To be sure, each segment of the supply chain will face its unique challenges, but overall the successful companies will be those that return to managing the basics of their business in what Technomic calls a "new normal."
While all of foodservice sales should reach $429.9 billion next year, which represents a nominal growth rate of 2.4% over this year, sales in the restaurant and bar segment alone should expand at a rate of 3.2%. Joe Pawlak, senior principal, Technomic, characterized the foodservice industry as being mature but expanding.
Technomic presented its 2004 forecast and outlook at three conferences, sponsored by the International Foodservice Manufacturers Association, in Newark, NJ, San Francisco and Chicago (Oct. 13).
(SH)Distributors Value Up
As for distributors, who are more buoyant about business prospects next year than are manufacturers and operators, Technomic sees their value to manufacturers and operators as gaining in prominence in the near future. The drivers behind this thinking are the expected increase in the number of DSRs, the growth of distributor-owned brands, a decrease in manufacturers' sales staffs and the mounting significance of "control of operator." Stated differently, distributors, sensing growth next year, are planning to add DSRs and sales pros. Additionally, many distributorships, with Sysco leading the way, are expanding their own brands at a time when, Technomic indicated, manufacturers' sales staffs are contracting. Consequently, how do you leverage your ability to exercise control of the operator ? the key ingredient to sales success?
When asked if in light of these conditions will DSRs and distributors be more important in helping manufacturers market their products to operators in the future, Gary Karp, vice president, Technomic, emphatically replied, yes.
Drawing on his experience at Alliant Foodservice, Karp explained to the manufacturers in the room that operators had continuously told the distributorship's executives that the most important reason why they purchased one brand of product rather than another was the DSR. Furthermore, the second most important influencer of this operator purchasing process, he added, was the distributorship's driver.
Pawlak explained that the "distributor can absolutely help the manufacturer capture the operator. As we know, the distributor sales rep, and even the driver, are the key contact points, the key conduit between distributor and the operator and can also be a very strong conduit between the manufacturer and the operator. DSRs can be the catalyst of that communication," Pawlak said.
(SH)Growth amid mixed signals
In a time of mixed economic signals, with strong and weak indicators attracting equal attention, the foodservice industry is showing strong growth. Monthly sales growth at restaurants reached 8.5% and a rolling average growth rate of 5.2% in July. By operator segments, first six-month revenues for 2003 as compared with the previous year varied: limited service rang up 8.7% more business, midscale ? 3.4% while casual dining facilities lead the pack with 11.8%.
With margin pressures weighing heavily on the minds of manufacturers, distributors and operators, the industry is also perplexed by other issues. Food safety, labor, legislation and obesity, according to Technomic, fall into the primary group of concerns. Explaining the labor point, Pawlak noted that the concern is not so much about the availability of workers but of the cost of employing them. Operators are being pressured by so-called "living wage" considerations and legislators are being urged to raise the minimum wage. Workers rights, working conditions and insurance premiums also fit into this category.
Obesity, coupled with nutrition and wellness, will be major topics in the coming months, as Americans' waistlines grow and lawyers and media capitalize on the anxiety. This awareness will force many operators to consider healthier menu choices as well as smaller portions.
Technomic noted that if the industry doesn't initiate change in nutrition matters, the government may step in and new government regulations and interference may not be conducive to a growing economic environment.
In addition, the industry stays up nights pondering terrorism, mad cow, the growing acceptance of irradiation or cold pasteurization, smoking bans, menu nutritional labeling, prime real estate shortage and consumers trading down and downscaling their eating out habits.
Distributors more positive
As for attitude, 72% of the distributors polled were optimistic about the national economy next year, compared with 65% of operators and 51% of manufacturers. When asked about their thoughts on foodservice prospects over the next 12 months, 79% of distributors, 64% of operators and 45% of manufacturers said they were optimistic. When asked about expectations for their own business, 39% of operators, 55% of manufacturers and 69% of distributors answered it was strong.
Despite their optimism, all segments indicated it would be a real struggle to make money next year. Commenting about sales, 71% of operators, 67% of distributors and 85% of manufacturers said it would be a challenge; while 76% of operators, 90% of distributors and 87% of manufacturers admitted meeting margins would be difficult.
Distributors painted a very bright picture of business next year: 90% of them expect sales to grow, 76% ? gross profit and 62% ? operating profit. To be sure, Technomic's analysts pointed out, distributors rely on manufacturers for their growth and are expected to continue to seek marketing support. In the eyes of distributors, manufacturers are the "low hanging fruit" but distributors will also need to seek other avenues to grow their business, Pawlak said.
The distribution segment continues to be affected by consolidation and the concentration of corporate prowess at the summit. Technomic's Alan L. Hyatt said the entire distributor community is not growing equally ? it is in a "take share" environment, in which one company loses a customer and someone else picks up that customer. Sixty-seven percent of distributors concur that sales growth will be difficult going forward while 90% say maintaining margins will be difficult.
Distributors' attention, as well as that of the entire supply chain, are focused on Sysco Corp. and U.S. Foodservice, Nos. 1 and 2, respectively. On one side, U.S. Foodservice's accounting and legal problems may evolve into new industry practices, as uncertainties continue whether its apologies will mollify government officials or are lawsuits in store for the broadliner's execs. On the other hand, Sysco, called a "leader in supply chain efficiency," continues to amaze everyone with its revenue and profits. A strategic initiative of the Houston-based company is to be "very supportive of its own brands." Its declared goal is to read $50 billion in sales by 2008 ? twice as much as it is reporting this year.
Among the distributor initiatives that are shaping sales growth and profitability are: account penetration, sales expansion, supply chain efficiencies, redistribution, category management, acquisition, distributor owned brand, category expansion and customer profitability. More than nine out of 10 distributors admit that account penetration is their No. 1 priority. Nearly four out of 10 are considering expanding into perishable categories and an almost equal amount are exploring expansion into non-foods.
DSR employment bright
The hopeful outlook could also boost employment among distributor sales pros: 67% of distributors said they would add DSRs; 51% plan to add specialists and 77% ? inside sales reps. Distributors category expertise through their DSRs as well as their specialists are key to controlling operators and penetrating accounts.
The composition of the distributor's warehouse has changed since 1997, Technomic demonstrated. Manufacturers' brands, which accounted for 65% of the stock and $93 billion of distributor sales, now amount to 57% and $103 billion. On the other hand, DOBs occupied 11% of the inventory and totaled $16 billion in sales and now account for 18% and $32 billion in sales.
Another bright light in the distributor segment is redistribution, with Sysco aggressively pursuing this line of business. In 2002 overall redistribution totaled $8.5-$9.5 billion in revenue and Technomic expects it to grow to $29-$31 billion by 2010.
Technomic's advice for distributors:
* Ferociously defend current business
* Fine-tune your leverage points
* Look for sweet spots in the market
* Know your customer's profitability
* Resolve "operator as customer" question.
Distributors must also eliminate all internal inefficiencies and unnecessary costs via efficient foodservice response projects and category management principles. When asked how do they explain the ability of regional independent distributors to successfully engage the corporate distributorships in the marketplace, Hyatt and Karp said they managed to find the "sweet points" in their territory and to successfully exploit the dynamics of geography, product categories, service and product expertise.
Pawlak expounded on this thought: "Given today's environment and looking at what operators are struggling with, namely labor, cost, business building, successful distributors need to be more than just sellers of products to operators. They need to be more consultants, they need to help the operator understand how to be better businessmen, they need to work with the operator on training, business building tactics, so going beyond than what they've traditionally done. It is increasingly more important for the distributor to be more of a partner not just a procurement arm."