SUPERMARKETS LOSING TO FOOD SERVICE: STUDY

JANIN FRIEND

DALLAS (FNS) -- Although some fresh departments in supermarkets are showing a modest increase in growth, food service is still capturing the lion's share of consumer food spending, according to a study presented at the Dairy Foods Industry Convention here last week.

"As an industry, supermarkets will lose," said Jevin Seth Eagle, an associate with the Chicago office of McKinsey & Co., which did the study for the International Dairy Foods Association. "The report is a wake-up call for supermarkets."

Prepared food and deli sections in supermarkets are expected to capture 11.8% of the $100 billion in growth in total U.S. food expenditures during the next decade, bringing their total share of the market from 1% to 3%, the study revealed.

But that growth doesn't offset projected declines in the rest of the supermarket, where the share of U.S. consumer food and beverage spending is predicted to fall from 40% in 1995 to 36% in the year 2005 as fewer people cook and turn instead to takeout food. "The dramatic shift of food spending away from grocery toward food service over the past decade will accelerate through the beginning of the next century," the report said.

Commercial food-service groups from fast-food restaurants to "home meal replacement" operators are expected to net the vast majority of the growth and secure 41% of overall food expenditures by the year 2005, compared with 35% in 1995, according to the study.

Eagle and another McKinsey associate, Robbin Mitchell, talked about the study with SN after Eagle's general session speech, "Foodservice 2005: Satisfying America's Changing Appetite."

They encouraged supermarkets to lower costs and enhance convenience to consumers, particularly the 25% of customers who are out shopping for that night's dinner. For example, supermarkets could provide advance ordering, separate parking for deli and home meal replacement sections, separate checkout lines and drive-through operations, Mitchell said.

Overall, the entire food-service industry is predicted to grow an average of 1.6% annually during the next decade, from $685 billion in 1995 to $785 billion in the year 2005. Of that $100 billion, commercial food services, including fast-food and home meal replacement operations, would achieve $80 billion in growth, and supermarkets almost $12 billion.

The No. 1 winner would be kiosks of fast-food chains with a limited menu, grabbing 15.8% of the growth; in second place would be home meal replacement groups, such as Boston Chicken and Eatzi's Market, capturing 13.5% of the growth, according to the food-service study.

Prepared meal/food and deli sections of supermarkets are projected to be No. 3, with 11.8% share of the growth, ahead of table-service restaurant chains, such as Chili's, that are expected to gain 5.1%, and fast-food chains (excluding kiosks), expected to gain 2.9%, study results indicate. Losers include convenience stores and limited table-service restaurants, like buffets or cafeterias.

The "Foodservice 2005" study bases its projections on several trends. One is that Americans are cooking fewer meals. For example, the study said, American consumers ate about 40 billion more meals or snacks per year in 1995 than they did in 1985, and of these, 30 billion "eating occasions" were consumed away from home, chopping away at the supermarkets' share of the business.

In 1985, supermarkets had 42% of total U.S. consumer food expenditures, compared with 40% in 1995, while supermarket prepared food sections, as a separate category, stayed even with 1% of the total in the past decade, according to the study. Except for the prepared food sections of supermarkets, which will see an increase, losses in market share by supermarkets will accelerate as certain trends become more pronounced.

By the year 2005, the population will have shifted significantly toward older groups, who will spend more on food and are likely to eat more food away from home, the study said. Specifically, the percentage of people who are 45 or older will grow from 32% to 38% of the population.

The average consumer now eats 27% of his or her meals outside the home, Mitchell said, and that figure is expected to grow, although no prediction was made in the study. Cooking from scratch is also diminishing; many consumers in 2005 will have never cooked a meal from basic ingredients, the report concludes.

To cope, Mitchell said, supermarkets and other food providers will need to do some fresh thinking, with experimentation an important part of that process. The report points to some of the challenges for supermarkets, which are expected to hold 7% of the food-service market by the year 2005.

"Few grocers have figured out how to make money in prepared foods, although most are trying," the report said. "The majority of grocers that we assessed with extensive prepared foods businesses are either struggling to break even or operating on thin margins.

"They face high preparation costs, driven largely by union wage rates. Food costs are also high, partly attributed to high waste levels," the report continued. "Overall, supermarkets are still working to modify their traditional business systems in order to better serve the prepared food market."

Some supermarkets have hired skilled workers or trained chefs to prepare meals in the store, but the cost for meal preparation is twice the cost of the deli and only works for stores capable of developing significant prepared food volume, according to the report.

The information in the report was based on 50 industry interviews and 100 consumer interviews as well as research on demographics and market information.