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But for all the glad tidings, including continued low interest rates, negligible core inflation, strong property prices and continuing expansion of housing starts, and a weakening dollar that is making our exports cheaper and imports dearer, there remains something of a gathering storm overhanging the foodservice E&S industry. Whereas average consumer prices actually dipped by 0.2% and industrial production jumped up by 0.9% nationwide in November of last year according to federal Labor Department reports, businesses engaged in E&S manufacturing, sales, specifying and service are still facing circumstances brought on by several significant structural challenges that threaten to retard their ability to achieve profitable new sales growth.
Looking at U.S. manufacturers of equipment and supplies, for instance, we see far too many mid-tier firms (both those within conglomerates and independents) seeking sales in a market that has been experiencing marginal growth or contractions since before 9-11. North American E&S factories are also now being threatened not only by the growing presence of less-expensive, foreign-made equipment (such as light refrigeration units), but also the enhanced ability of overseas manufacturers to make acquisitions of competitors here with increasingly cheaper U.S. dollars. Add in the wide-spread perception among end-users of competing models of many sorts of equipment being functionally identical (commodization), U.S. manufacturers' rising labor and insurance costs (as well as the expense of still-idle capacity) and a war for market share that shows no signs of abating and the year ahead appears far from resounding for many American E&S producers.
For their part, dealers, too, remain more numerous than current market conditions can profitably support. Many are also struggling to hire and retain the needed next generation of qualified employees and to break out activity-based operating costs. Perhaps even more ominous than the margin-threatening conditions for many dealers (and FEDA leaders) is the proliferating number of alternatives to traditional E&S distribution. Now including organizations as diverse as big-box retailers, redistributors, broadliners and online marketplace sites, these "alternate" distributors are challenging dealers' ability to hold on to current customers and maintain "most favored" status with their factories. This is an especially critical issue, since E&S available to some non-dealer distributors is being purchased from manufacturers at prices that rival even buying groups' best deals. As a result, dealers once more feel they have grounds to question actively their suppliers' loyalty and commitment to their business models.
Foodservice consultants, by contrast, having generally struggled through a period of declining billings, postponed projects and forced lay-offs that lasted from late 2002 through the middle of last year, are now, broadly speaking, enjoying better times. With noncommercial institutions (particularly colleges, healthcare and corrections) once again implementing expansion plans, and the resort and casino markets booming, some consultants had already booked their budgeted '04 revenue by the end of 2003. However, this profession's key challenges still include trimming operating costs that rose sharply during the '90s, finding appropriate market niches in which they can out-perform competitors and keeping the growing number of dealer design departments from encroaching further on small design and MAS projects.
We also see a shift in business models beginning to emerge among service agencies, as the first national parts and maintenance-service networks are now announcing themselves to the market. The ability of new competitors to support client operations from coast to coast, and the continuing consolidation of E&S manufacturers, are jointly putting additional competitive pressures on many established service agencies that have depended on regional business and opportunities to service multiple makers' equipment for survival.
Business challenges confronting reps are also well known, and range from the difficulties of maintaining profitable lines as conglomerate manufacturers look for exclusive "all or nothing" relationships to the need to add value for customers by providing a greater number of "unpaid" services. There is also the potentially contentious issue of reps restructuring their businesses to undertake such traditionally dealer-handled functions as taking title to, warehousing and displaying equipment and supplies.
Because every channel partner in foodservice E&S must overcome the sort of formidable business challenges just described, too many industry sales are still being made at any cost and too many companies face eventual financial starvation as they continue, willingly or not, to try to compete on price alone. With these caveats in mind, and remembering that recent business news and foodservice sales reports have generally become more positive, we present some key findings from this year's FE&S Industry Forecast. This year's study, which was fielded last fall as surveys of nearly 1,000 leading operators, distributors and manufacturers, is laid out here in three parts, beginning with responses from commercial and noncommercial operators.
Operator Findings Our 2003 response sample included just shy of 700 operators, all with E&S purchasing involvement and all drawn from the nation's top restaurant chains and independent restaurant companies, as well as leading foodservice organizations.
These operators, as a group, foresee bright sales prospects this year, with almost three-quarters (73%) anticipating a rise in gross sales and projecting an average increase of 11%. Understandably, given the historic precedent for election-year economic policies to favor both small business owners and consumers, noncommercial operators are less certain about increasing program profits in '04 than their commercial counterparts, with 80% of those in the latter group predicting an increase vs. 64% of noncommercial. Our noncommercial respondents were also less likely to declare themselves to be "extremely confident" about the performance of the national economy this year than commercial operators surveyed (13% vs. 21%) and slightly more likely to admit that they were "not very confident" about the '04 economy compared to restaurateurs (4% vs. 1%).
|Products Dealers Expect To Achieve High Sales In 2004*|
|Custom-Fabricated Serving Counters||5%|
Despite the economic and political uncertainties encountered last year, operators surveyed for this report still bought an impressive lineup of primary cooking equipment in 2003. While ever-popular microwave ovens were purchased by 54% of our sample, more than 25% bought one or more braising pans, tilting skillets, griddles and/or grills, steamers, fryers, ovens and toasters. Respondents also told us that some 61% of equipment purchases in '03 were made to replace existing pieces (a fair measure of demand for new equipment pent up during two prior leaner years), while 23% were bought to support renovations and 16% were installed in new operations. It will be interesting to see if, as might be expected, more equipment is bought for new construction and remodeling projects, and less for replacement in 2004, compared to last year.
Another sign of confidence is that 80% of surveyed operators told us that their E&S purchasing budgets will either stay the same (49%) or increase (31%) this year compared to last, leaving only 20% forecasting a decline in their equipment and supplies outlays. With those anticipating larger 2004 E&S budgets expecting a rise (on average) of more than 15%, rationales offered for the increase included the need to replace older equipment (51%), concept renewal or expansion (18%) and the addition of new locations (14%) - all clearly supportive of operators' expectations for a positive year. Of less cheer to E&S suppliers is the fact that only 5% of surveyed end-users expecting to spend more on their products this year said they will do so because "the equipment is better," posing an equally apparent challenge to manufacturers' and dealers' marketing personnel.
When we asked operators which percentage of their 2004 E&S budgets they were going to allot to different products, responses from commercial and noncommercial end-users were remarkably similar. (See Chart 1.) Nearly identical allocations were indicated by operators on both sides of the market regarding primary cooking equipment (14%), smallwares (13% and 12%) and food preparation equipment (11%). Noncommercial respondents, however, appear somewhat more likely to spend budgeted funds on paper goods (14% vs. 11% for commercial operators) and serving equipment (11% vs. 9%). Only for furnishings (5% vs. 3%) and tabletop items (6% vs. 5%) did commercial respondents indicate a willingness to allot more of their current budgets than noncommercial operators, and then only narrowly. Among the varieties of cooking equipment our operators said they purchased in 2003, three items were named as being even more likely to be purchased this year - steamers, steam-jacketed kettles and rotisseries. We see this response as reflecting operators' growing desire for equipment that supports more healthful cooking methods, as well as pieces appropriate for high-volume display or exhibition preparation.
Another notable finding was that more surveyed operators are now eager to invest in technology that provides or improves point of sale systems (50%) vs. technology that supports food safety (48%). Regarding technology as a whole, commercial operators said they are most likely to invest in business, labor and guest management systems (including e-commerce), while noncommercial respondents are looking for technological support for food production, procurement and inventory management functions, as well as interconnected kitchen equipment (13% vs. 9% of restaurateurs).
When they do go to market for foodservice E&S, 63% of all surveyed operators (66% noncommercial, 60% commercial) buy from traditional dealers. (See Chart 2.) Though these numbers most likely do not represent as much of the available sales as most dealers would like, it should be noted that only 15% of surveyed commercial operators and 14% of noncommercial operators said they buy E&S from broadliners and even fewer buy direct from factories (11% commercial, 8% noncommercial). Ensuring these balances improve or grow no worse may well prove a key challenge for dealers in the year ahead.
Dealer Findings Optimism - expressed both in reports of growth in sales and profits last year and projections of further robust performance this year - was also to be found among the responses of the 137 E&S dealers and broadliners who participated in our 2004 IF survey. As a group, these distributors recorded average sales of more than $15,327,000 and average gross profits of $898,460 in 2003.
More than 60% of these distributors reported an increase in sales volume last year compared with 2002 revenue, averaging a rise of almost 14% year on year. This is remarkably strong performance, especially in light of dealer sales presented in last April's Distribution Giants listings, implying that additional market opportunities were realized during the second half of 2003.
What's equally notable is the fact that fully 92% of our surveyed distributors projected a sales increase for this year, only 1% expect to see a decline and just 7% foresee their sales remaining steady. And, although some 34% of respondents forecast a sales rise of no more than 1% to 9%, 38% expect increases of between 10% and 19%, and 10% anticipate a sales jump of 30% or higher this year. The most frequently expressed reasons from this sample for such optimistic sales projections included improving economic conditions, the hiring of additional sales staff to extend market penetration and a (logically commensurate) expansion of existing customer bases. Better purchasing power and growing contract business were also cited as factors underpinning surveyed distributors highly positive sales expectations for 2004.
As Chart 3 depicts, responding dealers and broadliners further anticipate particularly high operator demand this year for such E&S products as furniture and furnishings, refrigeration units, paper products, heavy cooking equipment, custom serving counters and ice machines. While operators' replacement needs certainly factor into these forecasts, it is interesting to note that all the products mentioned as most likely to be in high demand are also essential for new unit openings.
To help identify where expected growth and product demand is coming from we asked our distributor sample to estimate which operator segments would offer the greatest sales opportunities in 2004. (See Chart 4.) Our respondents told us that they see family dining operations (44%) and similar casual and themed restaurants (42%) as their best sales targets on the commercial side of the market. Among noncommercial operators, top prospects identified by our respondents included healthcare institutions (35%); B&I facilities, expected to grow sales due to increased corporate hiring, (23%); primary schools, since districts are expanding due to the rising national population (18%); and senior-care organizations, which are serving more and more of the long-lived elderly (16%).
It is also worth noting that only 16% of responding distributors see the once-booming fine-dining sector as a source of outstanding sales opportunities, and that even fewer (14%) anticipate doing their best business with QSR chains. In the latter case, this most likely indicates that ongoing market saturation is restricting new unit openings, rather than any anticipated fall in same-store sales.
One other distributor response to our 2004 IF survey deserves elaboration and that is the response given to our question about the amount of sales dealers and broadliners are currently conducting over the internet. While 52% of these respondents told us that they still do no web sales whatsoever, some 48% are selling online - the highest percentage of internet transaction activity we've ever recorded. Significantly, some 14% of surveyed distributors are now recording 3% to 5% of their total sales on their web sites, 7% are doing 6% to 10% of their business online and 11% said that they now achieve more than 10% of their total volume from internet sales.
Manufacturer Findings With 64% of our 83 responding E&S manufacturers reporting sales increases in 2003 over 2002's results, the picture of a recovery spreading throughout the E&S industry last year is fully drawn. However, with the largest number (44%) of reported increases in the 1% to 9% range, followed by 10% to 19% (34%), and given the very small number of respondents who stated their change (up or down) in 2003 gross profits, it is difficult to determine how much of this uptick in sales resulted in enhanced profitability. Nonetheless, our manufacturers had an average of $10,800,000 in sales last year and claimed average gross profits of $1,622,000. In addition, among our surveyed factories, about one-third produce heavy or light equipment, almost 30% make smallwares, 18% manufacture tabletop items, 10% offer janitorial products, 5% fabricate furnishings and 7% said they fit in the "other" category.
Given the optimism expressed by our surveyed operators and distributors, it's not surprising that 85% of responding manufacturers also projected sales increases this year, with 47% expecting volume to rise by 1% to 9% and 31% looking for growth in the 10% to 19% range. When asked why they anticipate positive performance in 2004, those expecting sales increases most often named the release of new and/or improved products as their rationale.
A further indication that manufacturers currently have a growing number of distribution options is presented in Chart 5. Now able to go to market through six reported channels - only two based on traditional dealers - as well as an "other" category containing redistributors, E&S manufacturers are beginning to see ways to gain additional leverage in their efforts to raise margins and increase market share. Tellingly, though, sales through traditional E&S dealers, whether affiliated with buying groups or not, were reported by surveyed manufacturers at 58%, lower than many dealers might have expected, while 16% of sales from these factories went through broadliners and 12% were made directly to operators.
No matter how they chose to distribute their products, a clear majority of surveyed manufacturers (57%) told us that they see their greatest sales opportunities this year in the casual-dining and themed restaurant sector. (See Chart 6.) Unlike responding dealers, though, our manufacturers named healthcare foodservices as their second most promising market (35%), closely followed by hotel/motel operations and colleges/universities (both at 34%). Responding manufacturers also saw more opportunities than their distributor partners for enhanced sales in the QSR (26%) and fine-dining (20%) sectors, but thought just as highly of this year's prospects with B&I and senior-care operations (17% each).
Finally, 56% of surveyed manufacturers noted that they expect to levy price increases on one or more products during 2004, although a more-than-expected number (12%) stated that they will cut prices on their items. And, though positive 2004 sales and profit projections were supported by assertions of improved cost controls, of the responding manufacturers expecting to raise prices, 86% cited increased manufacturing, materials or general overhead costs as driving these rises. This conclusion seems fitting, as it expresses the confluence of conditions, both positive and negative, that are likely to make 2004 a year in which E&S suppliers will find that the road to realizing their rising expectations is a little longer than anticipated.