"Surprisingly resilient." That's how U.S. Chamber of Commerce Chief Economist Martin Regalia described the U.S. economy in his 2006 economic forecast in December, and it seems an apt read of the country's—and the foodservice industry's—overall business conditions.
Despite dramatic increases in the cost of oil and natural gas, dislocations caused by hurricanes Katrina and Wilma and the dampening effect of 13 interest rate increases over 18 months, 2005 gave the country—and the foodservice industry—a solid year of expansion for the fifth straight year.
The economy grew at a healthy 3.6 percent clip (Fig. 3) and forecasters expect it to continue at that pace, with hiring likely to accelerate (Fig. 4). The core rate of inflation is modest and consumer prices should increase under two percent in 2006.
"Noncommercial segments are picking up the pace and ... are growing faster than they have for a number of years." – Joe Pawlak, Technomic
Foodservice passes a milestone. Foodservice this year will exceed a half trillion dollars in sales for the first time. And, in a significant contrast to a few years ago, noncommercial segments have staged a significant comeback in terms of growth prospects (Figs. 1 & 2).
"From the manufacturer's standpoint, these segments are picking up the pace and in aggregate are growing faster than they have for a number of years," says Joe Pawlak, vice president of Technomic.
He notes in particular "a real turnaround" in higher education and hospital foodservice due to "upscaling" and adds, "suppliers that have tended to take their eye off these market segments in recent years should revisit them in terms of future planning."
Rising energy prices are having an impact. Despite the inflation forecast, operators who pay utility overhead are finding it hard to cover increases caused by the spike in oil and natural gas prices. While wholesale food and commodity prices should remain flat or trend downward in 2006 (Figs. 5 & 6), rising transportation costs are affecting delivered food prices, either as distributor price increases or as fuel surcharges.
Technology is playing a bigger role. Slowly but surely, technology is finding its way into front of the house productivity solutions. Cashless debit systems are growing more sophisticated; non-contact, RF payment systems are appearing in B&I and healthcare; POS technology is helping operators manage product movement and fine-tune meal bundles. And, as many FSDs expand retail operations, an increasing number of them are experimenting with self-applied bar codes on prepared foods.
Operators are also carefully watching the public's acceptance of touch screen kiosk ordering stations. If these catch on as a form of self service in quickservice restaurants, look for them to be adopted by high volume lunchrooms in B&I, healthcare and higher education.
Nutrition, nutrition, nutrition. Food and foodservice found their way to the front pages of American newspapers in the last year in a way they have seldom done before. In many cases, the reason was growing public concern about nutrition, especially among children. A spate of cautionary studies and reports from the government, organizations like the National Institute of Medicine and in publications like the American Journal of Public Health fueled the fire.
Both operators and manufacturers are looking to respond to public-concern by improving the nutritional profiles of their offerings. But longer term, the fear is that such efforts alone will not be enough to fend off greater regulation.
In K-12 schools this is already happening—by the middle of last year, 28 states had proposed legislation going beyond existing federal guidelines to regulate the availability of "competitive foods" in schools (Fig. 13). Such regulations go beyond bans on such items as candy and pop and affect many other products and menu offerings.
The labor pool is growing tighter—and more expensive. From the healthcare industry to the education community, administrators report it is becoming more difficult to maintain quality staffing. A wave of baby boom retirements and a decline in high school graduate populations will complicate this trend over the next five years. Employee benefit cost increases remain a real problem and are pushing total compensation budget lines higher than wage increases alone suggest.
The good news: as workplaces put more emphasis on attracting and retaining talent, foodservice as a benefit tends to rise in importance. Now, let's take a quick look at some of the trends affecting individual segments within the onsite market.
The surge in higher education enrollments that has been ongoing for almost two decades continues, with a record 17 million students entering college this year. At the same time, college administrators have their eyes on the period five years from now when the number of graduating high school seniors will begin to decline.
A demographic sea change. Speaking at The College Board Forum last fall, Penn State President Graham Spanier warned that over the next decade, the Northeast, Midwest and Great Plains states will likely see a significant decline in their traditional pool of prospective students. By 2012, thirty states will be experiencing a decline or no growth in their annual number of high school graduates.
Complicating the situation: 65 percent of the population growth over the next 15 years will be among ethnic minority groups, which historically have been less likely to enter and graduate college, and three-fifths of that increase "will take place in just three states... Florida, California and Texas," Spanier said. Other shifts include the increasing majority of women students. "By 2020, 156 women will earn degrees for every 100 men who do."
Looking for bigger contributions. As federal and state support for higher education has declined, colleges have turned to increased tuition and other charges to make up the gap.
"Dining departments are one of a limited number of income generators for institutions, and administrators are knocking on their doors," says Ray Petit, a principal with FoodStrategy, Inc. of Potomac, MD.
"That knocking is going to continue," he adds, citing a survey of college FSDs that shows 69 percent of respondents expect their revenue " contributions" to the general fund to increase over the next two years (Fig. 7).
Better margin management. "In general, dining department revenue increases are outpacing their cost increases," agrees Mona Milius, associate director of residence/dining at the University of Northern Iowa and a member of the NACUFS benchmarking committee. "The challenge for many directors is accomodating the pressure from the campus to keep retail prices low" (Fig. 8).
"High food costs in retail are being addressed," Milius says, "through more effective use of branded concepts and management of product mix. By holding food and labor cost percentages in check, operators improve their gross dollar margins on retail sales as price points increase."
College c-stores are also improving their performance and have had a steady increase in sales per square foot over the past five years. Milius cites several reasons: "Directors have become more savvy about integrating convenience retailing into other operations in terms of adjunct space. C-store managers are becoming more effective marketers and are more closely assessing shelf space and product movement for revenue and profitability. And as students get more equivalency options in their board plans, they tend to use that in c-store outlets."
Achieving retail/residential balance. Shawn LaPean, director of Cal Dining at UC Berkeley, points to the struggle many FSDs have balancing the customer experience between retail and residential programs.
"Students like the idea of all-you-care-to-eat meals, but whenever there is an exchange—whether in real currency or meal currency— they tend to prefer a la carte dining. They perceive more value in the food that can be offered in that kind of venue," he says.
Informed benchmarking. Product specs for the two programs are typically different "and you can set yourself up with quality discrepancies" when students purchase some meals in retail and then contrast them with all-you-care-to-eat meals in a dining hall, he adds.
"You need to answer key questions," LaPean says. "'Are you adding retail to generate more dollars? To offer service improvement to resident students? As a marketing device to sell more meal plans to nonresidents?' Depending on the answers, your strategy will vary."
Educating administrators about such issues is essential, LaPean says. In that regard, "the NACUFS benchmarking program is critical, and so is ensuring an administration compares your numbers to those of a similar school. If a program is structured differently, it is hard to compare your results against those of a completely different environment."
Making meal plans marketable. Administrations have rediscovered the financial value of meal plans, with 90 percent of schools in a recent survey reporting they have some form of mandatory plan, Petit says (Fig. 9). But managing equivalency values between retail and dining hall programs remains a challenge, he adds.
"Equivalencies are a big win for the customer, but not usually for the institution on a financial basis. On the other hand, they do make meal plans more marketable.
"Traditional 16-21 meal plans have largely lost that marketability. Block plans are holding their own and declining balance plans appear to be on a slight upswing. Unlimited dining is attracting a lot of interest, again probably because of the marketability factor.
"It's important to remember that residential dining often represents 70 percent of a department's revenues, and that underscores the importance of schools achieving stability in these plans," he says.
As K-12 school enrollments continue to climb (Fig. 10), so have the segment's sales, with Technomic forecasting 3.5 percent growth for the segment next year. However, the same trends noted by Penn State's Spanier are already pronounced in primary and secondary schools, with most of the enrollment growth in the South and West, and with student demographics in these areas much more ethnically diverse than in the past.
Making wellness into school policy. Widespread public and institutional concern about childhood obesity has provided additional impetus to ongoing programs looking to strengthen nutritional programs in schools, including USDA's new wellness policy mandates (see related story on p. 28).
On the one hand, surveys show three out of four adults claim they are trying to eat more healthfully. The irony is that 60 percent of them are technically obese, with a new NPD Group study revealing that significantly larger numbers of them regard being overweight as acceptable compared to only a few years ago. And despite government efforts to promote better eating habits via its "Food Pyramid" guidelines, only small numbers of Americans appear to be following them at home (Fig. 11).
That irony hasn't been lost on foodservice directors at the nation's schools, where Pyramid-compliant meals must be offered each day, where wellness policies are now required by law and where all those overweight adults seem to think household eating habits can be corrected in their children.
"Competitive" foods remain under the gun. So-called competitive foods—whether offered in a school cafeteria's a la carte line, via vending machines controlled by school administrators or from "school stores" operated by student groups—continue to attract scrutiny in terms of their impact on overall student nutrition (Fig. 14).
A new study released in August by the General Accountability Office (GAO) documented that many schools generate significant revenue from these programs (Fig. 15) and that at least 28 states have proposedlegislation that would go beyond existing federal guidelines in regulating their sales in schools (Fig 13). While many school nutrition directors endorse such efforts, making them mandatory could have the potential to unbalance the already tenuous finances of some K-12 foodservice operations. Administrators are typically reluctant to give up the revenue from non foodservice department food sales because they help fund a wide variety of unrelated school programs.
Manufacturers are also concerned that a proliferation of different state regulations may create a "Tower of Babel" effect on what products can and can not be marketed and distributed in different regions.
GAO reports like the one mentioned often presage Congressional action, and many observers are looking to see if a national consensus on the competitive foods issue can be reached in the next few years. Much behind the scenes lobbying at both the local and the national level appears to be already underway.
Breakfast remains a big opportunity. In the decade since 1995, the number of school breakfasts served each year has grown nearly 50 percent, with about 9.2 million breakfasts eaten by children at school each day last year.
That number will significantly increase if "underperforming" states work harder to ensure that low-income children start the day with free or reduced-price breakfasts in the their schools, according to a new report from the Food Research and Action Center (FRAC). FRAC estimates that 10 underperforming states would gain almost $250 million in federal funds if they simply matched the record of the 13 top performing states in terms of breakfasts served to qualified students. (Fig. 16).
Since even the top performing states typically only serve breakfast to 55 percent of the students who qualify for subsidized lunches, the study underscores how much potential exists in this daypart. A new "got breakfast?" campaign, formally endorsed by both the School Nutrition Association and former Senators George McGovern and Bob Dole, will strongly promote such programs in 2006. By next year at this time, look for the numbers to show it's been a success (see related story in the January 06 FM).
Marketing becomes more sophisticated. As management companies have slowly penetrated the K-12 segment, they have brought more sophisticated marketing approaches to the business. That has led to more research into student psychographics and to dining programs that reflect these findings.
Aramark's research (Fig. 12) led to its development of the "UBU" program, for example, which among other objectives seeks to offer "Older Fast Food Guys" more of the "hangout" environment of the quickservice restaurants they say they'd prefer to eat lunch in. It has also led to menu offerings that are designed to appeal to "Meal Skipping Girls," and "Time Pressed Achievers."
While K-12 student populations will begin to decline a few years hence, there is plenty of penetration potential in terms of the customer base to more than make up the difference. More sophisticated marketing strategies of this sort will be key to ensuring that the segment continues its growth.
BUSINESS AND INDUSTRY
Foodservice programs in business and industry have finally emerged from the long slump caused by the business recession. While Technomic's 2 percent nominal growth forecast for B&I lags that of other noncommercial segments, it is a big improvement from the negative growth numbers of 2001-2003.
New government statistics show that employment growth has firmed up and may return to pre-2001 levels in the coming year. Even hard-hit Silicon Valley added new jobs for the first time since 2001, according to a regional report released in January.
Still, that doesn't mean a return to "business as usual," at least in the ways B&I operated in the 80s and early 90s. The most recent benchmarking study of the Society for Foodservice Management (SFM) notes that basic changes are occurring both in employee-customers' dining expectations and in the goals of management at companies that provide business dining.
An increased emphasis on corporate cost-effectiveness. Corporate leaders "are moving their goals for dining services from a wide range of types and quality services to a narrower, more cost effective scope of services," SFM says.
Further, the foodservice liaison, a position that once entailed significant experience in the foodservice field, "is moving rapidly away from a dining specialist to a more multi-service, multi-facility individual" at most corporations.
Financials are improving, but labor costs are an increasing concern. At the same time, B&I is showing healthier financial signs in terms of its basic operating model. While participation at lunch is modestly declining (and remains several percentage points below its scores in the pre dot-com era), breakfast participation has been rising (Fig. 19).
Check averages are up and "market basket" measures of menu items show that operators are increasing prices to more adequately cover costs (Figs. 17 & 18). One significant warning sign: labor costs are increasing faster than food costs, with average hourly labor costs up 35 percent between 2001 and 2004 (Fig. 20), although tightened controls appear to be moderating such increases.
B&I accounts that subsidize their operations have reduced the level of that subsidy significantly in recent years, says Tom Newcomb, president of Corporate Dining, Inc., the consulting organization that managed the SFM survey and which also conducts extensive market research for its own FoodMark clients. Newcomb also notes his research shows that subsidized operations tend to have lower participation rates than those operating at an excess.
"While other factors are also at work, such numbers suggest that corporate managements will be more likely to ask themselves if there is a good reason to subsidize," he believes. One result of such findings is that SFM's benchmarking committee has begun collecting more survey detail about operations that run an excess in order to provide a better-tool for members looking to manage operations.
Fighting "commoditization." A major challenge: "many corporations are asking their procurement divisions to oversee the contractual process," says Ira Cohn, Aramark's president of business services.
"They, from a professional perspective, often tend to administer those contracts as if foodservices were a commodity. While the HR community and local managers may appreciate differences among providers, the contracts are not being managed with much room for those distinctions. In that sense, foodservice is itself not so much a commodity, but is sometimes being managed as one."
Even as today's business diners are expecting more, "contracts are being managed to strip out costs," Cohn says. "This is making it an increasingly-complex market for service providers."
Penetration is becoming a primary strategy. "There are very few parts of the B&I world that are expanding," Cohn observes. "This is especially true in terms of the number of sites with 1,000 or more employees. While employment continues to increase, it is not necessarily doing so at the types of locations that traditionally supported foodservice.
"Instead, providers have to focus on strategies for growing 'share of stomach' at existing accounts, increasing the amount customers spend and penetrating dayparts more effectively. Also, as the demographics and mobility of the customer base have changed, you have to satisfy a more varied set of demands. That means finding ways to make your platforms more flexible.
"In the end, a provider's only real point of differentiation is in execution," Cohn concludes. "That execution reflects your management discipline and culture. Innovation plays a role, but can be easily copied. In the end, it all comes back to execution, and to creating appropriate expectations for that execution in the sales process."
Technomic forecasts hospital foodservice sales will grow four percent next year, the best performance since the late 1980s, one of many signs that point to a stabilization of sorts in the acute care environment. The annual decline in hospital beds that has plagued the industry since the early 90s is largely over. Many acute care facilities are regularly filled to capacity and new construction projects to expand or rebuild aging facilities are benefiting foodservice.
While much experimentation is going on in terms of patient meal service models, that's not where foodservice sales growth is occuring. "The action is in the cafeteria, where many hospitals have upgraded the food considerably," suggests Technomic's Pawlak.
Competing with brown baggers. Recent research by Aramark's Healthcare Management Services division paints a clear picture of where the opportunities lie in such front of the house service. Onsite cafès on average provide about half of the meals eaten by hospital employees even though time restrictions make it difficult for most of them to leave the facility for meals.
The real competition is meals brought from home (Fig. 22). To displace that "brown bag option," hospital cafès need to be more appealing to a workforce that tends to be largely female, and middle-aged, interested in healthful options and meal occasion opportunities that facilitate socialization (Fig. 21 & 23).
Foodservice facelifts pay off. "In the past, many administrations tended to ignore the need to modernize kitchens, but that need is becoming critical because of their increasing age," observes Sharon Cox, director of nutrition at Memorial Sloan-Kettering Medical Center and this year's president of HFM (National Society for Healthcare Foodservice Management).
"We are also finding that capital projects in the front of the house are usually associated with increases in revenue," she adds. (Fig. 24)
A recent survey by HFM (Fig. 25) shows that 72 percent of respondents have completed a construction project in the last 12 months or have one planned for 2006.
Over one third of these are servery renovations or kiosk-type additions and another quarter are kitchen renovations; many of the rest are related to equipment replacement or the addition of new patient service options.
Most of those upgrading front of the house facilities saw a growth in sales, and of these, a quarter saw increases of more than 10 percent.
"I see both acute and long-term care focusing more on their retail opportunities in the future," adds Georgie Schockey, principal with Ruck-Shockey Associates. "An analysis of one of our projects showed that a new retail area would help the department deliver about $6 more per patient day in revenue, which in effect will reduce the department's bottom line cost."
Competition for capital. Cox cautions that competition for capital remains a key issue for healthcare operators. "You are not the only department looking for upgrade dollars and you need to be able to show the experience other hospitals have had with projects like those you are proposing," she says.
Operators who do not receive the funding they are hoping for "should make it a point to review with their healthcare executive what was missing in their financial requests," offers Shockey.
"They should also know what is being done by competing hospitals in their markets to upgrade facilities and use that information in the next year's budget requests.They should also look for any additional revenue generating opportunities that can help the overall ROI of a project."
Broadening the measures of customer satisfaction. Cox points out that "many administrators are partly compensated based on their Press-Ganey scores. These surveys measure patient satisfaction, but don't measure the satisfaction level of other customers, like visitors and hospital employees who dine in the cafeteria. Yet, this is typically where 70 percent of the department's foodservice budget goes."
Cox says HFM has added overall cafè satisfaction metrics to its benchmarking programs. "We believe it is important to provide an ' internal customer' satisfaction measure for administrations to consider," she says. "That way they can see more clearly the relationship between these metrics and the costs associated with maintaining higher levels of internal customer satisfaction."
Food safety programs also remain a top concern, Cox notes, with many operators looking to automate documentation systems and better monitor food production and service.
Emergency preparedness "has been getting more attention, especially since hurricane Katrina's devastating impact last fall," she adds. "We were always required to have a contingency plan on hand, but now there is more concern about departments also being able to show 'physical readiness,' in terms of having emergency supplies on hand in case they are needed."
CCRCs are booming. In the extended care market, traditional nursing homes are losing some share to CCRCs (continuing care retirement centers), where Technomic says foodservice sales grew seven percent last year, and will grow an equal amount in 2006.
That translates into retail sales equivalent of about $1.7 billion. CCRCs thus have only a quarter the sales of the nursing home segment, but are growing almost three times as fast. For a complete review of trends in the CCRC market, reference the special report that appeared in the August 2005 issue of FOOD MANAGEMENT.
For information on the NACUFS Benchmarking program, call (517) 332-2494.
For information on obtaining a complete copy of the SFM Benchmarking Survey Results, contact SFM at (502) 583-3783.
For information on HFM, its benchmarking programs and surveys, contact HFM at (212) 297-2166.
For a copy of the GAO report, School Meal Programs: Competitive Foods are Widely Available and Generate Substantial Revenues, GAO-05-563, go to www.gao.gov
For a copy of the FRAC report, School Breakfast Scorecard, 2005, go to www.frac.org