What a difference a year makes. According to the National Restaurant Association, one year ago, only 9 percent of its members rated the economy as their top business challenge. Today, 40 percent of the NRA members surveyed said the economy is their top concern.

“You can see how dramatically the landscape has changed,” says Hudson Riehle, senior vice president of research and information services for the National Restaurant Association.

Indeed the foodservice equipment and supplies industry landscape has changed considerably in just 12 months. A year ago, the industries experiencing the greatest pain were those tied to the financial and housing markets and economists were debating whether the U.S. economy had entered a recessionary period. Now it’s widely accepted that the economy’s in a recession, one that promises to be deeper and wider than any the United States has experienced in the past 50 years.

“Bottom line, this is a lousy economy and it has been and will remain that way for a while,” says Ken Goldstein, an economist with The Conference Board.

A variety of factors are working together to make this downturn last longer than previous ones. “The dynamic here is a double-squeeze. There’s pressure on the household budget and the business, too,” Goldstein says. “And that’s a squeeze that’s not going to get any relief for the next 12 months.”

In fact, Goldstein predicts things will get worse before they get better. Unemployment is one area that may face increased pressure. “Even if we get to 7.5-percent unemployment, it means that 92.5 percent of the people will still be employed,” he adds.

So, has the economy bottomed out yet? “I think we’re getting close to hitting bottom,” says Darren Tristano, executive vice president for Chicago-based market research firm Technomic. “We’ve seen a big change in the stock market and a big change in the way we look at the value of our home and the way we take equity out. So, people are going to start living off what they earned as opposed to what they have earned in the appreciation of their homes or retirement funds. Our credit consciousness will increase.”

The one question most anyone wants answered is when will it end? The good news is that the end may be growing near. The bad news is that it will take longer than people would like. “We are going to be better in 2010,” Goldstein says. “This is not going to go on forever.”

Take the Good with the Bad

So, where does this leave the foodservice industry? “I think it’s important to put 2008 in perspective when compared to the previous three or four decades,” Riehle says. “It is also important to note that sales on a current dollar basis still continue to advance.”

Specifically, Riehle points out that October was a record-high sales volume month for the industry. Simultaneously, at 4.3 percent, menu price inflation is running at its highest rate since 1990. “That’s below grocery store price inflation and general inflation,” he adds. “It is still a high rate and consequently the sales advances that are occurring are a reflection of a higher menu price environment.”

The net result is that when all the math is done, 2008 will most likely represent the industry’s first real-term sales decline since 1991, Riehle says. Even 2001, considered one of the leaner years by foodservice standards, saw the industry post a modest gain in real-term sales. “Depending on what segment you are looking at, 2008 has been one of the most challenging ones for the restaurant industry since the early 1980s,” Riehle says.

So, where’s the good to accompany all this bad? Well, Riehle projects that 2009 will be better than 2008, relatively speaking. The NRA is forecasting menu price inflation will drop to 3.6 percent for 2009, which represents a slight improvement. “In historical perspective, that’s still pretty elevated, though,” Riehle says. Moreover, Riehle points out that in previous years, menu price inflation would hover in the 1-percent to 3-percent range. Although the inflationary pressures will ease ever so slightly, Riehle and the NRA do not project that will be enough to keep the industry from experiencing another real sales decline in 2009.

The consumer will be the central figure triggering any form of recovery for the foodservice industry. Exactly how long it will take for the rebound to kick in is anybody’s guess. “It’s important to note that this is forced upon the consumer and not their own doing,” Riehle says. “Consumers love to use restaurants but their cash-on-hand situation is really stressed. Once that stress is relieved, they will step-up their restaurant usage and patronage.”

Backing up the NRA’s relative optimism, is the fact that the association’s research indicates that 48 percent of the consumers’ food dollar is spent on items prepared away from the home and feels this will remain the long-term trend. “Obviously, the at-home market can enjoy a temporary boost based on consumers pulling back on the number of times they frequent restaurants,” Riehle adds.

Indeed, there’s no denying that the challenges of the day may continue to inspire people to eat more frequently in the home. “And they will learn to enjoy it,” Tristano says. “This will mean more than the convenience and savings of this. They will see the value of being at home.”

While consumers’ appetite for food prepared away from the home remains healthy, the lousy economic conditions may have forced them to change how they satisfy their hunger. “We are getting in the habit of eating at limited-service restaurants, so I think this is going to benefit that segment more,” Tristano says. “If I am able to live on one cup of coffee, why do I need two? People have taught themselves to live with less so as a result they are not going to rush back to their older habits just because the economy is improving.”

Regardless, the economic challenges of the day have made consumers place a greater emphasis on what they perceive to be as valuable. “This could include tapping into any of the countless of value promotions out there,” Tristano says. “We are seeing a return to comfort foods such as pasta and meatloaf. They are high-value and fill you up.”

Of course, foodservice operators need to be careful in terms of how they frame the concept of value in their customers’ eyes. “The savvy restaurant operators don’t back off price points that much,” Riehle says. “They understand it’s important to get their regular customers into their establishments more frequently and many will do that in the form of frequent diner programs.”

The Role of the Consumer

The mind-set of the average consumer continues to be pretty volatile. “The customer is not just wary or pessimistic about the economy,” Goldstein says. “They are also frustrated and who do they take it out on? The person taking their order.”

According to Goldstein, consumers want to know: Why is the recession taking so long? Why did it have to be this bad? Why couldn’t it have been someone other than us? Understanding customers’ state of mind is key to getting things moving in a positive direction.

“The whole reason to talk about this is that there’s a direct correlation between people’s emotions and what they spend,” Goldstein says. “It’s no longer about housing or gasoline, at least for now. Therefore, that level of frustration is coming out during that trip to the supermarket every week. And fewer of us are making that trip to the restaurant each week.”

Still, it does seem as if some consumers remain surprised that the general global economy and the United States in particular, did not continue to flourish in perpetuity. “I don’t know that we convinced ourselves that there would never be hard times or a soft economy,” Goldstein says. “They felt we could handle it and work our way out of it to get to the good times. We never thought it would get this bad or last this long. And that last part, I believe, is realistic.”

Business Feels the Credit Crunch, Too

Further exacerbating an already challenging business environment is a skittish credit market. “Part of the problem is that business is losing money, on average,” Goldstein says. “Therefore, just as consumers don’t have the ability to go out and eat at a fancy restaurant, there’s a reluctance on the part of businesses to go out and borrow. And even those who are willing to borrow are having trouble finding banks that will loan them the money. That’s why this is deeper and lasting longer than most recessions do.”

As a result, franchisors will have to lend franchisees money or pay for new equipment if they plan to roll out menu items that require new or specialty pieces of equipment, Tristano adds. And if a chain has trouble getting capital, purchasing new equipment will be a struggle. This could lead to an increased emphasis on maintenance contracts for existing pieces of equipment.

Operators will start to ask other questions, too, according to Tristano. “How do we extend the life of some of the things that we use that create cost?” will certainly be top of mind. This line of thought may spur other changes to foodservice equipment.

“What we are going to start to see is equipment designed to prolong the life of ingredients, like oil,” Tristano predicts. “And we are going to see equipment that will allow for healthier eating.”

For the time being, though, foodservice operators, particularly multi-unit ones, will chart their success in terms of unit economics instead of actually adding lots of stores. “It’s going to be a difference maker,” Tristano says. “When your demand decreases and you are not able to achieve those revenues you are not accustomed to and you can’t grow the way you want, you are stuck. So, your unit economics become something you can really control. It’s a lot easier to budget your costs than to project your sales. So, it becomes survival of the fittest.”

As part of this emphasis on unit economics, operators will most likely place a greater importance on creating a favorable customer experience. “They will focus on everything: the service, the décor, the music, the food, everything. The customers’ experience is what will keep them coming back,” says Tristano, who also anticipates seeing operators placing an increased emphasis on limited-time offers as a way to drive traffic.

This also creates an opportunity for foodservice equipment and supplies dealers and manufacturers to forge a closer working relationship with their customers. “It’s really much more of a cooperative relationship,” Riehle says. “You see many more instances of the supplier and operator working together to make sure the operator remains viable.”

Some examples include cutting back on the number of drops a supplier makes at a customer’s back door or innovative credit and financing options where possible. “In this environment, traditional sources of credit are not there so this becomes a 'win-win’ for both parties,” Riehle says.

And this opens up other doors for foodservice equipment and supplies dealers. “It’s a big opportunity for private-label suppliers to make some progress,” Tristano says. “That’s because private-label represents an opportunity for foodservice operators to trade down and save some money.”

Signs of a Rebound

It’s highly unlikely that once the economy starts to rebound that anyone will hold a ceremony officially marking that auspicious occasion. That’s why it’s important for business leaders, particularly those in foodservice, an industry inextricably linked to consumer consumption, to know what to look for in a recovery.

One of the first signs the economy is improving will be pretty obvious, particularly to the foodservice equipment dealers and manufacturers. “Certainly, we will have to see the credit markets come back to life and see folks borrowing money to invest in equipment or buy a car,” Goldstein says.

Odd as it may seem, prices increasing represent another sign that the economy is starting to gain strength, according to Goldstein. “That will mean some relief in terms of margins and will allow business to borrow,” Goldstein says.

Also, because this is a global recession, and not something unique to the United States, any foreign economy moving forward may be another sign that conditions are improving. “That might set the stage for the rest of the world,” Goldstein says. “Although this is a global recession, we were the first to weaken because of our housing market.”

Taking a more micro look at things, the NRA’s Restaurant Performance Index should provide a good indicator of how the foodservice industry continues to fare. The index achieving a rating of 100 or more will be a sure sign of recovery.

Paying attention to foodservice industry employment levels is another good statistic to monitor. Overall, in 2008 the foodserviceindustry reported average annual employment of 13.1 million people, according to the NRA’s Riehle. And in 2009, the NRA projects that figure will edge up slightly to 13.2 million. “So, the rate of growth for the industry overall has moderated but it’s still positive,” says Riehle, also noting that July was the first month where industry employment turned negative.

Everyone agrees that on a macro level, increased consumer confidence will be critical to triggering an economic renaissance. “Anxious consumers do not spend freely,” Riehle says. “Once consumer confidence and employment opportunities improve, it means consumer spending habits will improve.”

In the interim, the economy has received some relief in the form of lower gas prices. “Each cent decline in gas prices at the retail level is an equivalent of $1.4 billion in economic stimulus,” Riehle says. “And that’s bigger than the 2008 second-quarter economic stimulus. We certainly don’t expect gas prices to stay where they are currently but there’s nothing on the horizon to indicate that they would reach where they were last summer.”

Indeed, those families still have to contend with rising costs in other places. “We’re back to filling up the gas tank for $20 but the rest of the money saved is now going into the grocery cart,” Goldstein says. “And that’s not going to change. In fact, it will probably get more expensive to fill that grocery cart to the tune of 2 percent to 3 percent. Your average consumer has been in and remains in a mode where they will pay the mortgage, car note, utility bill and put food on the table. Everything else remains on hold.

“In terms of the average family budget and how much of it is tied up in the grocery cart and gas tank, are the main reasons why consumer confidence will not go up in the next 12 months,” Goldstein says.

There’s little doubt that all businesses, specifically the foodservice community, will continue to monitor the transition to power of President-elect Barack Obama, who takes office later this month. Of particular interest will remain what steps the Obama Administration will take to first stabilize and then stimulate the economy.

“They are going to come up with some new and different ideas,” Goldstein says. “What works they are going to keep and what doesn’t they are going to be fast to change. And that’s probably most appropriate for now. This group is going to tinker. They are not going to sit back.

“First, you get this thing back on track,” Goldstein adds. “Then you worry about inflation or the deficit or taxes.”

Few would argue that stimulating demand is key to any kind of economic rebound. “Obviously, there will be an economic stimulus package but the breadth and depth of it is not clear,” Riehle says. “Hopefully, it is directed toward increasing employment because employed people have a heightened demand for foodservice.” Specifically, employed people tend to have more money to spend and their fuller schedules make the convenience aspect more appealing.

Undoubtedly, individual members of the foodservice industry are anxiously awaiting a return to a time where the economy moved more freely than it does today. But it’s important for them to be patient in plotting their comeback. “There’s no silver bullet or magic pill,” Goldstein says. “It’s not going to be quick or painless.”

Still, it’s important for foodservice companies to put this presumably slower period to good use. “They should use this time to strategize,” Goldstein says. “They should ask themselves: 'What are we going to continue? What are we going to stop? What are we going to invest in to make money when the economy is in better shape?’”

Over the next few pages, we hope to provide some answers to those questions by sharing the data from our 2009 Foodservice Industry Forecast Study. The following sections contain results from our foodservice operator and dealer studies. The manufacturer data is available on our web site.

Operators

Last year presented foodservice operators with a mixed bag of results. For 19.4 percent, 2008 sales were better than expected. Another 45.2 percent of operators surveyed indicated last year’s sales performance was about what they expected, while 35.3 percent felt their results were worse than anticipated.

When examining sales results from the perspective of commercial operators and non-commercial, the picture changes slightly. Both segments reported similar results when asked if sales exceeded their expectations. A solid 65 percent of non-commercial operators felt sales met their expectations, compared to only 32.1 percent of commercial operators. And 48.1 percent of commercial operators report that 2008 sales were worse than expected, compared to only 16.4 percent of non-commercial operators.

Looking more closely at sales volume, it becomes apparent that commercial and non-commercial foodservice operators had slightly different experiences last year. For example, 45.5 percent of non-commercial operators reported an increase in sales volume last year, compared to only 31.3 percent of commercial operators. In contrast, 44.7 percent of commercial operators reported a decrease in sales, compared to 24.4 percent of non-commercial operators.

Among those commercial operators reporting an increase in sales, the average is 12.58 percent. Independent operators fared better than chains, reporting average increases of 14.81 percent to 7.53 percent. For the non-commercial operators reporting an increase, the average is 9.88 percent.

Looking at those foodservice operators reporting a decrease in sales, the average reported was 14.39 percent for commercial establishments and 11.9 percent for non-commercial. Independent operators, at 15.33 percent, reported a slightly higher average decline in sales than chains, 12.45 percent.

Profitability, a metric important to most any business, remains top-of-mind for foodservice operators, too. In 2008 a similar amount of commercial (29.8 percent) and non-commercial (30.4 percent) report their gross profits increased by an average of 11.73 percent and 8.12 percent, respectively. In contrast, 44.2 percent of commercial operators and 28.5 percent of non-commercial operators reported a dip in gross profits. The average decline among these segments was 12.4 percent and 15.56 percent for commercial and non-commercial, respectively. Finally, 26 percent of commercial operators and 41.1 percent of non-commercial operators reported their 2008 gross profits remained consistent with 2007 levels.

Turning to 2009, our data indicates that operators see the foodservice market stabilizing. Similar percentages of commercial (40.9) and non-commercial (38.8) anticipate an increase in sales. In addition, 37.8 percent of commercial operators and 46.7 percent of non-commercial operators project their sales will remain consistent with 2008 levels. Only 21.3 percent of commercial operators and 14.5 percent of non-commercial operators anticipate a dip in sales. Among those companies anticipating an increase in sales, the average is 10 percent for commercial operators and 5 percent for non-commercial.

Generally speaking, operators seem to feel gross profits will stabilize, too, with 81.6 percent of commercial operators reporting they expected this metric to stay the same (43.4 percent) or increase (37.2 percent). Only 19.4 percent of commercial operators surveyed expect their gross profits to decline from 2008 levels. Looking at non-commercial operators, 83 percent estimate their gross profit will remain the same (55.2 percent) or increase (27.8 percent) compared to 2008 levels. Only 17 percent of non-commercial operators surveyed project a decline in gross profit. Among those companies projecting an increase in gross profit, the average is 6.5 percent for commercial operators and 5 percent for non-commercial.

Perhaps part of the reason operators see gross profits stabilizing is that they seem to have a grasp of some issues that affect their business. For example, 72.8 percent indicated they have (45.7 percent) or plan to (27.1 percent) pass along increases in commodity prices and other operating expenses to their customers.

With respect to budgeting, operators seem to be taking a conservative but steady approach. For example, 43.1 percent of commercial operators project their equipment and supplies expenditures will remain consistent with 2008 levels, while 17.8 percent even project a slight increase. Still, 39.1 percent of commercial operators project a decrease in equipment and supplies expenditures. Looking at non-commercial operators, 69.9 percent project their expenditures will stay the same (39.4 percent) or increase (30.5 percent). Also, 30 percent of non-commercial operators expect their equipment and supplies expenditures to decrease in the coming year.

Dealer Outlook

Without a doubt, last year was a challenging one for foodservice equipment dealers and the results from our 2009 Forecast Study further support this point. Only 56.1 percent of dealers reported an increase in sales for 2008, compared to 72 percent the previous year. In addition, 20.3 percent of dealers surveyed reported a decline in sales, compared to only 13 percent last year. And 23.6 percent of dealers report that 2008 sales remained consistent with 2007 levels. In last year’s study, the percent of dealers reporting flat sales totaled 15 percent. Among those dealerships reporting an increase in sales, the average rate was 16.43 percent, also down from last year’s 19.13 percent. The average decrease among dealers was 13.97 percent compared to 10.83 percent last year.

Interestingly enough, these more somber results seemed to fall into line with what dealers expected. According to our study, 71.6 percent of dealers said their sales were about what they expected (50.6 percent) or better than anticipated. Rounding out this segment, 28.4 percent of dealers indicated sales failed to meet their expectations. Last year, 89 percent of dealers felt 2007 sales exceeded (44 percent) or met (45 percent) their expectations.

Heading into this year, dealer expectations seem pretty well-grounded relative to recent years. For example, only 39.5 percent of dealers project an increase in sales for the coming year, compared to 78 percent last year. An even larger 42.9 percent of dealers expect sales to stay the same this year, compared to 16.9 percent a year ago. Also, 17.7 percent of dealers anticipate a dip in sales for 2009, which does represent a sizable increase compared to the 5.1 percent who had that feeling in 2008.

Among dealers projecting an increase in sales for 2009, the average rate is 16.61 percent compared to 14.23 percent.

Much like sales expectations, dealers’ gross profit projections have shifted over the past year. For 2009, 33.1 percent of dealers project an increase in gross profits, a sharp decline over last year where 60 percent of dealers projected an up-tick in this important metric. In addition, 42.6 percent of dealers project that gross profits will remain consistent with last year’s levels, while 24.3 percent project a decrease. Last year, only 18 percent projected gross profits would remain the same and 12 percent projected a decrease. Among those companies projecting an increase in gross profits, the average growth rate is 13.27 percent.

It is interesting to note that among those companies projecting a sales increase, 52.6 percent cited design/build projects as the factor most responsible for their growth. This was followed by replacement business at 33.3 percent and renovations at 14 percent. Dealers’ expectations regarding sales generated by renovations seem to be in line with operators, who do not anticipate doing much in 2009.

Like operators, foodservice equipment and supplies dealers saw prices increase across the board last year and 86.9 percent of them have already passed them along to their customers. Another 9.7 percent plan to pass the costs along this year. The most direct way dealers have passed these costs along to their customers is in the form of higher prices, according to 87.1 percent of those participating in this survey. Also, 28.8 percent increased the minimum amount for delivery and 22.3 percent placed a fuel surcharge on all deliveries.

Top Three Operator Responses to the Down Economy