The food-service industry is set for "staggering" growth in the next decade, and supermarkets will have to make major operational changes to participate, said industry experts reacting to new research on the food-service market conducted by McKinsey & Co. and released last month.
As reported in the Sept. 30 issue of SN, the report from the New York-based research firm McKinsey projects that supermarkets' piece of the total food-service sales pie will grow at an annual rate of 11.8%, and hit $28 billion in 10 years.
Two other segments are pegged for a higher rate of growth than supermarkets: limited menu chains' kiosks with a 15.8% annual growth rate and broader menu (home meal replacement) operators with 13.5%.
It is a golden opportunity for supermarkets, but one likely to become reality only if retailers start thinking and acting more like food-service operators, industry executives told SN.
They said the research also points out that to meet consumers' complex demands for quality, variety, convenience and value, supermarkets must reduce their costs and hit price points that are "moderate premium" vs. fast-food chains' prices, and equal to HMR chains' prices.
The research hammered home the notion that food service is a critical issue for every entity that sells food. While the total food industry is expected to approach $800 billion in sales by 2005, food service alone is projected to capture up to 100% of any incremental growth, the report says.
The McKinsey data was introduced at Falls Church, Va.-based Food Distributors International's Midyear Executive Conference in Hilton Head, S.C., last month, where a panel commented on the research's implications. In addition, SN interviewed other experts familiar with the report to help put the findings into perspective.
The speed of growth in food-service sales anticipated by the study came as a surprise even to industry experts who were already well aware that a major shift was taking place.
"The figures in the study that show food service claiming at least $80 billion of the $100 billion in incremental food sales between now and 2005 are a staggering statistic, I think," said Robert Emmons, chairman of Smart & Final, Vernon, Calif.
Industry experts told SN the study indicates that supermarkets must quickly make significant changes -- in format, merchandising, marketing and accounting practices -- to get their share of the consumer's food dollar.
Creative merchandising could go a long way to getting retailers into the game quickly, said Robert Stauth, chairman and chief executive officer of Fleming Cos., Oklahoma City.
"We're challenging our stores to become as modular as possible. We're going to have to find plug-in module display cases so we can move cases around [to reconfigure the interior of the store] instead of doing whole remodels," Stauth said.
"I think we've missed the trend over the last few years, but there's going to be a big response from supermarkets to these figures," he added.
Just about all the industry experts suggested that independents and small regional chains have an edge when it comes to responding quickly to the trend. Less bureaucracy and closer relationships with distributors were cited as elements that could give them an edge.
"For those of us in the supermarket business, the study is a distinct wake-up call," said Emmons of Smart & Final. "Chains are beginning to think in terms of a smaller box and combinations of a store and restaurant. Supermarkets will have to make format changes if they're going to participate in the consumer trends. We can't change societal trends, but we can participate in them.
"Restaurants have been responding. Here in southern California, you can get a hot meal delivered from a restaurant now," Emmons added as a warning.
Among the changes to be considered by supermarkets are drive-up windows or delivery operations, he said.
"I think supermarkets have an edge. They can produce a meal that's a cut above the quick-service restaurant and at a better price than a [table-service] restaurant. They just need to give a more significant role to meal solutions [in their operations]," he said. "I think the 78,000-square-foot store could easily drop back to 60,000 [for traditional grocery items] in order to make room for a meals center."
The executive said a meals center, whatever its format, could provide the differentiation that supermarkets are always striving for.
Immediate past chairman of the International Foodservice Distributors Association, Falls Church, Va., Emmons was one of the leaders instrumental in getting the study under way. He said it was imperative that some research be done on what consumers will be wanting in the long term, so the food industry could gear up to respond.
"In dealing with various segments of the industry, I'd found there was too much attention on short-term planning and not enough attention being paid to the massive changes taking place in consumers' lives," he said.
John Gray, executive director of IFDA, agreed. "I think we've all missed the boat because we weren't ready for today's consumer. The figures are pretty astounding. Consumers are driving these changes, not our efficiency efforts," Gray said.
"And along with that, the actual cost of eating a meal out has gone down. You've got that trend you don't usually think of," Gray added. He suggested that there are probably new formats now meeting consumers' needs in particular areas -- run by operators that haven't made the national news yet.
"You can bet there are other concepts out there that we haven't heard about that are addressing home meal replacement. Boston Market is just the tip of the iceberg," he said.
"For supermarkets, it's going to take real thinking out of the box -- literally. How do they make it convenient for consumers to pick up a meal from them? How can supermarkets compete with the commercial food-service industry? Can they provide short-term parking? It's been made very clear what the consumer wants, and it'll be a challenge for supermarkets to respond," Gray said.
"This study is about understanding what's going on in the consumers' minds and seeing how, with a particular format, you can give them what they want," said Patrick Kiernan, senior vice president for industry relations at Grocery Manufacturers of America, Washington. "It also underscored that the migration away from scratch cooking to buying meals already prepared is unstoppable.
"The report shows that between 0.5% and 1.5% per year of food dollars will be siphoned off by the food-service industry. That may sound glacially slow, but the fact is that that percentage would fundamentally change the profit economics of the grocery industry," Kiernan said.
That means that for the supermarket industry to keep its share of the consumer food dollar, it will have to focus its attention on selling prepared foods. Its innovators are doing so, he added.
"The best of class grocery stores, such as Ukrop's, devote only 40% [of store space] to traditional dry goods and nonfood. The rest is fresh foods. They're already there," he said. Traditional supermarkets, meanwhile, still have more than half of their space devoted to dry goods and nonfood, he said.
Retailers will also have to switch their accounting systems for prepared foods, to more closely resemble those used in the food-service industry, he said. "I think the traditional grocery store is still managing markdowns, and if they transfer that retail accounting system -- which is a limiter of sales -- to full-line food-service programs, it won't work," Kiernan said.
The study was sponsored by the International Foodservice Distributors Association, Food Distributors International, Grocery Manufacturers of America, International Foodservice Manufacturers Association, International Food Brokers Association and 11 manufacturers.