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Technomic: Don’t call it a recovery, yet

Outlook not as bright as expected, but opportunities for growth, differentiation exist

Both restaurants and the consumers they serve have yet to feel the economic recovery many had expected, according to data and analysis from the research firm Technomic Inc., which presented new research Wednesday at its 2011 Trends & Directions conference in Chicago.

Holding restaurants back is increased costs, while consumers are faced with negative economic indicators from housing to unemployment figures and gas prices. According to Technomic surveys this spring, fewer consumers than last year think the economy will recover, and more consumers think the economy will worsen. From a restaurant operators perspective, Technomic said just one in five reported that they had felt a recovery from the recession.

But opportunities do exist in this environment, according to Technomic executive vice president Darren Tristano.

“In an economically difficult time, you actually have more control …,” he said. “There are a lot of opportunities to differentiate your brand that create value. So while everyone is still looking at price before quality of food, a differentiated brand is the best way to succeed. That means investing in your brand, whether it’s remodels or menu innovation, versus discounting.”

The latest Technomic industry forecast estimates that real, or non-inflation adjusted, 2011 total restaurant sales growth will fall 0.8 percent, a deeper decline than originally projected last fall, when restaurants’ real growth rate was expected to decrease 0.4 percent. The inflation expectations were adjusted between last year and this summer, once estimated at 2 percent and now at 3.5 percent.

The real growth rate for the full foodservice industry will fall 0.6 percent, according to the latest estimate, compared with earlier projections of a dip of 0.3 percent, Technomic data shows.

On a nominal basis, which assumes menu price inflation, the restaurant sector is expected to grow 2.6 percent, while total foodservice will grow 2.8 percent. Those expectations are improved from the growth estimates of 1.6 percent and 1.7 percent, respectively, calculated last fall.

The rising menu price inflation rate reflects restaurants’ recent moves to raise prices as food costs increase. The move is tricky in a down economy, but not an impossible one. Technomic even said consumers understand the need to increase prices.

Sixty-one percent of consumers who responded to an April Technomic survey noticed higher prices at restaurants, compared with 81 percent who notice higher grocery store prices. Those who do notice the differences in price, blame macroeconomic factors, not the restaurants themselves, Technomic said.

“When we ask people why restaurants have raised prices, only one in 10 think it’s because [the industry is] greedy and wants to make more money off them,” Melissa Wilson, a technomic analyst said.

When asked what is behind higher menu prices, 69 percent of respondents said higher gas prices are to blame, while 62 percent point to the cost of ingredients, 43 percent say it’s the state of the overall economy, and 42 percent blame the increasing price of energy.

While escalating food costs and consumer malaise still dominates, general trends showing industry improvement do exist, both in 2010 and 2011. The industry saw some sales recovery in 2010, compared with 2009, Technomic said, although the 500 largest chains reaped most of those gains, often at the expense of smaller chains and independents. Aggregate sales for the largest 500 chains rose 1.8 percent in 2010. All other foodservice brands outside that top cohort logged a collective sales decrease of 2.2 percent.

“If you were not in that top 500 group, on average you were still down in 2010, so the message is it’s an improving situation but not a growth situation for the industry overall,” Ron Paul, president of Techmomic, said at the conference.

Technomic data also showed that just one in five surveyed operators reported that they had felt a recovery from the recession.

Paul did note a positive sign — the industry’s employment picture, which improved by 2.1 percent in May, from the same month last year.

“If we make the assumption that none of you would add employees unless you think you need to and can afford to, this says that the industry is definitely seeing a recovery,” Paul said, speaking to a group of restaurant operators. “Some of you for sure are seeing growth or wouldn’t be adding people.”

The new consumer

Technomic analysts also discussed the attitudes of the post-recession customer, based on several consumer surveys conducted by the firm in the past several months.

Compared with how they felt in December 2010, consumers reported in April 2011 that the economic recovery they were expecting didn’t materialize. In 2010, 36 percents of respondents said they expected the economy to improve, but that number fell to 21 percent by April of this year. Similarly, the percentage of people saying they thought the economy would worsen rose from 29 percent in December 2010 to 50 percent in April 2011.

The decline is resulting from lackluster economic indicators, like lower jobs numbers and housing prices, combined with higher gas prices, according to Sara Monnette, a Technomic analyst.

“While this all comes across as bad news, we should also look at it as an opportunity to understand the consumer,” she said.

Wilson added that consumers say they expect to change their spending behavior at restaurants, but that isn’t always what they end up doing, “as we’ve seen with attitudes toward health and nutrition.” While many will visit restaurants less or spend less while they’re there, few will stop going out to eat altogether.

Based on consumer survey responses this year, only 5 percent of customers stopped eating at restaurants completely. Thirty-five percent are going out to eat as often as before, but they’re spending less or looking for more deals. Meanwhile, 30 percent of consumers are going to restaurants closer to home to save on gas, and 40 percent are making fewer special trips to restaurants, preferring to eat out only when they’re already away from home for other errands.

One of the major ways customers have cut back their spending at restaurants to offset price increases is to stop ordering “extras” like appetizers, desserts and alcoholic beverages.

“The tactics to successfully address these are really evolving,” Monnette said. “Restaurants tend to focus on flavor innovation around these menu parts, and they’re using more tiered pricing and portions.”

Wilson added that there are two converging forces right now that make it a good time to consider changing portion sizes as a way to engineer value.

“Consumers have used smaller portions as an excuse to cut back on spending,” she said. “They may say it’s to order something healthier, but the real reason is to spend less. On the operator side, they have been able to add smaller-portion items to the menu and say it’s because of nutrition labeling and health and wellness, but it’s an opportunity to add lower price points without the appearance of discounting.”

Contact Mark Brandau at [email protected].
Follow him on Twitter: @Mark_from_NRN

Contact Sarah Lockyer at [email protected].
Follow her on Twitter: @slockyerNRN

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