By Robin Ashton, Principal
Ashton Foodservice Consulting
As many of you know, I have forecasted the foodservice equipment and supplies market since the early 1980s. And I will continue to do so, now that I have set myself up as an independent consultant.
How would I characterize the foodservice and foodservice E&S markets the past couple years? Weird, just weird.
Given the macroeconomic inputs we usually follow because they have traditionally driven the markets, nothing is really tracking. With the exception of a bit of an upward blip in gasoline prices this year, all the macro factors are very, very positive. Employment, disposable income, consumer spending and consumer confidence are all at levels that normally drive significant growth in foodservice.
But these trends, which have been in place since gas prices plummeted and employment boomed beginning mid-2014, only briefly accelerated foodservice growth.
After hitting a post-recession high of 5.1% nominal growth in 2015, according to Technomic Inc. estimates, growth slowed to 4.1% in 2016 and again to only 3.7% in 2017. Things have improved a bit this year—Technomic in May revised its 2018 forecast up to 4.1% and expects similar growth next year—but given the strong general economy, one would expect much bigger gains.
Things have been even stranger on the E&S side. My forecasting partner John Muldowney, principal at Clarity M&A, and I estimated E&S market nominal dollar growth at the manufacturer level fell from 4.8% in 2015 to 4.3% in 2016 to just 3% last year.
Tracking the MAFSI Business Barometer—in which manufacturers’ reps report their sales changes—tells the tale, too. The four-quarter moving average (an average of the change for each of the previous four quarters) of the Barometer hit 5% first quarter 2016, fell to 4% by first quarter 2017, and plummeted to 2.2% by the second quarter this year. The Barometer gains for the first and second quarters this year—1.5% and 1.8% respectively—are at their lowest levels since the Barometer went positive fourth quarter 2010.
Which means we not only have a disconnect of the macro economy and foodservice growth, but also one between foodservice sales growth and the E&S market.
So, what’s going on? Why the disconnects? Several things, I think. On the macro to foodservice vector, I think two things are critical. First, the U.S. foodservice market is the most mature in the world. There are simply too many restaurants and too many seats chasing too few fannies, as the old industry saw goes. You can see that in NPD Group’s ReCount restaurant census. Total net units have been falling for three years.
Second, there is a dramatic shift in the way the 18-to-34-year-old demographic cohort uses foodservice. They just don’t eat out nearly as much or spend as much when they do. Average annual visits for this group—traditionally the heaviest users of restaurants—fell more than 27% from the mid-2000s to the depths of the Great Recession, and have not ever really recovered. That overall visits for the entire country have remained essentially flat since 2010 is actually quite surprising, given that change.
On the foodservice to E&S market vector, the market maturity, slower new-unit growth and flat traffic trends all come into to play in making operators spend less on E&S.
But I think there is another key factor at play as well: In the past nine years, we’ve just burned most of the pent-up demand for new and replacement equipment out of the market. That demand was driven by an aging foodservice equipment infrastructure, the casual-dining and fast-casual booms of the 1990s, 2000s and 2010s, and the renovation of much of the institutional foodservice infrastructure at healthcare, colleges, schools, etc. Hey, the E&S market expansion is nine years on; nothing lasts forever.
Now, I think this is actually positive for foodservice equipment servicers, parts suppliers and others. For almost two decades I’ve been telling industry audiences (and investment bankers and private equity companies) that the U.S. foodservice market has become like the old European foodservice model: You build a restaurant and operate it for four hundred years. That requires a lot of equipment repair.
Have a great 2019 and see you at The NAFEM Show.