Fortune Favors The Prepared

By Mitchell Schechter, Editor in Chief -- Foodservice Equipment & Supplies, 11/1/2004

Mitchell Schechter Editor in Chief

As if the foodservice E&S industry hadn't endured enough since the start of the new millennium, what with structural overcapacity, declining margins, flat demand, proliferating channel options and rising costs, yet another challenge has emerged in the market. Based on numerous conversations with manufacturers, dealers, consultants and reps, a sentiment seems to be forming that contract work for the end of '04 and the first half of next year may be drying up.

Those of you who are regular readers of this magazine will know that an increase in contract and bid work in 2003 and the opening months of this year was partly responsible for new sales at many manufacturers and dealerships, and a reversal of fortune at not a few consultancies. The reasons for the recent ramp-up in contract and bid work are various, but most center around the pent-up demand for new and renovated foodservice facilities that was unleashed as our country recovered from the attacks of 9-11.

Now, however, some E&S professionals are describing the contract and bid business as 'having fallen off a cliff,' 'an empty pipeline' and 'dead till the end of '05.' This most likely indicates a further tightening of business conditions for many firms involved in E&S manufacturing, specifying and sales, and increases the likelihood that a much-delayed shake-out will (unfortunately) thin the ranks of U.S. E&S factories and distributors. Unsurprisingly, though, these are not the only potential consequences likely to emerge from a decline in the contract/bid market.

One far-from-impossible eventuality is a hunkering down into further price wars, low-ball deals and pursuit of profitless new market share. Another concern is the need many suppliers see to go after work being offered for the end of next year, despite the current volatility in the cost of running their businesses. Though one manufacturer characterized the current dip in contract and bid demand as “just a trough between two waves,” he added that by locking in prices on contracts so far ahead, his company has left itself vulnerable to intervening spikes in prices for steel, energy, labor, insurance and other essentials.

The good news for E&S suppliers, however, is that contract business is cyclical and will rebound. The dissolution of U.S. Foodservice’s Contract division alone has been estimated by one industry veteran to mean that some $125 million in projects will eventually be returned to the market, though several fast-moving dealers have already captured a portion of this business. Opportunities for E&S suppliers are also now increasing in markets such as clubs and spas, convention centers, G-stores, coffee concepts and large-market independent restaurants. What’s more, growing numbers of dealers are successfully increasing the breadth of services they’re offering to existing customers, learning to provide cost-effectively everything from self-branded janitorial and cleaning supplies to custom fabrication and millwork services.

The lesson here, perhaps, is that over-reliance on any one revenue stream or any one type of customer can become problematic for E&S suppliers when markets experience their inevitable fluctuations. Despite the expected downturn in short-term contact work, growth prospects remain brightest for those firms able to respond first to emerging demand when traditional markets slacken. As always, fortune favors the prepared.