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  1. Analysis
March 3, 2015

Briefing: Foodservice in the US – what the analysts say

The US foodservice market is worth US$702bn and is set to experience growth of close to 4% this year, according to US consultants Technomic. With mainstream grocery retail stagnant, could the foodservice channel offer packaged food manufacturers a route to growth? We speak to four industry analysts in the US to see how they view the opportunity for manufacturers in the foodservice sector.

The US foodservice market is worth US$702bn and is set to experience growth of close to 4% this year, according to US consultants Technomic. With mainstream grocery retail stagnant, could the foodservice channel offer packaged food manufacturers a route to growth? We speak to four industry analysts in the US to see how they view the opportunity for manufacturers in the foodservice sector.

just-food: How is the foodservice channel performing in the US?

Michael Hughes, lead analyst, Canadean: There were a total of 51,746 million transactions in the US foodservice market in 2013, a CAGR of 1.6% over the period 2008-2013. The biggest channel is quick service restaurant (QSR) and fast food.

Elizabeth Friend, senior analyst, Euromonitor: Certain segments of the restaurant industry are growing very quickly. Fast-casual dining is the most notable segment, which has become the focus of most of the energy and investment in US chained foodservice right now. In 2013, sales in fast-casual dining in the US grew at the rate of 11%, which is nearly twice that of the next fastest-growing category, specialist coffee shops. 

David Henkes, vice president, Technomic: Over the last couple of years we've seen slow but steady growth. Coming out of the recession consumer spending hasn't quite accelerated in the way that we had hoped. Foodservice is a very mature industry in the US – growth has not been spectacular and in some segments like QSR has been flat to probably even down a little. Fast casual or upscale fast-food have been doing quite well and certain segments like hotels, grab-and-go have been growing pretty rapidly also. 

j-f: Do you find packaged food firms are increasingly eyeing entry or boosting their existing presence in the channel? If so, why?

Jonathan Feeney, analyst, Athlos Research: Absolutely – for three reasons. First, there’s been a slow steady migration of dollars to foodservice to the point its reaching 50% of food spending and food companies need growth.  This will continue for demographic reasons like smaller households. Second, restaurants are looking for the same kinds of answers to new consumer trends like special ingredients – non-GMO, gluten-free – so as packaged food companies invest to meet those needs, it makes sense they would want to leverage that in restaurant/foodservice channel. Third, with high valuations and limited growth, everyone is looking for answers on how to reduce costs.

Friend:  Foodservice is a valuable channel for packaged foods companies who aren’t already using it as a revenue stream. Margins are higher in foodservice at the customer level, so there’s an opportunity for suppliers to improve their profitability as well. Foodservice also offers packaged food companies an additional benefit in the form of exposure. 

Hughes: The foodservice sector is a hot bed of innovation and allows manufacturers to experiment with new concepts and products and understand sensory touch-points that encourage trade up. In many instances, innovation from the foodservice channel can often trickle down to retail, so targeting foodservice first enables manufacturers to get ahead of competitors when it comes to retail innovation.

Henkes: For most companies, foodservice is perhaps 10-20% of their total sales. For many, the main line of sales and profitability comes from the retail sector. Foodservice in a lot of ways is viewed as a way to gain some incremental sales but also as a brand-building exercise, so it might not be a lot of volume but there is certainly a lot of exposure and opportunity to build consumer awareness and impressions. 

j-f: In your mind, which are the packaged food firms have had success in the channel?

Henkes: Foodservice in a lot of ways is not just a sales channel but a marketing channel. The percentage varies per category, but I would say on average if you're talking companies like Frito-Lay, General Mills, Kellogg, Danone, Mondelez International – for the most part, foodservice is not a huge share of the business. I think when you look at CPG firms most have a foothold in foodservice. It's very hard to find a brand that would not be somewhere. Brands like [PepsiCo's] Frito-Lay have very strong presence in sandwich shops and the Subways of the world and a strong presence in non-commercial or beyond restaurant operations like hotels, colleges and healthcare establishments. Certainly Kellogg and General Mills have strong brands and focus a little bit more on the breakfast day parts. Tyson Foods and Hillshire Brands are companies that do quite a bit of business in foodservice.

Feeney: The companies like ConAgra Foods, General Mills, Campbell Soup Co. that already have meaningful foodservice are looking at expanding as much as ever I think. For those major packaged food firms not exploiting the channel yet, they aren’t doing so because they are lower margin and it doesn’t leverage their brands as much as their ingredients and technology. But it's an exciting time; high valuations, cheap debt and slow centre-store growth are driving a lot of management to consider markets and even combinations they never had before. I think packaged food companies will look more at foodservice both because it makes sense and because it’s an “all options are on the table” environment. At these stock prices, muddling through with a few cost cuts and buying back stock isn’t going to be enough to make the math work. From a corporate strategy perspective this feels a lot like the late 1990s in that it’s a stock market party and everyone is rightly wondering what huge event is coming next, but it’s even more frenzied for food companies, who back then were taking risks because they were in the wings of a technology and growth driven party, but today they are the ones doing the keg stand at the centre because it’s all yield driven. Like any party as it gets late a lot of great things happen, but a lot of expensive learning experiences too. Both will likely happen with packaged food companies and foodservice in the next 18 months.

j-f: Which categories do you think stand to gain the most through establishing a presence in the channel?

Feeney: Special ingredient – organic, gluten free, non-GMO versions of familiar foodservice products, protein-centric items like egg whites,  plant-protein of any kind and any hot, prepared meal substitute that goes in a convenience store, gas station or kiosk.

Henkes: The challenge with packaged food companies is that all of the money and investments they make in building up their brand equity is different in foodservice. To a large degree you're not selling to the end consumer, you're selling to the restaurant operator. Pillsbury Doughboy doesn't mean as much to a chef as it does to the consumer. As a CPG firm, if you are going to try to exploit and build on your consumer brand equity the best places to focus are those places consumers see the brand. So that's things like snack foods, carbonated soft drinks, and where do they play? In places like grab-and-go, sandwich shops, convenience stores, petrol forecourts.Whether Kellogg snack bars, Frito chips or Oreo cookies from Mondelez,  those are areas they can build on their existing brand equity. Brands don't do as well when they are used as an ingredient. Brands like Maggi that are more back of house brands are more vulnerable to private label options because for the most part, restaurant operators are not going to tell a consumer they're using a specific brand back-of-house.

j-f: As a packaged food firm, how do you get the most out of the foodservice channel?

Hughes:  Manufacturers targeting the foodservice industry need to recognise that the market is becoming more dynamic and fragmented when it comes to innovation and understand the key trends emerging in the market. Examples of this include value gourmet such as the rise of street food offerings in indoor settings, pushing the boundaries of indulgence and challenge through large portion sizes making healthy eating appear stylish and cool.

Henkes: It all starts with your strategy and the type of product you are; whether you are front-of-house consumer-facing, or a back-of-house ingredient that gets used in an ultimate end product to the consumer. If you're a consumer facing brand in a restaurant then you've got a lot stronger pull – you can go in and create the story about how great consumers consider your brand and how much you'll drive sales. If you're back-of-house then your marketing story has to be very different – directed at the restaurant operator, telling them how much better you are going to make their product.

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