The food service boom rolls on
Elsevier Food International, Vol.9, Number 4, November 2006 Christiane Weinberger
Food service remains a boom industry - between 2005 and 2010, Planet Retail estimates that global foodservice sales will increase, on average, by six per cent annually to US$2,474 billion in 2010. Facts driving this growth are increased outsourcing efforts by companies, more mobile lifestyles, economic recovery helping the hotel industry and more, albeit smaller, households underpinning an increase in restaurant visits.
Three regions are principally behind the growth, namely North America, Europe and Asia Pacific. Established markets in these regions will continue to show healthy growth rates, although the highest rates will be generated by new and emerging markets including the BRIC countries (Brazil, Russia, India and China).
With the exception of China, the world’s third largest foodservice market, these markets are relatively small when viewed in a global perspective. Nevertheless, smaller-sized foodservice markets are able to increase sales a lot faster than established markets. Since the base of growth is lower, growth can be faster than in a market like the USA that reported foodservice sales of more than US$500 billion in 2005.
Driven by the USA, the world’s largest foodservice market, North America will see its share of the global market increase to 30.0 per cent in 2010. Foodservice sales reached US$500 billion in 2005 and are expected to climb to an estimated US$685 billion in 2010. The American restaurant business is characterised by a decline in demand for fast food, a sector which will need to reinvent itself to match historic growth levels. The need for change has been prompted by increased concerns over obesity levels and meat safety issues. The fast food operators have responded with healthier menu introductions.
Asia Pacific will see its share increase slightly to 30.2 per cent. China is the engine of this growth and foodservice sales will increase at a compound annual growth rate of 11.8 per cent between 2005 and 2010 to reach US$201 billion in 2010, up from US$115 billion in 2005. As one of the fastest growing economies in the world, the Chinese government is predicting sustained growth of seven per cent - a rate which should quadruple the size of China’s economy over the next two decades. China’s economic growth has led to rising levels of consumer spending, with consumer spending per capita more than doubling from the level in the mid-1990s. Consumer spending growth has been particularly rapid in the major cities within the coastal provinces of the country. With 1.3 billion inhabitants, China has the potential to be the world’s largest single consumer market. Although just over one-third of the population is urbanised, this figure is rising as people migrate to the cities to escape rural poverty.
The growth of China is counterbalanced by a market share decrease of Japan. The world’s second largest foodservice market (in 2005) will see its share decline from 17.7 per cent in 2005 to 12.5 per cent in 2010 as the foodservice industry is on a long-term, downhill slope. The decline is due to a combination of factors such as the prolonged recession, price deflation, shrinking like-for-like sales of existing restaurants, lower customer transactions, disappearing owner-managed businesses and increased blurring of the boundaries between foodservice and retail.
Europe’s share of the global market will experience a slight decrease to 32.0 per cent. Mature markets including the UK, France and Germany will continue to grow at a rate of about 3 per cent, while central and eastern European markets will share much higher growth rates. Russia is considered one of the most interesting markets in this region. However, as these happen from a much lower base, the region as a whole cannot increase its share of the global market at the same levels as Asia Pacific or North America.
Channel blurring
The most important trends in the foodservice industry include the launch of healthier and more diversified menu options, the blurring of channels, and the growing importance of manufacturers’ brands as foodservice companies stress the quality of their products served. Additionally, restaurant operators are using format innovations to increase sales per outlet and developing alternative sales channels away from actual restaurants to diversify revenues.
Healthier and more varied menus focus on low-fat and low-carbohydrate products such as salads, non-fried chicken, fruit and yoghurt. More varied menus and format innovations make it increasingly difficult to properly classify a given foodservice outlet - this has led to channel blurring within the industry. In fact, companies are no longer competing within a given fast food segment (for example hamburger parlours or coffee shops). Today, competition is taking place across several segments at the same time – hamburger chains are these days trying to win market share from coffee shops and sandwich chains.
Burger King and McDonald’s for example have added premium coffee to their menu, making them the next significant competitor for coffee shop operators such as Starbucks. McDonald’s has even gone a step beyond new product launches: it has successfully developed an in-store coffee shop concept called McCafé that it is rolling out in select markets including Australia, Germany, the UK and Brazil. McCafé does resemble a typical Starbucks coffee shop and sells a wide range of coffee specialities, cakes and pastries, and features a lounge-style seating area. So if a hamburger joint now includes an upscale coffee shop, can it still be considered a hamburger joint?
Unarguably, McDonald’s is competing with coffee shop operators with the expansion of its McCafé concept. But at the same time, it also puts pressure on the individual café owner.
Another example of channel blurring is taking place between pubs in the UK and the traditional English restaurant sector. Some pub chains have refurbished their outlets and have considerably expanded their food offering leading to the creation of the term "gastro pub". These enjoy increasing popularity, and have become a foodservice destination for family dining requirements, thus putting them in direct competition with traditional restaurants.
In general, the restaurant sector is seeing the growth of the fast casual segment, not only in the USA but also increasingly in Europe (Wagamama and Nando’s in the UK, Vapiano in Germany). These chains offer high quality food at affordable prices, putting them in direct competition with the traditional restaurant sector as well. Benefiting from high product volumes, these chains can negotiate lower prices from suppliers and can sell their menus at more affordable prices than independent restaurateurs. The latter will find it increasingly difficult to survive in an environment driven mostly by price pressure.
Maufacturers’ brands
Especially in the fast food sector, new product and menu launches are sometimes coupled with increased availability of manufacturers’ brands. This is partly a result of more global supply agreements but also because consumers have increased their appetite for recognised and trusted brands. The Coca-Cola brand for example has become McDonald’s supplier for soft drinks on a global level, while coffee and water brands at McDonald’s are supplied on a regional level (for example Evian water in France). In the USA, Wendy’s clearly communicates the use of brands for its desserts.
Brands allow a standardised offer, both regionally and globally, and furthermore strengthen a company’s corporate image and reinforce consumer loyalty and bonding, ultimately driving visits and thus sales volumes.
Apart from traditional refurbishments, restaurants are increasingly resorting to multi-branding. This involves the combination of two or more restaurant concepts in a single location. Such restaurant combinations focus on complementary daypart strengths in the hope to generate higher sales volumes from such units. By adding a second unit to an already existing outlet, companies do not have to deal with the difficulties of finding adequate and affordable real estate and can also keep personnel costs at lower levels. This is still very much a US trend, but as with most trends, they will eventually spill over to Europe.
New sales channels
The opening of satellite restaurants is yet another format innovation, which responds to today’s mobile lifestyles. Satellite outlets are smaller than traditional outlets and offer a limited version of the menu. Both McDonald’s and Yum! Brands have opened satellite restaurants in high traffic areas such as city centres and railway stations, as well as on city outskirts in the form of drive-through outlets. While satellite or kiosk formats are especially useful in western Europe markets to open in locations that lack the space for traditionally-sized outlets, they form an integral part of the foodservice industry in countries including Russia and Brazil. In Brazil, McDonald’s operates two distinct kiosk formats. The first sells only ice cream and beverages, and the second is the kiosk format of McCafé – called McCafé Express. The menu includes a limited version of McCafé’s vast coffee specialities, as well as brownies, biscuits and pastries.
Diversification into new sales channels, adding new avenues for future growth, is another noteworthy trend in today’s foodservice industry. Although still very much a US-based phenomenon, the UK and Germany are seeing the beginning of this trend as well. Starbucks has been the frontrunner of new channel development, selling its coffee, ice cream and bottled beverage brand Frappuccino at grocery stores across the US. Pizza Express in the UK is selling pizza and side items such as garlic bread at Sainsbury’s; McDonald’s branded ketchup is available at select supermarket chains in Germany.
The catering industry
The catering industry faces similar trends to those of the restaurant and fast food sectors with increased concern over healthy eating and a rise in branding. The leading caterers have all developed healthy menu programmes – these are the most innovative at business & industry accounts. In vending as well, demand for healthy snacks rather than just Snicker bars is growing. Aramark has launched the Just4U for vending programme for its business & industry clients; Sodexho’s Wellness & You, On The Go vending offer is tailored to the health care segment.
Branding takes two different forms: on the one hand, caterers are developing proprietary foodservice concepts to better compete with commercial restaurants, and on the other, they are forming partnerships with fast food and restaurant chains. Compass and Sodexho have been the most successful in developing their own brands. Compass includes its Upper Crust sandwich chain and Caffè Ritazza, a coffee shop concept. Confident that several of its restaurant concepts can compete with commercial restaurants, Sodexho created a wholly owned subsidiary in February 2005 to franchise its brands outside of the contract catering segment. Called The Retail Brand Group LLC, the subsidiary seeks franchisees for eight brands including Jazzman's Café, Pandini's Italian bistro, Sub Connection, Sky Ranch Grill, Mein Bowl, Salsa Rico, Pete's Arena pizza and Strutters, a chicken concept.
Caterers benefit from greater customer satisfaction by adding well-known brands; restaurant chains profit from faster expansion as caterers act as franchisees. The benefit for restaurant chains is that caterers have the necessary cash to rollout operations more easily than individual franchisees, and can thus expand more quickly. Aramark has reached agreements with Asian-inspired fast food chain Panda Express and doughnut chain Dunkin’ Donuts.
In addition, the catering industry is continuing to see increased levels of professionalism largely driven by consolidation. Following a high number of mergers and acquisitions, the industry has become more concentrated with the top catering companies notably increasing their market share. As well as being a vehicle for driving expansion and sales growth, consolidation also leads to economies of scale. These become vital as caterers seek to diversify their businesses to include catering-related support services such as building maintenance, security and reception services, as well as finding global solutions for global accounts.
Top 30 foodservice sales
Christiane Weinberger is team leader research in Planet Retail´s foodservice research team.
This article is based on the report “Foodservice Trends Worldwide” which was published by Planet Retail in August 2006. For more information please contact Volker Koch (+49 69 9621 756, e-mail: Volker.koch@planetretail.net). At www.planetfoodservice.net you can register for the Weekly News on Foodservice International.
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