Over the past several months it has become evident that the total US ...
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SPECIAL EDITION – SPRING 2008<br />
®<br />
<strong>Over</strong> <strong>the</strong> <strong>past</strong> <strong>several</strong> <strong>months</strong> <strong>it</strong> <strong>has</strong> <strong>become</strong> <strong>evident</strong> <strong>that</strong> <strong>the</strong> <strong>total</strong> U.S. economic picture <strong>has</strong> <strong>become</strong><br />
more cloudy. The sub-prime loan collapse, coupled w<strong>it</strong>h falling housing prices and rising energy costs,<br />
<strong>has</strong> pushed <strong>the</strong> economy toward a significant slowdown. For <strong>the</strong> foodservice industry, <strong>the</strong> result <strong>has</strong><br />
<strong>become</strong> slowing traffic and fewer customers which translate into slowing sales. Add in skyrocketing<br />
commod<strong>it</strong>y and food costs, and <strong>the</strong> foodservice operator is really feeling <strong>the</strong> pinch.<br />
This special ed<strong>it</strong>ion of Tyson Insights & Discovery newsletter explains some of <strong>the</strong> economic and<br />
foodservice factors causing <strong>the</strong>se tougher times and <strong>the</strong>ir impacts. More importantly, specific ideas and<br />
measures are suggested to operators in order to better pos<strong>it</strong>ion <strong>the</strong>m to wea<strong>the</strong>r <strong>the</strong> tougher times.<br />
Insights & Discovery is produced by Tyson Food Service Marketing in collaboration w<strong>it</strong>h Technomic, a fact-based food industry marketing<br />
Insights research & and Discovery consulting is produced firm. This by information Technomic, cannot Inc., <strong>the</strong> be leading distributed provider or duplicated of consulting w<strong>it</strong>hout and <strong>the</strong> research express<br />
to wr<strong>it</strong>ten <strong>the</strong> restaurant approval industry. of Tyson Foods, Inc.<br />
© 2008 Tyson Foods, Inc.<br />
1
33%<br />
10%<br />
The Economic Slump<br />
The U.S. economy <strong>has</strong> a direct impact on all industries, and foodservice is no exception. The key measure for <strong>the</strong> economy<br />
is Gross Domestic Product or GDP. Manufacturers GDP is <strong>the</strong> value of all goods and services Operators produced in <strong>the</strong> Un<strong>it</strong>ed States, which currently<br />
stands at about $14 trillion dollars annually. <strong>Over</strong> <strong>the</strong> <strong>past</strong> 5 years, GDP quarterly growth <strong>has</strong> averaged about 3%. However, for<br />
<strong>the</strong> 4th quarter of 2007, growth slowed considerably to a meager 0.6%.<br />
Ano<strong>the</strong>r economic factor <strong>that</strong> is cr<strong>it</strong>ical to <strong>the</strong> foodservice industry’s health is disposable personal income or DPI. DPI is <strong>the</strong><br />
amount of money consumers have in <strong>the</strong>ir pockets after paying taxes. Historical data suggest <strong>the</strong>re is a strong correlation<br />
between <strong>the</strong> foodservice industry and DPI growth, and this fact is relatively intu<strong>it</strong>ive. If consumers have more money, <strong>the</strong>y have<br />
more discretionary dollars to spend on Foodservice affordable Industry luxuries Growth such as (% meals Change prepared vs. Prior away-from-home. Year) Ano<strong>the</strong>r sign of economic<br />
weakness and concern for foodservice is <strong>that</strong> DPI slumped to <strong>it</strong>s lowest level in 2 years in <strong>the</strong> latest reporting period.<br />
Looking 6.0% forward, <strong>the</strong>re does not seem to be much optimism about <strong>the</strong> state of <strong>the</strong> U.S. economy. Two special surveys have<br />
been conducted w<strong>it</strong>h both foodservice manufacturers and operators, asking each group about <strong>the</strong>ir optimism regarding <strong>the</strong> U.S.<br />
economy 5.0% over <strong>the</strong> next 12 <strong>months</strong>. It is apparent <strong>that</strong> both operator and manufacturer optimism for <strong>the</strong> economy is considerably<br />
lower today compared to recent previous periods.<br />
4.0%<br />
% Optimistic About <strong>the</strong> U.S. Economy <strong>Over</strong> <strong>the</strong> Next 12 Months<br />
3.0%<br />
August 2006<br />
48%<br />
2.0%<br />
46%<br />
August 2007<br />
43%<br />
43%<br />
1998 1999 2000 2001 2002 2003 2004 2005 February 2006 2008 2007 (P) 2008 (F)<br />
33%<br />
8.0%<br />
6.0%<br />
10%<br />
Producer Price Index – Food<br />
4.0%<br />
Manufacturers<br />
Operators<br />
2.0%<br />
Source: Technomic Surveys<br />
For 0.0% <strong>the</strong> foreseeable future, economists are pessimistic on <strong>the</strong> economic state, w<strong>it</strong>h many predicting an actual decline in GDP in<br />
<strong>the</strong> first half of 2008, which would technically plunge <strong>the</strong> economy into a recession for <strong>the</strong> first time since 2002.<br />
-2.0%<br />
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J<br />
Softness In The Foodservice Industry<br />
2005<br />
Foodservice Industry Growth 2006 (% Change vs. Prior Year) 2007<br />
Not surprisingly, <strong>the</strong> economic slowdown <strong>has</strong> impacted <strong>the</strong> foodservice industry negatively. Less consumer spending overall<br />
<strong>has</strong> translated into lower spending on meals away-from-home. Technomic’s 12 month moving average, a barometer tracking<br />
6.0%<br />
<strong>the</strong> health of <strong>the</strong> foodservice industry, <strong>has</strong> shown a steady decline in <strong>the</strong> industry since July 2007.<br />
5.0%<br />
12 Month Moving Average Restaurant Growth (% Change vs. Prior Year)<br />
6.0% 4.0%<br />
5.0% 3.0%<br />
4.0% 2.0%<br />
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 (P) 2008 (F)<br />
3.0%<br />
2.0%<br />
Producer Price Index – Food<br />
8.0% N D J F M A M J J A S O N D J F M A M J J A S O N<br />
2005<br />
6.0%<br />
2006 2007<br />
Source: U.S. Census Bureau; Technomic, Inc.<br />
4.0%<br />
<br />
© 2008 Tyson Foods, Inc.
33%<br />
% Optimistic About <strong>the</strong> U.S. Economy <strong>Over</strong> <strong>the</strong> Next 12 Months<br />
10%<br />
All areas of <strong>the</strong> industry have been impacted, but some have been impacted more than o<strong>the</strong>rs. August Full 2006 service restaurants have<br />
been hurt by consumers trading 48% down to less costly foodservice venues, 46% such as fast food restaurants.<br />
August 2007<br />
In add<strong>it</strong>ion, many<br />
consumers, when vis<strong>it</strong>ing full service Manufacturers 43% restaurants, are skipping extras such Operators 43% as appetizers, desserts and alcoholic beverages. The<br />
February 2008<br />
business & industry segment is struggling as company cutbacks and layoffs occur, leaving smaller populations to serve.<br />
33%<br />
As such, Technomic, Inc., <strong>the</strong> industry’s forecasters, believe this year will be a trying year for foodservice sales. Comparatively,<br />
2008 is expected to be <strong>the</strong> weakest for growth since 2003.<br />
10%<br />
Foodservice Industry Growth (% Change vs. Prior Year)<br />
6.0%<br />
5.0%<br />
4.0%<br />
Manufacturers<br />
Operators<br />
3.0%<br />
Foodservice Industry Growth (% Change vs. Prior Year)<br />
2.0%<br />
6.0%<br />
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 (P) 2008 (F)<br />
Source: Technomic, Inc.<br />
5.0%<br />
P = Preliminary<br />
F = Forecasted<br />
Producer Price Index – Food<br />
4.0%<br />
8.0%<br />
Rising Food Costs<br />
3.0% 6.0%<br />
Food cost increases are causing pain for virtually every link in <strong>the</strong> foodservice channel. The producer price index or PPI for food,<br />
2.0%<br />
<strong>the</strong> key<br />
4.0%<br />
food cost inflation measure, <strong>has</strong> risen to consistently higher levels over <strong>the</strong> <strong>past</strong> year, and continues to do so in early<br />
2008. 1998<br />
2.0% As of <strong>the</strong> latest 1999 reporting 2000 period (January 2001 2008), 2002 <strong>the</strong> PPI for 2003 food rose 2004 8.3% compared 2005 to January 2006 2007. 2007 (P) 2008 (F)<br />
0.0%<br />
-2.0%<br />
Producer Price Index – Food<br />
8.0%<br />
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J<br />
6.0%<br />
2005<br />
2006 2007<br />
4.0%<br />
2.0%<br />
12 Month Moving Average Restaurant Growth (% Change vs. Prior Year)<br />
0.0%<br />
6.0%<br />
-2.0%<br />
5.0% J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J<br />
2005<br />
2006 2007<br />
4.0%<br />
Base: 3.0% Bureau of Labor Statistics<br />
12 Month Moving Average Restaurant Growth (% Change vs. Prior Year)<br />
2.0%<br />
6.0%<br />
N D J F M A M J J A S O N D J F M A M J J A S O N<br />
5.0% 2005 2006 2007<br />
4.0%<br />
<br />
© 2008 Tyson Foods, Inc.
Food price increases are being driven by a number of factors:<br />
• Compet<strong>it</strong>ion for corn from biofuels, which are subsidized significantly, reducing available supply for food and<br />
animal feed applications.<br />
• Farmers sw<strong>it</strong>ching to corn from o<strong>the</strong>r crops, such as soybeans, wheat, and o<strong>the</strong>r grains, taking advantage of<br />
corn subsidies. Less available land for <strong>the</strong>se o<strong>the</strong>r crops means tightening supplies.<br />
• Growing wealth of emerging economies and rising standards of living in countries such as China and o<strong>the</strong>r<br />
developing countries, which are pushing up demand for various food commod<strong>it</strong>ies.<br />
• Recent sub-standard growing seasons in o<strong>the</strong>r agricultural countries such as Australia and <strong>the</strong> Ukraine,<br />
resulting in less global supply.<br />
• Higher cost of fuel and energy necessary for producing, processing and transporting food, which are passed<br />
along down <strong>the</strong> channel.<br />
All of <strong>the</strong> above have combined to cause significant pain in <strong>the</strong> industry. It’s a simple equation of economics: less supply and<br />
greater demand translates into higher prices. Since an extremely high percentage of foods are made and animals are fed<br />
w<strong>it</strong>h <strong>the</strong>se commod<strong>it</strong>ies, higher prices are impacting almost every food category.<br />
Foodservice operators have not been spared and are feeling <strong>the</strong> pinch of higher food costs. In a recent survey conducted by<br />
Technomic w<strong>it</strong>h foodservice operators, more than three-quarters of foodservice operators report <strong>that</strong> <strong>the</strong>ir food and beverage<br />
costs have on average increased 8% versus <strong>the</strong> previous year. In fact, <strong>the</strong> number one operator concern today is rising food<br />
costs. O<strong>the</strong>r cost increases related to healthcare, energy and labor are only compounding operator pain.<br />
What To Do?<br />
Primary Operator Concerns<br />
Issue<br />
% Concerned<br />
Rising Food Costs 82%<br />
Rising Healthcare Costs 77<br />
Rising Energy Costs 77<br />
Rising Labor Costs 73<br />
Inabil<strong>it</strong>y to Grow Prof<strong>it</strong>s 71<br />
Base: Technomic Operator Survey<br />
The economic picture and cost s<strong>it</strong>uation have combined to cause a “perfect storm” in <strong>the</strong> industry: slowing growth plus<br />
higher costs equals less prof<strong>it</strong>. This “stagflation” s<strong>it</strong>uation <strong>has</strong> resulted in concern among all in <strong>the</strong> industry, and <strong>the</strong> question<br />
arises, “What can we do?” There are a number of different tactics and strategies foodservice operators can employ in <strong>the</strong>se<br />
tough times to wea<strong>the</strong>r <strong>the</strong> storm. A number of examples are listed below.<br />
.<br />
.<br />
In<strong>it</strong>iate or increase frequency of deals. As consumers have less money in <strong>the</strong>ir pockets, <strong>the</strong>y are more sens<strong>it</strong>ive to<br />
special incentives when selecting where and what to eat. Offering special deals or bundled meals to consumers are triedand-true<br />
measures to help drive traffic. The fear among many operators is <strong>that</strong> deals will decrease margins significantly,<br />
rendering <strong>the</strong>m not worth <strong>the</strong> effort. However, sophisticated operators realize deals <strong>that</strong> get customers through <strong>the</strong> door<br />
are just a first step; once this is accomplished, using point of sale and suggestive selling allows for upselling to raise <strong>the</strong><br />
transaction values.<br />
Install a Two-Tier Pricing Strategy. A number of operators have inst<strong>it</strong>uted a two-tier pricing strategy to drive traffic.<br />
At one end of <strong>the</strong> spectrum are “normally” priced products <strong>that</strong> often include complete meals. At <strong>the</strong> o<strong>the</strong>r end are<br />
value-priced <strong>it</strong>ems <strong>that</strong> often just include one component of a meal and/or a smaller size (e.g., mini-sandwich). These<br />
<br />
© 2008 Tyson Foods, Inc.
value-priced <strong>it</strong>ems are ano<strong>the</strong>r means of driving traffic, providing operators w<strong>it</strong>h an opportun<strong>it</strong>y to upsell customers when<br />
ordering.<br />
.<br />
.<br />
Continue new menu development efforts. One of <strong>the</strong> first reactions of many operators is to pull back on tweaking <strong>the</strong><br />
menu in tough times. This natural instinct is driven by <strong>the</strong> necess<strong>it</strong>y of purc<strong>has</strong>ing add<strong>it</strong>ional products and ingredients for a<br />
new menu <strong>it</strong>em <strong>that</strong> may not meet sales expectations, resulting in wasted costs. If executed correctly, new <strong>it</strong>em in<strong>it</strong>iatives<br />
add exc<strong>it</strong>ement to <strong>the</strong> menu and offer opportun<strong>it</strong>ies to increase traffic. The keys to successful new product introductions<br />
are <strong>the</strong> same in tough times as in good: offering products <strong>that</strong> are on-trend w<strong>it</strong>h <strong>the</strong> operator’s target clientele base and<br />
promoting new <strong>it</strong>ems via in-operation merchandising and external promotions. Also, as compet<strong>it</strong>ors may pull back on new<br />
menu development, involvement here may serve as a point of pos<strong>it</strong>ive differentiation in <strong>the</strong> customer’s mind.<br />
Don’t Be Afraid to Raise Menu Prices. There is often reluctance among operators to raise menu prices, especially when<br />
traffic slows down. Operators fear <strong>that</strong> menu price increases will alienate customers and cause <strong>the</strong>m to eat elsewhere. In<br />
<strong>the</strong> current environment, however, <strong>it</strong> will be difficult for operators NOT to increase menu prices. Higher food costs, coupled<br />
w<strong>it</strong>h o<strong>the</strong>r cost increases in healthcare, energy and labor, will necess<strong>it</strong>ate <strong>that</strong> operators review <strong>the</strong>ir menu pricing. In fact,<br />
many are already doing so. Based on a recent operator survey conducted by Technomic, over half of operators have raised<br />
menu prices over <strong>the</strong> <strong>past</strong> six <strong>months</strong> and plan to do so again in <strong>the</strong> next six <strong>months</strong>. On average, <strong>the</strong>se operators have<br />
and/or are planning to increase <strong>the</strong>ir menu prices by 5% during each of <strong>the</strong>se 6 month time frames.<br />
Implications<br />
Operator Menu Price S<strong>it</strong>uation<br />
Time Frame<br />
% Increasing<br />
Menu Prices<br />
Average<br />
Increase<br />
W<strong>it</strong>hin <strong>the</strong> Last Six Months 53% 5%<br />
W<strong>it</strong>hin <strong>the</strong> Next Six Months 55% 5%<br />
Base: Technomic Operator Survey<br />
Before taking a price increase, operators should research how <strong>the</strong>ir compet<strong>it</strong>ors are pricing on <strong>the</strong>ir menus, so <strong>that</strong> <strong>the</strong><br />
appropriate magn<strong>it</strong>ude of any increase can be determined.<br />
5. Don’t Sacrifice Qual<strong>it</strong>y for Price. One common error during tough times is operators reassessing <strong>the</strong>ir food ingredient<br />
and component needs, and trading down to lower priced, lower qual<strong>it</strong>y goods across-<strong>the</strong>-board. Significant risks are present<br />
in doing so, most notably <strong>the</strong> risk of alienating current customers by producing inferior qual<strong>it</strong>y menu <strong>it</strong>ems. However, <strong>it</strong><br />
might be a good option in some circumstances to slightly downgrade for lesser costs in some categories if this doesn’t<br />
negatively impact qual<strong>it</strong>y and disappoint customers.<br />
.<br />
.<br />
.<br />
.<br />
.<br />
The economy is expected to slow considerably, at least for <strong>the</strong> first half of 2008. DPI, <strong>the</strong> key foodservice indicator, is falling, meaning<br />
<strong>that</strong> consumers have less money to spend overall. Operators should revise <strong>the</strong>ir expectations for sales and traffic appropriately.<br />
Although <strong>the</strong> industry is slowing, consumers will continue to purc<strong>has</strong>e meals away-from-home, however <strong>the</strong>y will shift to lower<br />
priced venues, and have a propens<strong>it</strong>y to skip extras. Depending on <strong>the</strong> operation, <strong>it</strong> may be prudent to begin offering a lim<strong>it</strong>ed set<br />
of value priced <strong>it</strong>ems and increase dealing activ<strong>it</strong>y to drive traffic.<br />
Food cost increases are a real<strong>it</strong>y, and significant reduction of prices is not expected in <strong>the</strong> foreseeable future. Look to improve on<br />
your yield and internal systems to use ingredients and components more efficiently. Taking a price increase is also a viable option,<br />
as compet<strong>it</strong>ors most likely will as well.<br />
Menu development and promotional strategies should be intensified as a means of driving traffic and differentiating from customers.<br />
Realize <strong>the</strong> goal of any dealing is to drive traffic, as well as upsell once consumers come through <strong>the</strong> door.<br />
Desp<strong>it</strong>e all <strong>the</strong> economic and cost issues, <strong>the</strong>re is cause for optimism. The foodservice industry is one <strong>that</strong> <strong>has</strong> historically come out<br />
of economic downturns more quickly than o<strong>the</strong>r industries. We see no reason why this episode should be any different.<br />
<br />
© 2008 Tyson Foods, Inc.