As food manufacturers strive to cash in on the opportunities that growth in the foodservice sector can offer, it's vital not to underestimate the differences between foodservice and retail.
Elsevier Food International, Vol. 4, Number 4, November 2001
Michelle Gibson

Foodservice plays an important and growing role in the global food market. Indeed of the overall food market, which is valued at some $4 trillion, foodservice accounts for around $1.2 trillion, food retail for the remaining $3.8 trillion. The foodservice market is primarily concentrated in the developed food markets of the US, Japan and Western Europe, which together make up over 80 per cent of the total. In the retail sector, this situation is reversed, with the US and Western Europe accounting for only a third of total sales, and developing markets for two thirds (see fig. 1).
The structure of the foodservice sector and consumer attitudes to it vary dramatically from market to market. There can be no doubt that the US market is leading the way in terms of both consolidation and consumer expenditure, which is already split 50-50 between foodservice and retail. The Japanese market is similarly advanced. In Europe this figure falls closer to 67:33 in favour of retail, although growth is strong at 2.75 per cent. Recent rumours have suggested that European foodservice growth is beginning to slow in response to economic downturn in some markets, but this is likely to be a temporary blip rather than an on-going trend. Developing markets are experiencing phenomenal growth in the sector of 5.8 per cent, but this is coming from a very low base.
Prevailing levels of economic development impact considerably on foodservice penetration.
In the early stages of economic development, low incomes mean that most meals are prepared from scratch and eaten at home. Restrictions on foreign investment and strong preferences for local food products mean that foodservice outlets are generally disorganised and independently owned. Retail is likely to continue as the major food distribution channel in the short to medium term. Growing incomes will lead to higher expenditure on branded processed foods, pushing up retail value sales. Market value will also be enhanced by population growth, boosting volume sales (see fig. 2). Manufacturers seeking to enter the foodservice sector, whether as suppliers or operators, should focus their efforts on developed markets in the first instance. Even here, the foodservice sector is significantly more fragmented and disorganised than retail (although the situation is changing). While the five largest foodservice operators (three fast food operators plus Compass and Sodexho) account for eight per cent of global sales, the top five global retailers account for 35 per cent of global sales. Food retailers also tend to be more international - 71 per cent of Ahold's sales are derived from outside the home market, compared to 51 per cent of McDonald's.

Implications for the manufacturer
Both in Europe and in the US, consolidation in the foodservice sector is increasing. In the commercial sector this is characterised by the growth of organised operators, and in the institutional sector, by the increasing dominance of contract caterers. Levels of development vary considerably by individual market, as in fig. 3.

Manufacturers as suppliers
For most food manufacturers, difficulties in coming to terms with the complexities of the foodservice supply chain will be one of the first hurdles to be overcome when tapping into the foodservice market. The role of the brand will be another key question.
To what extent can retail brands be leveraged in the foodservice market? How much will the products themselves need to be altered for use in foodservice? Clearly convenience will be a major criteria, but products will also need to be altered to meet the needs of specific operators and their consumer bases. Foodservice is not something in which manufacturers can successfully 'dabble', the differences between it and retail are such that a certain degree of focus is needed to fulfil operator requirements.

Key supply chain issues
The retail sector in developed markets is characterised by strong and well-defined buyer-supplier relationships. This is primarily the result of large-scale consolidation from both parties, and the declining involvement of intermediaries. Many of the large retail groups exert a huge amount of power over an ever-shrinking manufacturer base. The foodservice sector is still relatively undeveloped in comparison, but is gradually starting to follow these trends.
Relationships and the distribution of power within the foodservice supply chain are driven principally by the size of players at each level, resulting in a clear dichotomy between the independent and organised sectors. As a general rule, the more organised the customer base, the greater the upward influence and pressure on both products and prices. The buyer-supplier interface is complicated further by the role of the intermediary. By intercepting the flow of products, intermediaries are able to exert a certain degree of power over both their suppliers and, more likely, their customers. Alongside growing consolidation, the issue of power within the foodservice supply chain is set to change. The most important development will be a shift from working independently to greater co-operation and integration between suppliers and their customers, where partnerships will thrive. This is likely to benefit manufacturers in enabling them to supply to a more organised customer base. For the foodservice supplier, being responsive to customer needs and demands is one of the most important tools in maintaining strong working relationships within the sector.
Three main manufacturer player types can be identified (as shown in fig. 4) within the foodservice sector:

• Conservative players are generally strong in retail and maintain marginal involvement in, and profitability from, foodservice. Supplying to the sector represents little more than a chance to absorb excess capacity in production, which will contribute to overall economies of scale. These companies generally lack control over supply into the sector and have a better chance of prospering in the less organised markets that are dependent on retail supply. In organised foodservice, however, they lack the commitment or knowledge to offer foodservice-specific products, least of all in a customised way.

• Maximisers are involved in both the retail and foodservice sectors, possibly with strong front-of-house brands. For the majority of players in this sector, foodservice currently takes a secondary, rather than equal, proportion of the business. Maximisers do have the ability to prosper in the sector, but this depends on taking a proactive, rather than reactive approach. This involves building strong relationships and brand loyalty with intermediaries and foodservice customers. A dual focus on retail and foodservice, however, can dilute its strength in each sector. The structure of the supply chain (the use and role of intermediaries) will influence the ability to truly maximise opportunities for profit.

• Dedicated suppliers maintain a strong focus upon foodservice, enabling them to maintain a strong customer and market orientation. In general, they are small to medium-sized, which is conducive to a high level of flexibility and responsiveness. The most proactive companies in this sector are best equipped to realise the most profitable opportunities in the foodservice sector.

At present, the vast majority of food manufacturers based in Europe fall into the Conservative category, accounting for by far the largest share of the foodservice sector, in both volume and value terms. Manufacturers seeking greater returns from foodservice involvement should, however, be aiming for the Maximiser position.

Manufacturers as operators
The supply of processed products into foodservice is becoming commonplace among manufacturers, but few have taken the step towards involvement at operator level. For those considering this move, there are four main options, each with their own set of pros and cons and associated risk levels. The suitability of each option will vary by company type (see fig. 5).
It is important to understand how the key competencies differ between supplying into foodservice and operating a proprietary foodservice outlet. At operational level, four key skills will be required:

• Service - within the foodservice sector, service is about identifying a particular type of food experience as desired by specific consumer groups, then focusing operations on servicing that need. Service is therefore achieved through the cultivation of a foodservice experience through the use of themes, customisation of food offering and even consumer interaction (as in Danone's Amoy noodle bar).

• Brand management - at the moment, manufacturers with strong retail brands try to push them through foodservice channels as hard brands. At foodservice operator level, developing soft or chameleon brands that evolve in tandem with consumer change is key to success.

• Innovation - an increasingly important competency with regard to stealing market share and retaining the interest and loyalty of existing clientele. Innovation in foodservice is all about consumer needs with regard to both product and service, being able to anticipate consumer demand for novelty, and having the ability to evolve and develop in step with consumer change. One example of such innovation is the concept of 'eatertainrnent' -live cookery shows in restaurants.

• Consumer focus - strong consumer focus is a must for any foodservice operator in today's market, given the weight of consumer influence in shaping the market. This equates to the development of direct relationships with the consumer in order to gain insight into preferences for particular experiences and services as part of the overall foodservice offering. Forward looking and innovative operators will aim to stay ahead of the game by creating new trends.
The benefits of operating in the foodservice sector are tangible: escape from retailer pressure on prices and margins, high growth rates and the potential for more widespread brand exposure, but the challenges should not be underestimated. Involvement in foodservice requires a solid commitment. Meanwhile, the need for flexibility and innovation in terms of product and service is paramount, whether at supplier or operator level.