Recession Worsens Restaurant Outlook

MATTHEW ENIS

CHICAGO — The recession is taking another bite out of the restaurant industry.

Citing worsening economic conditions and increasing job losses, foodservice consultancy Technomic recently revised its nominal growth forecast for the U.S. foodservice industry down to negative 2.2% for the coming year. According to a report issued with the forecast, Technomic is expecting 2009 to be the worst year for the foodservice industry since the firm began tracking performance in 1972.

Full-service restaurants are expected to bear the brunt of the decline, with nominal growth falling 6.0%. The forecast for the travel and leisure sector is also grim, with Technomic anticipating a decline of 5.1%. Nominal growth at limited-service restaurants — a segment that includes quick-service restaurants, cafeterias and buffets — is expected to remain flat, but with these predictions assuming an inflation rate of 2.5% for the year, even that sector may experience declining volume.

Opinions are mixed regarding the impact that a protracted recession and a resulting decline in restaurant traffic will have on supermarket prepared foods departments, but some analysts have expressed pessimism.

Last week, during a conference call reviewing recent financial reports from publicly traded food retailers, Karen Short, an analyst for Friedman, Billings, Ramsey & Co., said that “food retailers are not seeing a lot of benefit from restaurant customers eating out less and going to the grocery store to buy prepared foods. What some companies have told us is that consumers who were eating out are still eating out, but trading down within the restaurant category. And consumers who were buying prepared food in the supermarket are now buying less prepared food and more ingredients.”

However, Ron Paul, founder and president of Technomic, told SN that the firm still views supermarket prepared-food departments as a “bright spot” in the foodservice industry. Company research indicated that prepared foods grew about 6% in 2008, and the firm expects continued growth this year.

“We see [dollar sales] growth slowing slightly in 2009 — to 4% — as some consumers trade back to lower-priced options, such as frozen dinners, for example.”

In a poll of 1,500 consumers taken by Technomic in 2008, about 20% said that they had been buying more ready-to-eat prepared foods from retail sources than they had during the prior year.

Paul added that, in general, Technomic expects to see more food purchased from retail outlets this year. And if unemployment continues to rise, restaurants may be hit especially hard during lunchtime, with food retailers being the beneficiaries.

“If you're not working and you're not away from home, going out to eat for lunch may not be a very convenient option, if nothing else,” he said.

“But pure cooking, from an ingredient point of view? We don't see that happening. That's not something that most customers will get back to doing. They'd rather open a frozen-food package and microwave it, or open a can of soup or chili — something that's still convenient to prepare. It may be of lesser quality than they would like to have, but it's a less expensive option.”

In a potentially hopeful sign for sandwich programs at supermarket delis, the limited-service sandwich segment has also continued to grow during the downturn. Paul said that category leader Subway — which enjoyed more than $8 billion in sales in 2007 — was partly responsible for the segment's resilience.

“All you have to do is look at Subway and their pricing — the $5 foot-long subs,” he said. “That's quite a value for consumers. So, as long as that's a viable option, they're not going to move away from that. But, again, that's more likely to be a factor for those consumers that are out and about, rather than unemployed, sitting at home.”