Over the past several months it has become evident that the total US ...

SPECIAL EDITION – SPRING 2008
®
Over the past several months it has become evident that the total U.S. economic picture has become
more cloudy. The sub-prime loan collapse, coupled with falling housing prices and rising energy costs,
has pushed the economy toward a significant slowdown. For the foodservice industry, the result has
become slowing traffic and fewer customers which translate into slowing sales. Add in skyrocketing
commodity and food costs, and the foodservice operator is really feeling the pinch.
This special edition of Tyson Insights & Discovery newsletter explains some of the economic and
foodservice factors causing these tougher times and their impacts. More importantly, specific ideas and
measures are suggested to operators in order to better position them to weather the tougher times.
Insights & Discovery is produced by Tyson Food Service Marketing in collaboration with Technomic, a fact-based food industry marketing
Insights research & and Discovery consulting is produced firm. This by information Technomic, cannot Inc., the be leading distributed provider or duplicated of consulting without and the research express
to written the restaurant approval industry. of Tyson Foods, Inc.
© 2008 Tyson Foods, Inc.
1

33%
10%
The Economic Slump
The U.S. economy has a direct impact on all industries, and foodservice is no exception. The key measure for the economy
is Gross Domestic Product or GDP. Manufacturers GDP is the value of all goods and services Operators produced in the United States, which currently
stands at about $14 trillion dollars annually. Over the past 5 years, GDP quarterly growth has averaged about 3%. However, for
the 4th quarter of 2007, growth slowed considerably to a meager 0.6%.
Another economic factor that is critical to the foodservice industry’s health is disposable personal income or DPI. DPI is the
amount of money consumers have in their pockets after paying taxes. Historical data suggest there is a strong correlation
between the foodservice industry and DPI growth, and this fact is relatively intuitive. If consumers have more money, they have
more discretionary dollars to spend on Foodservice affordable Industry luxuries Growth such as (% meals Change prepared vs. Prior away-from-home. Year) Another sign of economic
weakness and concern for foodservice is that DPI slumped to its lowest level in 2 years in the latest reporting period.
Looking 6.0% forward, there does not seem to be much optimism about the state of the U.S. economy. Two special surveys have
been conducted with both foodservice manufacturers and operators, asking each group about their optimism regarding the U.S.
economy 5.0% over the next 12 months. It is apparent that both operator and manufacturer optimism for the economy is considerably
lower today compared to recent previous periods.
4.0%
% Optimistic About the U.S. Economy Over the Next 12 Months
3.0%
August 2006
48%
2.0%
46%
August 2007
43%
43%
1998 1999 2000 2001 2002 2003 2004 2005 February 2006 2008 2007 (P) 2008 (F)
33%
8.0%
6.0%
10%
Producer Price Index – Food
4.0%
Manufacturers
Operators
2.0%
Source: Technomic Surveys
For 0.0% the foreseeable future, economists are pessimistic on the economic state, with many predicting an actual decline in GDP in
the first half of 2008, which would technically plunge the economy into a recession for the first time since 2002.
-2.0%
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
Softness In The Foodservice Industry
2005
Foodservice Industry Growth 2006 (% Change vs. Prior Year) 2007
Not surprisingly, the economic slowdown has impacted the foodservice industry negatively. Less consumer spending overall
has translated into lower spending on meals away-from-home. Technomic’s 12 month moving average, a barometer tracking
6.0%
the health of the foodservice industry, has shown a steady decline in the industry since July 2007.
5.0%
12 Month Moving Average Restaurant Growth (% Change vs. Prior Year)
6.0% 4.0%
5.0% 3.0%
4.0% 2.0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 (P) 2008 (F)
3.0%
2.0%
Producer Price Index – Food
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
2005
6.0%
2006 2007
Source: U.S. Census Bureau; Technomic, Inc.
4.0%
© 2008 Tyson Foods, Inc.

33%
% Optimistic About the U.S. Economy Over the Next 12 Months
10%
All areas of the industry have been impacted, but some have been impacted more than others. August Full 2006 service restaurants have
been hurt by consumers trading 48% down to less costly foodservice venues, 46% such as fast food restaurants.
August 2007
In addition, many
consumers, when visiting full service Manufacturers 43% restaurants, are skipping extras such Operators 43% as appetizers, desserts and alcoholic beverages. The
February 2008
business & industry segment is struggling as company cutbacks and layoffs occur, leaving smaller populations to serve.
33%
As such, Technomic, Inc., the industry’s forecasters, believe this year will be a trying year for foodservice sales. Comparatively,
2008 is expected to be the weakest for growth since 2003.
10%
Foodservice Industry Growth (% Change vs. Prior Year)
6.0%
5.0%
4.0%
Manufacturers
Operators
3.0%
Foodservice Industry Growth (% Change vs. Prior Year)
2.0%
6.0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 (P) 2008 (F)
Source: Technomic, Inc.
5.0%
P = Preliminary
F = Forecasted
Producer Price Index – Food
4.0%
8.0%
Rising Food Costs
3.0% 6.0%
Food cost increases are causing pain for virtually every link in the foodservice channel. The producer price index or PPI for food,
2.0%
the key
4.0%
food cost inflation measure, has risen to consistently higher levels over the past year, and continues to do so in early
2008. 1998
2.0% As of the latest 1999 reporting 2000 period (January 2001 2008), 2002 the PPI for 2003 food rose 2004 8.3% compared 2005 to January 2006 2007. 2007 (P) 2008 (F)
0.0%
-2.0%
Producer Price Index – Food
8.0%
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
6.0%
2005
2006 2007
4.0%
2.0%
12 Month Moving Average Restaurant Growth (% Change vs. Prior Year)
0.0%
6.0%
-2.0%
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
2005
2006 2007
4.0%
Base: 3.0% Bureau of Labor Statistics
12 Month Moving Average Restaurant Growth (% Change vs. Prior Year)
2.0%
6.0%
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
5.0% 2005 2006 2007
4.0%
© 2008 Tyson Foods, Inc.

Food price increases are being driven by a number of factors:
• Competition for corn from biofuels, which are subsidized significantly, reducing available supply for food and
animal feed applications.
• Farmers switching to corn from other crops, such as soybeans, wheat, and other grains, taking advantage of
corn subsidies. Less available land for these other crops means tightening supplies.
• Growing wealth of emerging economies and rising standards of living in countries such as China and other
developing countries, which are pushing up demand for various food commodities.
• Recent sub-standard growing seasons in other agricultural countries such as Australia and the Ukraine,
resulting in less global supply.
• Higher cost of fuel and energy necessary for producing, processing and transporting food, which are passed
along down the channel.
All of the above have combined to cause significant pain in the industry. It’s a simple equation of economics: less supply and
greater demand translates into higher prices. Since an extremely high percentage of foods are made and animals are fed
with these commodities, higher prices are impacting almost every food category.
Foodservice operators have not been spared and are feeling the pinch of higher food costs. In a recent survey conducted by
Technomic with foodservice operators, more than three-quarters of foodservice operators report that their food and beverage
costs have on average increased 8% versus the previous year. In fact, the number one operator concern today is rising food
costs. Other cost increases related to healthcare, energy and labor are only compounding operator pain.
What To Do?
Primary Operator Concerns
Issue
% Concerned
Rising Food Costs 82%
Rising Healthcare Costs 77
Rising Energy Costs 77
Rising Labor Costs 73
Inability to Grow Profits 71
Base: Technomic Operator Survey
The economic picture and cost situation have combined to cause a “perfect storm” in the industry: slowing growth plus
higher costs equals less profit. This “stagflation” situation has resulted in concern among all in the industry, and the question
arises, “What can we do?” There are a number of different tactics and strategies foodservice operators can employ in these
tough times to weather the storm. A number of examples are listed below.
.
.
Initiate or increase frequency of deals. As consumers have less money in their pockets, they are more sensitive to
special incentives when selecting where and what to eat. Offering special deals or bundled meals to consumers are triedand-true
measures to help drive traffic. The fear among many operators is that deals will decrease margins significantly,
rendering them not worth the effort. However, sophisticated operators realize deals that get customers through the door
are just a first step; once this is accomplished, using point of sale and suggestive selling allows for upselling to raise the
transaction values.
Install a Two-Tier Pricing Strategy. A number of operators have instituted a two-tier pricing strategy to drive traffic.
At one end of the spectrum are “normally” priced products that often include complete meals. At the other end are
value-priced items that often just include one component of a meal and/or a smaller size (e.g., mini-sandwich). These
© 2008 Tyson Foods, Inc.

value-priced items are another means of driving traffic, providing operators with an opportunity to upsell customers when
ordering.
.
.
Continue new menu development efforts. One of the first reactions of many operators is to pull back on tweaking the
menu in tough times. This natural instinct is driven by the necessity of purchasing additional products and ingredients for a
new menu item that may not meet sales expectations, resulting in wasted costs. If executed correctly, new item initiatives
add excitement to the menu and offer opportunities to increase traffic. The keys to successful new product introductions
are the same in tough times as in good: offering products that are on-trend with the operator’s target clientele base and
promoting new items via in-operation merchandising and external promotions. Also, as competitors may pull back on new
menu development, involvement here may serve as a point of positive differentiation in the customer’s mind.
Don’t Be Afraid to Raise Menu Prices. There is often reluctance among operators to raise menu prices, especially when
traffic slows down. Operators fear that menu price increases will alienate customers and cause them to eat elsewhere. In
the current environment, however, it will be difficult for operators NOT to increase menu prices. Higher food costs, coupled
with other cost increases in healthcare, energy and labor, will necessitate that operators review their menu pricing. In fact,
many are already doing so. Based on a recent operator survey conducted by Technomic, over half of operators have raised
menu prices over the past six months and plan to do so again in the next six months. On average, these operators have
and/or are planning to increase their menu prices by 5% during each of these 6 month time frames.
Implications
Operator Menu Price Situation
Time Frame
% Increasing
Menu Prices
Average
Increase
Within the Last Six Months 53% 5%
Within the Next Six Months 55% 5%
Base: Technomic Operator Survey
Before taking a price increase, operators should research how their competitors are pricing on their menus, so that the
appropriate magnitude of any increase can be determined.
5. Don’t Sacrifice Quality for Price. One common error during tough times is operators reassessing their food ingredient
and component needs, and trading down to lower priced, lower quality goods across-the-board. Significant risks are present
in doing so, most notably the risk of alienating current customers by producing inferior quality menu items. However, it
might be a good option in some circumstances to slightly downgrade for lesser costs in some categories if this doesn’t
negatively impact quality and disappoint customers.
.
.
.
.
.
The economy is expected to slow considerably, at least for the first half of 2008. DPI, the key foodservice indicator, is falling, meaning
that consumers have less money to spend overall. Operators should revise their expectations for sales and traffic appropriately.
Although the industry is slowing, consumers will continue to purchase meals away-from-home, however they will shift to lower
priced venues, and have a propensity to skip extras. Depending on the operation, it may be prudent to begin offering a limited set
of value priced items and increase dealing activity to drive traffic.
Food cost increases are a reality, and significant reduction of prices is not expected in the foreseeable future. Look to improve on
your yield and internal systems to use ingredients and components more efficiently. Taking a price increase is also a viable option,
as competitors most likely will as well.
Menu development and promotional strategies should be intensified as a means of driving traffic and differentiating from customers.
Realize the goal of any dealing is to drive traffic, as well as upsell once consumers come through the door.
Despite all the economic and cost issues, there is cause for optimism. The foodservice industry is one that has historically come out
of economic downturns more quickly than other industries. We see no reason why this episode should be any different.
© 2008 Tyson Foods, Inc.