foodservice company and operators study: optimism and ......foodservice has grown over the past...
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l e k . c o m
ExEcutivE insights Volume XVI, Issue 21
l.e.k. consulting / executive Insights insights @ WORK®
2014 L.E.K. Consulting U.S. Foodservice Operators Study: Optimism and Opportunities was written by Manny Picciola, managing director and head of L.E.K. Consulting’s Food & Beverage practice, and Rob Wilson, a senior manager in L.E.K. Consulting’s Chicago off ice. For more information, contact [email protected].
After several years of relatively modest growth, foodservice
operators across all segments of the industry are now feeling
strongly optimistic about the future. The 2014 L.E.K. Consulting
U.S. Foodservice Study found several leading indicators of that
optimism, including that three out of four senior foodservice
decision-makers and executives believe business will be better
over the next three years than it was in the past three. In L.E.K’s
view the market now has strong tailwinds behind it and there
are numerous growth opportunities for foodservice operators.
Operators believe that healthier eating is here to stay and say
changing their menus to support that trend will be their biggest
priority for 2014. Farm-to-fork, operators say, matters: they
expect growing demand for healthier foods, locally sourced
items, cleaner ingredients and value products. Similarly,
operators say they are convinced that gluten-free dining is
not a fad. A remarkable 56% say they have already changed
or are changing their menus to include gluten-free items.
See also the L.E.K. Executive Insights “Fresh-Food Nation:
The Economic Promise of the ‘Farm-to-Fork Strategy” for
more perspective on this key food industry trend.
However, Sysco’s announcement in late 2013 of its intention
to acquire US Foods is a big concern for operators. The owner
of a bagel restaurant noted, “[t]here was definite panic in the
restaurant industry among small businesses when the merger
was announced. I have used bids from US Foods to negotiate
2014 L.E.K. Consulting U.S. Foodservice Operators Study: Optimism and Opportunities
lower prices from Sysco. We know that we are going to get
squeezed…”
Most operators who participated in the L.E.K. study agree:
60% of them think consolidation of the two biggest suppliers
will mean higher prices. Fifteen percent say they expect
the combined supply giant will take preferred products off
the shelves and offer them pricier house brands instead.
Operators are also not happy with their relationship with
manufacturers. It is time, they say, for food makers to start
paying closer attention to operators’ needs and preferences.
Operators told us that what they really want is more customized
solutions to their problems.
Growth Accelerates: Four Key Trends Driving it
For all the economic headwinds of the Great Recession,
foodservice has grown over the past decade, significantly
outpacing retail. The U.S. foodservice industry had a 4.9%
compounded annual growth rate from 2003 through 2012,
as compared to 3.5% for the retail industry.
Like much of the rest of the economy, though, foodservice
has experienced the “hourglass effect”: growth at the top and
bottom ends of the market and contraction in the middle. Since
ExEcutivE insights
l e k . c o minsights @ WORK®Page 2 l.e.k. consulting / executive Insights Volume XVI, Issue 21
ExEcutivE insights
2007, the fastest growth has been among quick service
restaurant (QSR) and fast casual brands, with middle-of-the-
road sit-down chains shrinking.
A large majority of operators across the board say they are
optimistic that business will improve over the medium-term
future. Seventy four percent told us they expect that growth
over the next three years will be stronger than in the past three
(see Figure 1).
Operators say they think the growth they’re expecting will come
via four key trends: healthy food, locally sourced (farm-to-fork)
food, clean ingredients and value. In fact, these trends are
already driving operator behavior. More than 50% of
operators say that in the past three years they’ve added gluten-
free, vegan or all-natural items to their menus (see Figure 2).
60
Source: L.E.K. Foodservice Survey
health-Related Changes in Menus and Purchasing habits
50
30
0Perc
enta
ge
of
Res
po
nd
ents
wh
o h
ave
mad
e ch
ang
es
40
20
10
Figure 2
Glu
ten
Fre
e
Veg
etar
ian
o
r V
egan
All
Nat
ura
l
low
-Fat
low
-cal
ori
e
low
-car
b
lact
ose
Into
lera
nce
/ A
llerg
y Fr
ee
Free
Ran
ge
cat
tle
or
Pou
ltry
No
n-G
mo
5652 51
4947
41 41
34
28
consumer Purchasing Habits Have changed
menu change Implemented
Expected nominal growth Per Year in Food industry – By segment
Figure 1
100
80
40
-20
Perc
ent
of
Res
po
nd
ents
60
20
0
-40
Expected growth next 3 Years vs. Last 3 Years
Expect increase 76% 71% 77% 71% 74% 55% 76% 74%
Expect no
Change7% 18% 14% 11% 10% 36% 16% 12%
Expect Decrease 18% 11% 9% 18% 16% 9% 8% 14%
more than 7% Increase
4-7% Increase
1-3% Increase
No change
1-3% Decline
4-7% Decline
more than 7% Decline
Full service Quick service
Fast casual Pubs, clubs and Bars
Non- commercial
contract managers
Distributors All
Source: L.E.K. Foodservice Survey
ExEcutivE insights
l e k . c o minsights @ WORK®l.e.k. consulting / executive Insights
Operators also say they don’t think those shifts in consumer
tastes are going away anytime soon. The trend towards
farm-to-fork, for instance, is only expected to grow – and
rapidly (see Figure 3).
Meanwhile, the biggest obstacles to growth, operators told
us, would likely be on the cost side of the business, especially
labor and supply prices. Forty-four percent said they expect the
biggest stumbling block over the next three years will be higher
labor costs. Forty-one percent said the biggest headache would
be upward pressure on prices.
The Fallout from the Sysco-US Foods Deal: Fewer Choices and Higher Prices
Meanwhile the Sysco–US Foods deal is very much on operators’
minds (see Figure 4). If approved by regulators the deal will be
completed later this year.
The main decision maker at one small non-commercial opera-
tor told L.E.K. “Sysco has always been one to supply their
own labels and minimize the choices of alternative brands…”
Some operators believe that a hardball approach means not
only high prices for them, but also fewer of the kinds of
products customers want. The chief decision maker at a small
full-service restaurant said, “We will lose choice by being
pushed into private labels with higher profit margins for
distributors who are less concerned with local, sustainable
and artisanal products.”
The effects of the deal are already being felt. One small
restaurant operator noted, “[i]n our area, Quandt’s Foodservice
was bought up by US Foods. They have already dropped the
ice cream line we prefer, changed the portion size on our sliced
beef liver we have used for over 30 years, and we no longer
have access to some of our locally produced items.”
Sysco has acknowledged some operators will take their business
elsewhere, creating opportunities for other distributors and
second tier outlets, like Restaurant Depot. According to Sysco
CEO Bill Delaney, “Sysco and US Foods together collected about
27% of the revenue in the U.S. food-distribution market last
year. Some customers that use both Sysco and US Foods may
now look elsewhere to diversify their sourcing. As a result,
combined market share is expected to start out around 25%.”
50
Source: L.E.K. Foodservice Survey
Locally-sourced Food – By segment
40
25
0
Perc
ent
of
foo
d p
rod
uct
s so
urc
ed lo
cally
35
15
10
Figure 3
large
Three Years Ago
small commercial
contract managers
Distributors
45
30
20
5
Today Three Years From Now
31%30%
34%
30%
38%
47%
18%
29%
40%
24%
29%
34%
INDusTRY AVG. NeXT 3 YeARs (44%)
INDusTRY AVG. ToDAY (36%)
INDusTRY AVG. lAsT 3 YeARs (29%)
30
Source: L.E.K. Foodservice Survey
Effect of Us Foods Acquisition by sysco on industry Prices
25
15
0
Perc
ent
of
Res
po
nd
ents
20
10
5
Figure 4
Dec
reas
e b
y m
ore
th
an 7
%
Dec
reas
e b
y 5%
-7%
Dec
reas
e b
y 3%
-4%
Dec
reas
e b
y 1%
-2%
No
ch
ang
e
Incr
ease
by
1%-2
%
Incr
ease
by
3%-4
%
Incr
ease
by
5%-7
%
Incr
ease
by
mo
re t
han
7%
01
4
8
2627
21
9
5
AVeRAGe: INcReAse BY 1.5%
62%
ExEcutivE insights
l e k . c o minsights @ WORK®Page 4 l.e.k. consulting / executive Insights Volume XVI, Issue 21
L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of their respective owners.
© 2014 L.E.K. Consulting LLC
L.E.K. Consulting is a global management consulting firm that uses deep industry ex-pertise and analytical rigor to help clients solve their most critical business problems. Founded more than 30 years ago, L.E.K. employs more than 1,000 professionals in 22 offices across the Americas, Asia-Pacific and Europe. L.E.K. advises and supports global companies that are leaders in their industries – including the largest private and public sector organizations, private equity firms and emerging entrepreneurial businesses. L.E.K. helps business leaders consistently make better decisions, deliver improved business performance and create greater shareholder returns.
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insights @ WORK®
Operators to Manufacturers and Distributors: More Attention, Please
Operators told L.E.K. that they purchase private label products
from distributors mostly for commodities (eggs, fresh fruit and
vegetables, etc.) and brand name products for pre-prepared
and manufactured foods. Most said they purchased brands
mainly because consumers recognized and preferred them,
not because they were of higher quality than private labels.
But despite the expectation that a merged Sysco-US Foods will
be pushing private labels, few operators expect to be buying
significantly more private product over the next three years.
As for manufacturers, operators believe that food makers
aren’t paying enough attention to them. If manufacturers want
more of operators’ business they need to do three things:
1. “A better understanding of my needs”
2. “More customized solutions, less off–the-shelf”
3. “More frequent visits from manufacturer reps”
Digital promotions offer another way for manufacturers to
build stronger bonds with operators. Twenty-two percent
of operators told us they used digital coupons and blog
promotions, two effective yet underutilized online sales tools.
Now is a time of great opportunity and optimism in foodservice.
Operators are challenged to evolve their businesses to better
meet consumers’ needs and manage labor costs while
navigating a consolidating supply chain. At the same time,
manufacturers have an opportunity to better help operators
succeed in this complex landscape through a stronger
understanding of their needs and by delivering solutions
tailored to address their primary concerns. As always, deep
experience and knowledge of the players and the changing
dynamics will be necessary for success.