily dealt with than those in the construction, manufacturing and other industries that seem so troubled in the short term.
The Big Picture
Perhaps this year, more than most others, the numbers tell the story. In the pages that follow, FM once again has gathered a sampling of statistics, surveys and study results that provide real-time snapshots and longer-term forecasts of trends driving the sectors that make up onsite foodservice.
In the big picture, the trends are the stuff of recent headlines. As the country has slogged through the recession, its gross domestic product has sunk into negative territory. The consumer's disposable income is tapped out, credit is short and unemployment is surging (Figs. 2, 3, 4).
While these setbacks have taken their toll, most onsite operators will see flat or modest sales growth in nominal terms in 2009, a better outlook than that facing the commercial side of the business. The main exception is business dining, the segment that is always most affected by reduced employment.
Beyond the bad news, there are a number of bright spots. Wage pressures have eased and labor shortages have all but disappeared. Wholesale food prices are moderating and many commodity prices will likely decline, although it will take time for this to show up at the wholesale level (Figs. 5, 6).
Looking to the year ahead, value, in all its forms, will be the watchword: driving menu promotions, procurement, portions and of course pricing. Now, here's a closer look at some of the other trends affecting particular onsite foodservice segments…
Colleges & Universities
Technomic, the Chicago-based foodservice market consulting firm, forecasts that college and university dining sales will achieve nominal growth of 3 percent this year. Not as good as last year (4.9 percent), but given the economy, a fairly positive outlook.
At the same time, administrators at colleges and universities are facing immense challenges. Sharp declines in the value of endowment investments have put the spending plans of many schools into disarray (a just-released survey by the Commonfund Institute and NACUBO says these funds dropped an average of 22.5 percent in the first half of the 2009 fiscal year at most institutions).
Complicating these losses are reductions in general tax revenues at the state level. As appropriations for higher education have been cut (Fig. 9), it has put additional pressure on the budgets of state-supported schools.
Looking ahead to next year, many smaller private colleges are reporting application rates are down. Those with tuition-driven budgets worry that even modest dips in enrollment will have serious implications.
The average cost of room and board (Fig. 8) has continued to rise, but at a consistently slower rate than tuition and fees. (Over the past decade, tuition and fees at public colleges have risen at an average rate of 4.2 percent a year after inflation, according to the College Board). And a new report, from the National Center for Public Policy and Higher Education, warns that the rising cost of attending college is rapidly outstripping increases in family income, rising even faster than the cost of medical care (Fig. 7).
This is drawing much public policy scrutiny to the segment and inevitably will have implications for dining departments, which remain one of the few sources of cash income on a campus. As schools come under increasing pressure to control costs they will, as always, look to foodservice to help defray overhead with increased contributions.
College operators have struggled to keep rising food and labor costs under control for several years (Fig. 12). At the same time, many were burned in 2008 by unexpectedly high increases in food costs (a trend not yet reflected in Fig 12 data). It will be hard for them to hold the line in 2009-10.
On the positive side, even low-end forecasts from the National Center for Education Statistics still call for enrollments overall to increase in the next few years. Further, the new GI Bill signed into law last June will encourage returning war veterans to seek degrees; and in many cases it will provide monthly housing allowances in addition to help with tuition and fees. In terms of operations, dining departments seem to be making real headway in covering increased internal costs with higher revenues per meal and higher average c-store transactions (Fig. 12).
Market basket surveys show that retail price increases have been modest (Fig 11). There will likely be pressure to increase these as dining strives to make it all balance out. “My guess is that a big debate will take place this summer when retail prices are re-set for the fall,” says Tom Newcomb, president of FoodMark®/Campus Dining Inc., a benchmarking data research firm.
Technomic forecasts predict that K-12 foodservice will also grow 3 percent this year. Again, not quite the increase seen in 2008 (4.5 percent) but still respectable.
Overall, K-12 enrollments are also continuing to increase, although with significant regional variations. Many districts are reporting increased meal program participation (Fig. 14), especially in free and reduced meal programs (Fig. 13). Schools are also adopting more eco-friendly practices and investing in more energy efficient equipment (Fig. 15). Also, as many schools have re-structured their programs either to prepare more nutritious meals or to make their food production more efficient, they have looked to different kitchen equipment systems (e.g. purchasing combi ovens for satellite finishing operations or as a replacement for traditional fryers and ovens.)
A driving force in the market this year will be the National School Lunch Act Reauthorization bill that will be coming before Congress. School Nutrition advocates will be lobbying hard for Congress to address the very real cost crunch that faces school meal programs nationally (see related story on p. 8 of this issue).
The implementation of wellness policies continues to have a major impact on school menus and programs. Surveys show there are major differences in how the effective these programs are pereceived to be in the eyes of administrators, foodservice professionals and community health advocates (Fig. 16). This suggests directors will need to step up efforts to communicate the extent and the science-based impact of these programs.
Another effect of wellness policies has been a trend in which schools have eliminated or curtailed a la carte programs that formerly provided some internal cash subsidies. That is a special problem in districts where high labor and other costs mean that meal production costs exceed federal reimbursement amounts. This spells trouble as a rise in unemployment almost certainly means that increasing numbers of families will apply for and qualify to receive free and reduced school meals this year.
As one respondent to the School Nutrition Association's annual “Back to School Trends Report” survey observed, “It will be a tough year.” Negotiations over the terms of the Reauthorization bill will likely prove to be both critical and assertive.
Business & Industry
B&I is the soft spot in the onsite foodservice market as it has been for several years. Technomic is forecasting B&I food manufacturer shipments will decline by 5 percent in nominal terms. Corporate downsizing, the Wall Street implosion, an economy in deep recession and a shrinking national manufacturing base have all taken their toll.
(Of note, Technomic this year significantly changed how it estimates B&I activity. Refer to “How Big is B&I” on p. 10 of the December issue for specifics, or go to www. food-management.com/segments/bi_contract/bi_technomic_1211).
One sign of the segment's challenges: research from NPD Group showing that “brown bagging” by employees is on an upswing. (Figs. 19 and 20). Another appears in the release of last year's benchmarking survey from the Society for Foodservice Management, which underscores the difficulty operators in the segment have in terms of raising check averages (Fig. 18).
It remains to be seen exactly how all of this will affect the B&I revenue of major contract companies. They have demonstrated a remarkable ability to sustain this segment in spite of its constraints, employing sophisticated menu, marketing business and procurement strategies to grow top line volume even as gross food purchases have remained flat or have declined.
Still, “we know that food costs went up over five percent last year, even as market basket studies show that retail prices increased only about 3.8 percent” says Tom Newcomb, president of FoodMark®/Corporate Dining, Inc., the research firm that compiled the SFM survey. “In 2009, providers will have to find some way to make up the difference.”
Newcomb says that close examination of SFM's data to compare the operations of those accounts operating at a surplus vs. those at a deficit suggests that differences in labor costs are often a key differentiating factor. “Those looking to reduce these costs are going to have to ‘transition' that labor component in some way,” to make it more competitive, he says.
He believes such pressures, along with continuing downsizing of B&I onsite populations, will “result in a significant amount of contract re-negotiation and RFP activity” in the coming year.
“Global contracts, whether national or international, have been trendy for the past decade,” he adds. “But our studies suggest some clients are now reconsidering this and may look to break some of them up, awarding them to a wider variety of providers.”
Healthcare foodservice, which includes acute care, continuing care and senior dining in CCRCs, is another onsite segment that Technomic says will fare better in 2009 than much of the rest of the industry, growing between 0 and 3.5 percent in nominal terms.
In the broader picture, a decline in the absolute number of available hospital beds has flattened out, although the number of beds per 1,000 in the population continues to decline (Fig. 22). Hospitals are continuing to move to room service models at a rapid pace (Fig. 23), driven largely by efforts to improve patient satisfaction scores.
Efforts to upgrade aging foodservice facilities and infrastructure, both to reduce maintenance and promote retail sales, continue.
A recent survey by the National Society for Healthcare Foodservice Management (HFM) shows that nearly 20 percent of its membership have renovated their kitchens in the past one to four years. The same survey shows that 27 percent have renovated their retail dining environment in the same period and that more than half expect a major renovation or construction project in the near future. Over half now say they have cashless payment systems in place, setting the state both for greater retail dining efficiencies and the potential for increases in check averages.
Another trend: as hospitals seek to improve the effectiveness of care delivery systems, many have re-focused on the role of nurses and sought to refocus the way their time is allocated.
For example, a 2008 study of three dozen U.S. medical and surgical units by Kaiser Permanente and Ascension Health showed nurses spent twice as much time away from patient bedsides as by them. Meanwhile, contract management giant Aramark has made it a major research initiative in the past year to identify opportunities to improve nurse/support service relationships at healthcare accounts where it is a major provider of food and other support services.
That is among the reasons many hospitals are re-evaluateing the common practice of having nurses deliver food trays. This often plays to initiatives like room service in which foodservice gains more control over the meal delivery process.
Increasingly, however, the credit crunch that has seriously constrained capital availability for many hospitals in the last six months is demanding all of administrators' attention. Their financial positions have also been complicated as the level of upaid patient debt has risen, another byproduct of the recession. And, just like K-12 schools, they often find that government reimbursement rates fall short of their actual costs.
Hospitals have also seen a major erosion in the value of their endowment funds and many have found themselves locked out of the tax-exempt bond market, another financing alternative. A just-released study by the American Hospital Association showed that nearly half the hospitals responding had put capital projects on hold and stopped those in process.
“The largest part of hospital foodservice these days is employee and visitor feeding, and operators there face many of the same issues as those in B&I,” says Technomic's Joe Pawlak.
“Onsite meals can still be seen as a good value, but operators will need to keep introducing new items to add excitement. They'll also have to be cautious about sacrificing quality for margin — the consumer will see that right away and have a negative reaction. In short, they will have to work hard at addressing the value perception. Beyond that, they just have to stay the course.”