The foodservice sector opens 2007 in a better state than it started 2006. There are several reasons to be bullish and perhaps the most significant is the fact that last year ended somewhat more positively than many had hoped.
While it is prudent to work on preliminary figures until the full year can be examined in the round - which Horizons will be doing in March as part of its regular forecasting process - it is possible to put some numbers to the last 12 months and to look forward to what might happen over the coming year.
Sales by foodservice operators were up on average by about two per cent in real terms over the whole of last year; notably, they were given a seasonal boost when demand increased in the final quarter. This strength looks likely to continue for a while but this will not be very apparent during the traditional lighter trading months of January and February.
The outlook for the whole of the coming year though is as unknown as it always is at this time of year. There are several uncertainties at large. For example, the overall state of the economy, with its higher inflation, has meant an increase in interest rates. These movements, although slight, will have an effect on consumers and operators alike. The actual nature of the impact is not clear but is likely to be on the negative side as far as the eating out market is concerned.
The smoking ban to be introduced in Wales in March and in England in July will influence the pub sector although, having investigated this in some detail, I believe that food sales in pubs will increase as a result of the ban at the expense of eating in restaurants.
Last year, the educational sector was spooked by the Jamie Oliver TV programmes, leading to a fall in meal numbers of up to 30 per cent in some local authorities. The overall decline was less than this but was nevertheless very real. How will schoolchildren and their parents react to the menu changes that are being rolled out? The results will have a substantial impact on suppliers of fresh produce who will be hoping for high sales into schools on the back of the government’s 5 A DAY fruit and vegetable campaign.
Apart from these expected developments it is certain that there will be unexpected changes too.
The eating-out market is going to grow in 2007, but the question is by how much? Horizons is forecasting growth of about two per cent overall, which will lift total food purchases by some £200-300 million to reach a shade under £10 billion in total.
For the last few years, inflation in the foodservice sector has been kept in check. A key underlying reason has been intense competition within the sector allowing the consumer plenty of choice in an environment where operators have been very reluctant to raise prices. In fact, special meal deals and other financial incentives have been the order of the day in many sectors.
This price stability has been massively assisted by pressure on the supply chain to keep prices low or even reducing them. This has been possible for a number of years because there have been inefficiencies in the supply chain which have been identified and eliminated in response to price pressures. There is growing evidence - both anecdotal and in published figures from suppliers - that indicate this squeeze cannot continue much longer without putting parts of the supply chain out of business.
This does not mean that pressure on price will cease, but it does mean that a point is being reached where ever-lower prices are no longer possible.
A positive side to this is the upward shift in the quality of food that is available to the eating out market. Although the changes are not necessarily obvious, you only have to compare the quality and choice available now with the position 10 years ago. This enhanced quality provides additional opportunity for adding margin.
A key driver for the success of the eating out market is the performance of the market leaders. When they succeed, the whole market benefits, but when, like the period just ending, they have not been doing so well because consumers are not eating out as much as they might, operators’ incomes and margins suffer.
Several managed pub chains, including Mitchells & Butlers and Greene King, have definitely delivered what the customer wants over the last couple of years. The restaurant sector includes brands such as Café Rouge which until recently were in intensive care, but which have been nursed back to life by successful managements.
There is a downside though. Little Chef has failed to perform and is now on the very sick list. Whitbread, for many years the leading branded restaurant operator in the UK, is now shrinking and increasingly focusing on a few core brands most notably the successful Costa Coffee business. And at the top of the tree in terms of size, Compass is busy overcoming a number of strategic problems.
However, these underperformers are now being outweighed by a number of star brands, such as Strada in the restaurant sector, and the emergence of new categories, like the upmarket burger sector highlighted by Gourmet Burger Kitchen.
With more than 800 stores, Subway has changed the UK “sub-sandwich” business which was off the radar even a couple of years ago. And the coffee segment appears set to continue growing with the likes of Starbucks and Caffe Nero more than offsetting the decline in chains like Coffee Republic.
Among group operators there are signs of dynamism and growth. As a result, Horizons expects group operators to expand their overall market share from its present 58 per cent. The Horizons forecast is that they will purchase an extra £200m of food in 2008 compared with last year. At the same time, smaller and independent operators will also expand and Horizons predicts that their food purchases will advance to £4.1 billion this year.
Horizons sees a positive future for foodservice supply over the coming two years, but two challenges face fresh produce suppliers. Prices will be under constant review and picking the winners among the huge range of potential customers will remain a challenge.
Apart from the expected in foodservice supply, it is certain that there will be unexpected changes too. The wise suppliers will plan for it to happen.
No comments yet