Foodservice Fundamentals Fast Track: Introduction to the Foodservice Industry

transcript

October 2012

Introduction to the

Foodservice Industry

• Leading foodservice industry organization

• IFMA partner on F&O, seminars, pubs

• Proprietary, multi-client consulting and research firm

• Food industry publications

Technomic, Inc.

Sample of Technomic Clients

Today’s Agenda

Overview of foodservice industry

Foodservice segment size/growth

Review of trends/issues

Provide answers to your questions

The Foodservice Business System

Operators

• QSR

• FSR

• Beyond Restaurants

• Hotels, Retail, Other

Distributors

• Broad-line

• Systems

• Club/CNC

• Specialty

Manufacturers

• Food

• Non Food

• FS Only

• Multi-Channel

Industry

• GPOs

• Re-distributors

• Consultants, Media, etc.

• Brokers, software, etc.

Consumers

• Generational

• Ethnic

• Healthy, Value

• Other

Critical Sources forFoodservice Outlook

Forecasting

FoodserviceOperators

Distributors

Manufacturers

Client Logo

Foodservice Industry Overview

Foodservice Is Defined as.. .

Establishments that prepare and generally serve food, meals,snacks and beverages away from home

Retail vs. Foodservice

Criteria Retail Foodservice

Units 50,000 1,032,373

Segmentation Little19 major segments;

multiple subsegments

Syndicated Data Nielsen, IRI None

Private Label Penetration Medium High

Product Selector Consumer Operator

Value Chain Example:Retail vs. Foodservice

Retail Foodservice

$1.00 $1.00$1.00

$3.50$1.30

ManufacturerShipments

DistributorSales

Retailer Sells/Consumer Pays

• Manufacturer shipments – valueof manufacturer sales todistributors – $152B

• Operator purchases – value ofdistributor sales includingdistributor margins – $175B

• Retail Sales Equivalent (RSE) –value of operator sales includingoperator margins – $529B

Foodservice Product Value Chain* –2010

*Food and nonalcoholic beverages only 11

Foodservice a Signif icant Shareof Total Food Industry Sales

2000 = $791B1990 = $566B 2011 = $1,179B

Foodservice Retail

$314B55%

$252B45%

$397B50%

$394B50%

$636B54%

$542B46%

Signif icant Opportunity Sti l l Existsfor Further Foodservice Growth

54%46%

*Retail sales equivalentSource: Technomic; NPD FoodWorld

Share of RSE* Share of Meals

Foodservice Retail

Two most critical indicators forfoodservice health:

• Disposable PersonalIncome (DPI)

• Unemployment

Other important measures:• Economic Growth (GDP)

• Inflation

Macro-Economy: Critical Indicators

Economic News a Combinationof Positives, Negatives

Positives Negatives

• Tax cut extension • Rising commodity costs

• Low interest rates • Europe financial instability

• Weak dollar helping exports • State/local budget shortfalls

• Some increase in consumerspending

• Major natural disasters

• Economy is adding jobs • High unemployment,underemployment

• Disposable personal incomeis growing

• Continued tight credit gripfor most

• GDP slowly improving

GDP Improving (Barely)

Source: Bureau of Economic Analysis

Quarterly % Change – Real vs. Prior Period

Q42008-6.8%

Q120065.4%

Q2 20121.7%

DPI Generally Flat

Source: Bureau of Economic Analysis

% Real Change vs. Prior Year

Aug20074.1% Dec

2009-2.9%

Aug 20124.1%

Unemployment Remains the KeyChallenge to Faster Industry Growth

Source: Bureau of Labor Statistics

Unemployment andUnderemployment

Unemployment4.6%

Jan'07

May Sep Jan'08

May Sep Jan'09

May Sep Jan'10

May Sep Jan'11

May Sep Jan'12

Job Openings and UnemploymentDisconnect

JobOpenings

UnemploymentLevel

2000 2006 2011

Jobs Picture and FoodserviceSpending

• People with jobs areexperiencing more stability

• Hiring for college grads isimproving

• More discouraged workersreturning to search

• Government sector is anegative exception

• 20% of the economy remainsunemployed, underemployed,or discouraged

• Acute problems for urban poor,especially in coastal areas

• Long-term unemployed andvets are stigmatized in themarket

Government Accounting Office, Congressional Budget Office, BLS 20

Food Inflation Resulting in Higher,Menu & Grocery Prices – U.S.

% Change vs. Year Ago

PPI Food2.2%

CPI FAH1.5%

CPI FAFH2.8%

-5%-4%-3%-2%-1%0%1%2%3%4%5%6%7%8%9%

May Ju

Both LSR and CDR Chains in PositiveSame-Store Sales Territory

Source: Public Company Reports, Technomic

% Same Store SalesChange vs. Previous Year

Q1'07 Q1'08 Q1'09 Q1'10 Q1'11 Q1'12

Heavy Restaurant Usage TrendBarometer Pointing Up

29% 28%

13%11% 11%

March '11 Sept. '11 Jan. '12 March '12

LSR FSR

Source: Technomic Amex Market Brief April 2012

Heavy Restaurant UsageTwo Times a Week or More

2012 LSR, FSR Growth RatesAdjusted

Nominal Change

Source: Technomic

Real Change

2010 2011 (P) 2012 (F)

Revised 2012 & First Look at 2013

Strongest industry growth since 2007 But still lower than 2003-2007 Real CAGR (2.8%)Key Insights

CPI-FAFH

Nominal Growth

Real Growth

CPI-FAFH

Nominal Growth

Real Growth

2012 (P) 2013 (F)

(P) = Preliminary(F)= ForecastSource: Technomic 25

Restaurants

Beyond Restaurants

Total Foodservice

Foodservice Returning to RealGrowth

Nominal Change

Source: Technomic

Real Change

2010 2011 (P) 2012 (F)

First real industry “growth” since 2007.Key Implication

Quiz Time:Foodservice Industry Overview

Client Logo

Operator Segment Review

Foodservice Segmentation 2010

Source: Technomic

Share of Operator Purchases

Restaurants57%

Healthcare6%

Other4%

Vending5%

Education8%

Leisure8%

Retailers9%

Restaurants & Bars SegmentIncludes.. .

Restaurants& Bars

Traditional

Bars &Taverns

Cafeterias& Buffets

LimitedService

MidscaleCasualDining

FullService

FineDining

QuickCasual

Restaurants& Bars

Traditional

Bars &Taverns

Cafeterias& Buffets

MidscaleCasualDining

FullService

FineDining

Segments Definitions

Limited Service(LSR)

• No table service• Fast service orientation• “Buy before you eat” system

Quick Casual (QC)• Subsegment of LSR• Freshly prepared, wholesome quality• Check average: $6-9

Full ServiceMidscale (FSR)

• Table service• Limited alcohol service• Check average: $6-10

FSR Casual Dining

• Lunch, dinner focus• Table service• Full bar service• Check average: $10-25

FSR Fine Dining• Dinner emphasis• Entrée over $20

Definitions

Beyond Restaurants Segments

*OCS = Office Coffee Service

Business& Industry

Includes employee feeding in offices, factories, andplants. To a large extent this service is handled bycontract feeding companies such as Aramark, Sodexo& Compass

Vending/OCS*

Defined as all food and beverage products soldthrough automatic vending machines, regardless oftheir location. Not included are other vended productssuch as cigarettes, cigars, bulk vending, and othernonfood items.

Retail Hosts

Retail stores that host foodservice, includingsupermarkets, convenience stores and other retailerssuch as general merchandise stores and departmentstores. Does not include foodservice within the storemanaged by an outside restaurant company.

Beyond Restaurants Segments

EducationCollege & University

Includes all full-time and part-timecolleges/universities (public and private two-yearand four-year colleges and junior collegeprograms.) The key foodservice areas are: Boardcontracts in dormitories, Cafeterias, Snack shopsand Special function services

EducationPrimary Schools

Encompasses all public and private primary andsecondary school feeding. Total consumption isbased on school purchases and governmentcontributions, which together compose the totaldollar value of food. The key components areLunch participation, Breakfast participation, Milkprograms, and la carte feedings

Travel & Leisure

The recreation segment includes foodservice foodand nonalcoholic beverages sales only in variousestablishments and locations where activities areconsidered recreational in nature.

Typical Restaurant Structure

Accounting for Non-traditionalLocations

Independent restaurateurs may operate more than onelocation.

• Technomic, Inc., defines independent restaurants as those withone to nine units, and chains as those with10 or more.

According to the National Restaurant Association, morethan 7 out of 10 of the nation’s “eating and drinking

places” are single-unit independent operations.

A Note on Independents

Lots of independents and Small Chains don’t equal sellingpower of the Top 500 Chains.

The Restaurant Landscape – 2010

Independents & Small Chains

Top 500

Leading Independent Restaurants Ranked

by Food & Beverage Sa les

Rank Restaurant/City Check Average 2009 Sales

1.Tao Restaurant & Nightclub – LasVegas

$70.00 $59.2

2. Joe’s Stone Crab - Miami Beach 68.00 26.3

3. Smith & Wollensky - New York City 84.50 25.0

4. Old Ebbitt Grill - Washington, D.C. 24.00 24.5

5. Carmine’s – New York City 30.00 24.0

6. Lavo Italian Restaurant – Las Vegas 60.00 22.0

7. Tao Asian Bistro - New York City 74.00 20.7

8. Buddakan – New York City 49.00 20.0

9. Gibson’s Bar Steakhouse - Chicago 62.33 19.9

2010 Projected Sales – $66.0MM• Restaurant - $28.0

• Club - $28.0

• Pool - $10.0

Statistics• 57 cooks, 8 chefs, 26 servers,

and 10 Hostesses

• 1,400 pp on a weekend

• Check average: $70.00

• Meals served: 590,990

• 75% of revenue from salesof alcohol

Tao Las Vegas

Miso Glazed Chilean Sea Basswith Wok Vegetables $36.00

Tao-Tini$13.00

Operator Business SituationSlowly Improving

25%31%

Increased Decreased

Operator Sales/Revenue Situation for First 4 Months*

20082008 20092009 20102010 20112011 20122012

Operators Have Concerns Butthe Mood is Brightening

*Top 2 Box on 1 to 5 scale where 5 = “extremely concerned” and 1 = “not concerned at all”Source: 2010 & 2011 F&O Operator Surveys

71%65%

57% 61%71%

Rising FoodCosts

IncreasingProfits

Ability toGrow Sales

EmployeeRetention

Rising FuelCosts

-14 -11 -17 -12 -1

Prime Cost: The Most ImportantOperator Metric

31.9% 32.2% 31.8% 31.9%

29.4% 33.7% 33.2% 33.7%

61.3%65.9% 65.0% 65.6%

LSR FSR <$15 FSR $15 to $12.99 FSR $25.00+

Food Cost Labor Cost Prime Cost

89%83% 79%

71% 71% 67%55%

LSR FSR <$15 FSR $15 to $12.99 FSR $25.00+

2007 2010

Hourly Labor Turnovera Headache But Getting Better

LSR = Limited Service Restaurants FSR = Full Service Restaurants *Average checkSource: NRA 2007 & 2010 Industry Operations Reports

Annual Turnover RateHourly Employees

“For as long as most people can remember, food has been gettingcheaper and farming has been in decline. In 1974-2005 food prices on

world markets fell by three-quarters in real terms. Food today is socheap that the West is battling gluttony even as it scrapes piles of half-

eaten leftovers into the bin.

“That is why this year's price rise has been so extraordinary. TheEconomist's food-price index is higher today than at any time since itwas created in 1845 . Even in real terms, prices have jumped by 75%

since 2005.”

The End of Cheap Food:The Economist – December 6, 2007

Food commodity prices since January 1980:Reversal of a 22-year downward trend

Index: January 2002 = 100

Source: International Monetary Fund:International Financial Statistics

Down 1/3 in 22 years

Doubled in 10 years

Index: January 2002 = 100

Primary factors affect ing crop prices 1

( June 2010 – Jan 2012)

Strong LDC economic growth.Rising oil price. U.S. $ depreciates

Russiawheat

export ban

EU suspendsbarley & feed wheat

import levies

Importersaggressively

buying

Reductions in estimated global ending grain stocks

Argentina drought

China dryness

U.S. HRW drought

Canada & NW Europe:rain damageswheat crop

Aust. raindamages

wheat crop

Russia drought

E. Africa drought

Russia stops grainimport

U.S. cornyields drop

(high temps)

Mexicofreeze

Argentine& Brazildrought

14-crop monthly price index: Wheat, rice, corn, & soybean prices; based on IMFprice and trade share data.

Russia endsexport ban

U.S. $ appreciates

Favorable weatherIn Europe & FSU

Higher estimated global grain stocks

Even Top 500 Chains Are NotImmune to Rising Commodity Costs

Jack in the Box Chili’s IHOP

Red Robin Texas Roadhouse Taco Bell

+5.0% +4.0% +5.0%

+5.5% +4.9% +7.0%

More Operators TakingPrice Increases

35%44% 47%

2010 2011 2012

Have Taken Price Increase inFirst 3 Months of Year

Will Take Price Increasein Next 6 Months

28%34% 37%

2010 2011 2012

Operators Need to Focus More Intensely onOther Value Drivers for Balance

Service

Convenience

Atmosphere

Quality

Low Prices/Deals are NotSustainable Competitive Advantage

The Drive for Value:Meeting Consumer Expectations

VariedMenu Strategies

Uppingtheir Game

On-LineCoupons

Major Strategies

• Remaining competitive

• Delivering more

• Responding to core needs, priorities

Points ofDifferentiation

Lifestyle

Operator’s Employing VariedValue Strategies

Tiered PricingEverydayLow Price Extras Relative Pricing

$2 $4 $6 $8Value Menu

$10.00 Large Pizzaup to 3 Toppings

Free Sides withPremiumSandwich

$5.00 Footlong

Upping Their Game:Domino’s “Oh Yes We Did”

Before After

Online Coupons Have Had MajorImpact

• Launched 2008; fastestcompany to $1B ever.

• Negotiates deep discounts andthen splits revenue withvendor.

• 38.0mm customers

• User:

– 18-34 years old (68%)

– College educated (50%)

– Single (49%)

– Woman (77%)

– $110K+ (29%)

About Groupon

Yes22%

Have Used Online Coupon

• 42% of Restaurants reported thatGroupon promotions were“unprofitable”

– Customers were deal makers.

– Poor tippers.

– Not repeat customers.

– Barrage of customersoverwhelms restaurant.

– Cannibalize sales and take spacefrom full paying guests.

– Lowers check average.

Groupon May Not Be Answerfor All Restaurants

“How Effective Are Groupon Promotions For Businesses?”, Rice University, 9/2010 55

Points of Differentiation: MenuInnovation

Chipotle Wing Stop Noodles & Company

Pei Wei Daphne’s Einstein Bros.

• McDonalds $5BB Makeover

– Remodels: 2,500 units

– Rebuilds: 6,100 units

Goal: boost average annual sales at each renovatedrestaurant from $2.3 million to $3.1 million during thenext four to five years (34.7%)

Points of Differentiation –Concept Rebuilding and Remodeling

• Flex Casual Asian

• Design more efficientlyservices guests

• Footprint reduced from3,000 to 2,500 sq. ft.

• Upfront cost reduced by$50,000

• Off-premise revenue hasgrown to more than 40% ofsystem-wide sales

• Monthly overhead expectedto decrease $2K

Points of Differentiation:Concept Re-Innovation

Points of Differentiation:Hey Bartender!

Social Media Rewards Loyalty

Free chips and salsa for checking invia FourSquare

New sushi roll for FourSquare“Swarm Party”

Coupons, customer engagementyield 10 million fans on Facebook

Discounts to “Tweet while you eat”

• 2.1 million pounds ofwaste paper saved

• 7.5 million gallons ofwater saved

• 4.4 million kilowatts ofenergy saved

• 3,194 cubic yards oflandfill space saved

Aligning with Lifestyle Needs:Eco-Friendly

St. Petersburg – Worm Bin

Guests Will Pay More for Mealsthat Match Their Lifestyle

“Makes me more willing to purchase and am willing to pay…”

Technomic College and University Report

Fair Trade

Locally Sourced

Sustainable

Slightly More For (Up to 5% Increase)

Significantly More For (More Than a 5% Increase)

Quiz Time:Segment Review

Client Logo

Consumer Mind Sets andOperator Responses

Consumer Mindset Trends HaveImpact on Foodservice

Multi-Generational Demands

Ethnic Influence

Value Orientation

Health & Wellness

Customization

Client Logo

1. Multi-Generational Demands

Post - Millennials( < Age 14 )

Millennials( Age 14 - 31 )

Generation X(Age 32 - 42 )

Baby Boomers(Age 43-62 )

Swing(Age 63-75)

World War II( > Age 75 )

Who We Are:Meet Your Neighbors

Generation

Generation Gap: Food at Home vs.Food Away-from-Home

“I eat out morefrequently than Iprepare my ownfood at home.”

All Millennials Gen X Boomers

Base: 1,501 respondents ages 16 to 62Scale: Top 2 Box rating on scale from 1-6 where 6 = agree completelyand 1 = disagree completely 69

< Age 3524%

35 - 4423%

45 - 5424%

55 - 6416%

65 - 748%

Age 75+5%

Generational Top Restaurant Spenders

Restaurant Spending Share by Householder Age

Source: Bureau of Labor Statistics Consumer Expenditure Survey 70

Generation Gap: Atmosphere

Sit-down, Full Service Chain(Chili’s, Outback Steakhouse, Red Lobster, etc.)

• To relatively quiet 68% 56% 71% 80%

• To be lively with conversations fromother diners in the background

32 44 29 20

BoomersGen XMillennialsAll

• Low sodium

• Low fat

• Low calories

• Low carb

• Portioncontrol

Generation Gap: Health & Wellness

• Fresh

• Organic

• Local

• Natural

• Sustainable

Preferences for Natural andOrganic Skew Younger

“Which of the following do you do on a regular basis?”

Eat Foods thatare Organic

Eat Foods that Are Considered All-Natural

Millennials Gen X Boomers

Base: 1,501 consumer respondents Scale: Top 2 Box – 5/6 rating on a 6-point scaleSource: Technomic, Generational Consumer Trend Report (2008) 73

Operator Strategies: AddressingMature Consumers’ Demands

Early Bird Special

Senior Discounts

28 Vegetables

“55 Menu”

Senior Loyalty Program

Senior Club Card

Weekly Drawings to WinFree Meal

“Diet Smart Choice” @Specialty Salad Bars

Source: Technomic; ID Magazine 74

Operator Strategies: AddressingYoung Consumers’ Demands

• Surpassed $1 billion in digital sales (US)

• Digital sales account for over 30% of overall sales

• iPhone and Android apps downloaded more than 3mm times

• Mobile ordering sales account for 8% of sales.

Smart Phone Ordering Changingthe Landscape

Tweets To Eats

Location: Los Angeles, CANumber of trucks: 4Web: www.kogibbq.comhttp://twitter.com/kogibbqTwitter Followers: 63,366Facebook Fans: 10,539

Kogi BBQ

Korean Fusion• Kimchi Pastrami Melt• Black Jack Quesadilla• Korean Short Rib Tacos• Tofu Tacos• Chocolate Tres Leches• Spicy BBQ Chicken Tacos• Burritos

Welcome to the Mainstream

Client Logo

2. Ethnic Influence

18%population by 2020

• 81% of the populationincrease from 2000 to 2020will be from minoritygroups

Ethnic Growth Signif icant

% Population Growth Through 2020

African American

Hispanic

Source: U.S. Census Bureau 81

Cost of Food

Receiving Value

Menu Items that Appeal to Kids

Kid Friendly Promotions

Promotions

Beverages With Natural Flavors

Healthy Kids Menu Items

Cost of Beverages

Non-Hispanic Hispanic

Importance of LSR AttributesVaries by Group

• Fine Dining

• Ethnic andIndependentRestaurants

• Specialty FoodPublications

• Sur La Table

• Food Network

• ChainRestaurants

• Williams-Sonoma

• MainstreamMagazines

• QSR Menus

• MainstreamGrocery

Ethnic Influence:Anatomy of a Trend

5 Stages of a Trend – Chipotle

1 2 3 4 5

Operator Strategies:Addressing the Minority Influence

Client Logo

3. Value Orientation

Across Income Groups, ManyConsumers Have Felt a Direct Impact

Yes70%

“Has the economy had a directimpact on you?" “Yes” by Income

<$35,000

$35,000-$59,999

$60,000-$99,999

$100,000-$149,999

$150,000+

• Absolute Cost

• RelativeExpenditures

• Combo’s &Bundling

• BOGO

• Ladder

Operators Util ize Variety ofPricing Strategies

Dealing Not Necessari ly a BadThing for Operators

“How does the fact that a restaurant offers a deal ordiscount influence your opinion of…?”

Overall

Improves It No Change Lessens It

Quality of Food

Value of Restaurant

Menu Mix Strategies –Focus on Higher Margin Products

July 2010July 2011 June 2008

November2010

June 2008 November2009

Alternative Protein Strategies:More Poultry on the Menu

• Chicken Selects• Chicken Snack Wraps• Chicken McBites• Chicken Wings (in test)

• Chicken Parmesan Sandwich• Italian Basil Chicken Sandwich & Wrap• Popcorn Chicken• Garden Salad Wrap with Crispy or Grilled Chicken

• Turkey Roaster• Turkey n’ Cheddar Roaster• Grand Turkey Club Roaster

Operator Strategies: Cheap Chic

Client Logo

4. Health & Wellness

"Food is an important part of a balanced diet."-Fran Leibowitz, author/actress

“Life expectancy would grow by leaps andbounds if green vegetables smelled asgood as bacon.”-Doug Larson, columnist, Green Bay Press-Gazette

“If I'd known I was going to live so long, I'dhave taken better care of myself.”

-Leon Eldred

Food for Thought

Portion Distortion

Then Now

Majority of Diners Sti l l Optfor Less Healthy Meals

Ordered a meal Iconsider to be

healthy42%

Ordered a meal Ido not consider to

be healthy58%

“Thinking about the last 10 times you purchased food from arestaurant, how many times would you say that you ordered a meal

that you consider to be healthy?”

Base: 1,500 consumers aged 18+ 95

All-natural

Preservative-free

Hormone-free

Steroid-free

Certified organic

Having no artifical sweeteners

Organic

Unprocessed

Natural

Antibiotic-free

What’s Healthy? It’s All in How YouSay It

Base: Approximately 500 consumers aged 18+; base varies slightly as attributes wererandomly rotated. Consumers indicated their opinion on a scale of 1–5 where 5 = muchmore healthy and 1 = much less healthy 96

Freshness Strongly Linked to Health

Base: Approximately 500 consumers aged 18+; base varies slightly as attributes wererandomly rotated. Consumers indicated their opinion on a scale of 1–5 where 5 = muchmore healthy and 1 = much less healthy

Seasonal

Homemade

Made from scratch

Premium

Housemade

Authentic

Homestyle

Artisan

Organic

Natural

Sustainable

Very good understanding

Good understanding

Guests Not So Sure What Goesinto a Healthy Halo

50 miles

100 miles

The city/community

The state

Perceived restaurant/retailer defintion Consumer definition

Local Means Close to HomeLocal Items Are Sourced Within…

Never Eat Anything Bigger thanYour Head

Aussie Cheese FriesAussie Fries topped withmelted Monterey Jack,Cheddar, bits of fresh

chopped bacon and servedwith a spicy ranch dressing.

Calories = 2,900Fat Grams = 182

Carbohydrate Grams = 240

Outback Steakhouse’s AussieCheese Fries Same as…

67 Slices of Bacon

4 Baskin RobbinsBanana Royale Sundaes

5 Big Macs

This is Why You’re Fat

Consumers Surprised by CalorieCounts; Higher than Expected

“Have you been surprisedby the calorie counts?”

Base: Have read calorie information = 161“Are they higher than expected?”Base: Surprised by calorie content = 136

Yes82% No

Yes70%

Consumers Think the Information HasMade Some Impact on Their Ordering

“How much of an impact has nutrition information onmenus impacted your ordering behavior?”

15%12%

A great deal Somewhat Not really Not at All

Base: Have visited restaurants that post calories = 192 104

Calories Per Dollar

Operator Strategies: Menu Clues

Operator Strategies: What’s in aName?

• Alarming child obesity statistics driving legislativeand operator initiatives.

• What does it mean to customers and operators?

The Next Battlefield: Kids’ Meals

Client Logo

5. Customization: Have It Your Way

The Importance of Choice

“How important is it to beable to customize your meal

at the following types ofLSR’s?

Base: 1,501 consumer respondentsScale: Top 2 Box – 5/6 rating on a 6-point scale

61% 59% 57% 53% 48%

78% 78%71% 71% 68% 63%

“How important is it to beable to customize your meal

at the following types ofFSR’s?

The New “31 Flavors”

“A Few Things, Thousands of Ways”

Operator Strategies: AddressingCustomization Desires

The Next Chipotle?

Client Logo

Foodservice Distributor Environment

Foodservice Distributor Landscape

2010 Foodservice Distributor SalesTotal = $201 Billion

2010 Number of Distributors

*U.S. only

Broadline2,50015%

Specialists11,000

Nonfoods3,00018%

Top 10Broadliners

All OtherDistributors

Club Stores/CNC8%

SystemsDistributors

Primary Business

Broadline Systems Club/CNC

1. Sysco

2. US Foodservice

3. PFG

4. Gordon

5. McLane

6. Restaurant Depot

7. Costco

8. Reinhart

9. Martin Brower

10. MBM

The Top 10 Companies ReflectMultiple Types of Distributors

• Canned, frozen, equipment,supplies, tabletop, disposables(400-500 suppliers)

• 2,000-4,000 customers

• 8,000+ SKUs on hand

• Negotiated pricing withindependents, small chains

• Cost-plus pricing with largechains

• Power Distributor >$150MM*in sales

• Billionaire Club Distributor >$1Bin sales

Broadline Distributors

Top Power Broadline Distributors

2005 Sales($B)

2007 Sales($B)

2010 Sales($B)

1. Sysco* $31.4 $36.4 $38.4

2. U.S. Foodservice 18.5 20.0 18.8

3. Performance Food Group 5.7 6.3 10.3

4. Gordon Food Service* 3.7 6.0 7.7

5. Reinhardt 2.1 3.1 4.5

6. Maines Paper 2.0 2.4 3.0

7. Food Services of America 2.0 2.6 2.6

8. Ben E. Keith 1.3 1.7 2.1

9. Shamrock 1.3 1.7 1.9

Total $69.1 $80.2 $89.3

*Includes sales in Canada 118

Power Distributors – 2005 vs. 2010

2005 2010 Change

Companies 31 34 +3

Total Sales($MM)

$74,800 $95,000 +$20,200

Sales/Company 2,412 2,617 +$205

DCs 387 464 +77

DSRs 20,500 20,000 -500

• USF is the second largest national broadline distributor in the UnitedStates

• 65 Distribution Centers and 14 Processing facilities

• Infrastructure

– ~250,000 customers

– ~27,500 employees

– ~4,700 sales associates

– ~300,000 SKUs

– ~35,000 Private Label

– ~6,000 suppliers

– ~6,000 trucks

• Serves three primary customer segments

– Street (independent restaurants)

– National Accounts (hospitals, schools, etc.)

– National Chain Restaurants

Anatomy of a Top 10 Distributor

Broadline locations

North Star locations

• More contract business with lowermargins

• Losing street customers to clubs,depots, CNC

• Less street pricing power than in thepast

• GPOs a battle for “operator control”

• Distributor brands advantage

• Focus on operating cost reduction

Evolving Distributor Realit ies

• Represent 20% of industrypurchasing

• Very strong healthcare penetration

• More involvement in othersegments

• Manufacturer issues: extendibility,double dipping, no volumeguarantee

• Distributor issues: loss of operator“control,”margin erosion

GPOs Increasing asan Industry Factor

2009 FSPurchases

($000) Segment Focus

Foodbuy(Compass)

$2,400,000Multi-Unit

Entegra(Sodexho)

2,000,000 Hospitality

Avendra 2,000,000 Travel & Leisure

Premier 1,500,000 Healthcare

Dining Alliance 1,000,000Multi-Unit

Top 5 GPOs

GPO Penetration of IndependentsHas Stirred Distributors

SegmentTotal Segment GPOPurchases ($MM)

% of Total RelevantSegment Purchases

K-12 $2,595 28%

Colleges 1,845 29

Hotels 3,337 36

Street Restaurant 3,055 6

Business & Industry 770 10

Hospitals 4,030 89

Nursing Homes 2,170 61

Recreation 2,216 34

Total $20,020 21%

Total Purchases Made through GPOs

Source: 2009 Technomic GPO Study

“In terms of non-specialized GPO’s, I would describe them aspariahs. They don’t add a lot of value. They simply disrupt

the profit potential in the marketplace.”

Contract Share of Business IsQuite High and Growing

62%Contract

Independents

Top 500 Chains

Other Contract/Chain

Total Purchases = $201B

Concern: Customer/Margin MixAre Critical to Profitabil ity

2010 (E) Share of…

(E) = Technomic estimate

Sales Profit

Street Contract

Street Sales Shoulderthe Profit Load

History of Distributor Brands

• Distributor labels

• Lower cost

• Questionablequality

• Distributor brands

• Better value

• Good quality

• An alternative tomanufacturer brands

Brand Structure – DistributorBrands

DB’s a Key to Future Success

Manufacturer$117B59%

Distributor$37B18%

Operator $47B23%

2010 Total Distributor Sales(Operator Purchases) = $201B

by Brand Type

Importance of DB’s toFuture Success

Not VeryImportant

Important23%

VeryImportant

ExtremelyImportant

Source: Technomic Distributor Intelligence Service Issue #68 (6/11) 129

Despites Profitabil ity, Challengesto DB Growth Exist

($0.35)

DistributorBrands

ManufacturerBrands

OperatorBrands

Distributor Profit/Case*Average = $1.30

*Based on case value of $26.50Source: Technomic

Obstacles to Selling DB’s

53%40% 40%

Mfg. BrandsSpecified

Sales RepResistance

Lack ofCustomer

Acceptance

Volume Growth Will Come fromOperator and Distributor Brands

*In constant 2010 dollars

Operator Purchases($B*)

Brand Type 2010 2015Change

Manufacturer $117 $115 -$2

Operator 47 53 +5

Distributor 37 39 +2

Total $201 $206 +5

• Educator, territorymanager, sales generator

• Handle 50-60 customers

• Distributors believe DSRspay big dividends

• Not looking to reducenumbers

• New skills – operator foodcost management

• Talent upgrades

Distributor Sales Rep (DSR) Landscape

“Our customers, even the newgeneration, want to see DSRs”

Agree60%

Disagree40%

“I am more loyal to my DSRthan I am to his/her company.”

There has been no major shift over the recent past

How Distributor Sales RepsSpend Their Time

*Includes admin, scheduling, etc.Source: Distributor Intelligence Service

% of Time

Average = 25 minutes

TakingOrders

HelpingCustomers

Traveling19%

Other*28%

• Buying Groups

• Systems Distributors

• Specialty distributors

– Product (meat, dairy,equipment)

– Segment (vending, airlines)

• Warehouse clubs

• Cash-n-carry

• Direct-store delivery (DSD)

Other Distribution Alternatives

• Affiliation for small/ medium-size distributors

• Provide buying clout –negotiation leverage

• Expanded marketing,strategy, support services

Distributor Buying Groups

• Serve the super chains

• Few customers

• Limited inventory

System Distributors

Source: Technomic; ID Magazine

Independent Chain OwnedChain OwnedBroadliner

OwnedBroadliner

• Lower overhead

• Cost-plus pricing with chains

• Ownership structures vary

“We see the club store segment as a greater threat tomarket share because of the growing ethnic restaurantsegment. They are very price sensitive. They don’t mind

running out to Restaurant Depot. They don’t consider thevalue that a broadliner provides.”

Club Stores Are Major Factor

• Quality merchandise

• Low prices

• No minimums

• Increased availability/quality ofperishables

• Package size

• Brand names and private label

• “See, touch, smell” before buying

Clubs/Cash-n-Carry Appeal toOperators

• Monies paid to distributors bymanufacturers tocarry/promote products

• Manufacturer trade funding =>75% of distributor operatingprofit

• Typical manufacturerspending level 16.2% ofsales

• Majority of Trade Spend is“Local Trade Spending”(58.5%)

A Primer on Trade Spending

Increases Volume

Increases AccountPenetration

Increases Profits

New Customers

Defining Success ofMarketing Programs

Source: Technomic Distributor Intelligence #58 (7/2010) 139

Distributor Trade Programs

92% 88%71%

SalesMeetings

Food ShowParticipation

Contests/Promotions

for DSR's

Top 3 Activities Included inMarketing Programs

Operator Food Show Likes

Source: Technomic Driving Change: Improving Local Trade Spending ROI.Common Interest Sponsorship (2009); Technomic Distributor IntelligenceService #58 (7/2010)

See NewProducts

Other13%

Talking toReps3%

Networking3%

PurchaseDiscounts

Samples8%

ServingIdeas10%

National and RegionalRedistributors

• Dot Foods • AlpineRedistribution

• Empire Beef

• FoodserviceCenter

• Honor Foods

• Reddy Raw

• RW Zant

• Twelve Baskets

• SYSCO RDCNetwork

• Golden Bay(Federated)

• Golbon

• Progressive GroupAlliance

• MBM

OpenDistribution

ClosedDistribution

National Regional

We have startedmapping our

strategy to roll outcategory

management13%

We do not haveany plans to

develop a CMP16%

We haveestablished aformal CMP

We would like tohave a formal

CMP are not readyto start

• Recognize value butslow to adopt

• Biggest Concerns

– CustomerRelationships (58%)

– Time Consuming(53%)

– Rank & FileCommitment (42%)

• Becoming a keyinitiative

– Sysco

– U.S. Foodservice

Finally, Category Management:What’s Happening?

Source: Technomic Distributor Intelligence Service Report #60 9/2010 142

Quiz Time: Distributors

Client Logo

Beyond Restaurants

BeyondRestaurants

$77.8B43%

Rest. & Bars$101.8B

BR Segments Represent LargeVolume Opportunities

2011 Total FoodservicePurchases = $179.6B*

2011 Beyond RestaurantsPurchases = $77.8B*

Retail Hosts$15.2B20.0%

Education$14.9B19.0%

Travel &Leisure$15.1B19.0%

Vending/OCS$9.4B12.0%

B&I$6.0B8.0%

Healthcare$10.1B13.0%

All Other$7.1B9.0%

*Excludes alcohol and non-foodsSource: Technomic 146

Issues & Outlook• Super Markets +4.0%

– Large FS footprint

– Value

– Variety

• C-Stores +1.5%

– Continued focus on beverage

– Hi fuel costs hurt

• Other +3.5%

– Club store growth

Retail Host Foodservice

Supermarkets$9.1B60%

C-Stores$3.7B24%

Other RetailHosts$2.5B16%

Total Retail Host OperatorsPurchases = $15.2B

Source: Technomic 147

C-Stores: Then & Now

Foodservice Leads In-Store Profits

Frozen DispensedBeverages

Cold DispensedBeverages

Hot DispensedBeverages

Prepared Foods

Source: CSNews Industry Report

Average Gross Margin Percent In-Store

Foodservice Merchandise

Meet “Bubba”

Heavy/Moderate Light/Infrequent

Gender Skews male Skews female

Age Skews young (<24) Skews older (45+)

Race Hispanic Caucasian

Education High school, some college College graduate

Income Less than $25K annually $50K-$75K

Not Your Daddy’s C-Store

Watauga, TX

Retail Host Foodservice All-Stars

Costco SheetzWegman’s

Issues & Outlook• Lodging +4.5%

– Meetings, catered events

– Upscale recovery

• Transportation +2.5%

– International departures

– Flat 2012

• Recreation +.4%

– Less discretionaries

Travel & Leisure Foodservice

Total Travel & Leisure OperatorPurchases = $15.1B

Recreation$4.7B31%

Lodging$8.5B55%

Transportation$1.9B13%

Travel & Leisure Foodservice All-Stars

Safeco FieldSeattle, WA

The SurreyNYC

Thai AirlinesEconomy Class

Issues & Outlook• K-12 +2.0%

– Diversified enrollment

– Nutrition legislation

– Parents

• College & University +4.5%

– College population increasing

– Growth in 2-year colleges

– Greater FSM, GPO focus

– More savvy diners

Education Foodservice

Total EducationPurchases = $14.9.6B

K-12Schools$8.8B59%

College/University

$5.8B41%

Education Foodservice All-Stars

Hokie Grill

West End Market

Virginia Tech University Greenview Upper Elementary School(South Euclid, OH)

Issues & Outlook• Senior Living +3.5%

– Here come the Boomers

– Housing crises

– Retirement income

• Hospitals +5.1%

– Upscaling, customer service focus

– Cash operations

• Long Term Care +.4%

– Severe budget shortages

– Delay of elderly entering nursinghomes

Healthcare Foodservice

Total HealthcarePurchases = $10.1B

Hospitals$4.2B43%

Long-TermCare

$3.2B32%

SeniorLiving$2.6B25%

Healthcare Foodservice All-Stars

Virtues Restaurant – SumaHealth Care (Akron, OH)

Vi Assisted &Independent Living

(San Diego, CA)

Hanna HealthCareCenter (Verona, PA)

Companies that operate and manage foodservice facilitieswithin/for other establishments (typically noncommercialestablishments) for purpose of making a profit

Foodservice Management Firms(FSMs)

FSMs Dominate Share of SeveralSegments

FSM Segment Share

38% 36%

19% 16% 15%

37% 35%

18% 15% 15%

B&I C/U Recreation Hospitals K-12 Senior Living Long-TermCare

2010 2007

Over 7,000 B&I units are FSM-run compared to lessthan 3,000 self-opsKey Insights

Organization U.S. Revenue (in millions)

1. Compass Group $9,200

2. ARAMARK 8,600

3. Sodexho 7,900

4. Delaware North 1,950

5. Centerplate 1,000

The Leading Players

¹/ North America revenueSource: Technomic/Foodservice Director 161

Business & Industry Education Healthcare Recreation Other

Leading FSMs Have PrioritizedStruggling B&I Segment

% of Revenue by Segment

Compass Uses Multiple BrandsAcross Different Segments

HealthcareDining

HealthcareFacilities Education Vending

Sports &Entertainment

BusinessDining

• Corporate name usedacross all segments

• Emphasize overallfoodservice expertiseversussegment expertise

• Management believesthat future change insegment brandingstrategy would bereactive and negativelyreceived

Aramark and Sodexho Use SingleBrand Strategy Across Segments

• University of TampaStadium

• Center of Plate: BBQChicken, Pork, Beef andFish

• Sides: Smoked Macaroniand Cheese, VegetarianChili, Corn Bread, SweetPotato Fries

• Combos: $5.49 - $8.49

Sodexo’s Newest - SparBQ

Quiz Time: Beyond Restaurants

Client Logo

The Chains

Limited Service Segmentation

*QSR Specialty includes: Bagel, Barbecue, Chili, Other Ethnic, Seafood and snack**FCR Specialty includes: Barbecue, Italian, Other Ethnic and SaladSource: Technomic, Inc.; company reports

QSR71.4%

FCR28.6%

LSR Segmentation

$1,098

Total LSR

Median AUVComparison ($000)

Mexican

Bakery Café

Chicken

Hamburger

Other Sandwich

Specialty**

FCR Composition

PizzaOther SandwichFrozen Desserts

HamburgerCoffee & Other Beverage

Specialty*Chicken

Cafeteria/BuffetFamily Steak

DonutMexican

QSR Composition

Total QSR Chains: 182 Total FCR Chains: 73

Full Service Segmentation

*CDR Specialty includes: Other Ethnic and Other**MSR Specialty includes: HamburgerSource: Technomic, Inc.; company reports

CDR82.0%

MSR18.0%

Full-Service Segmentation

$2,725

$3,000

$1,475

Total FSR

Median AUVComparison ($000)

Family Style

Italian

Specialty**

MSR Composition

Varied Menu

Italian

Mexican

Seafood

Specialty*

CDR Composition

Total CDR Chains: 201 Total MSR Chains: 44

LSR Menu Segments

Source: Technomic 2012 Top 500 Report*Nominal ** Seafood, Italian, BBQ, Bagel

LSR Segment ‘11 Sales $B ‘11 Growth*

Hamburger $68.2 3.6%

Other Sandwich 18.6 4.7

Pizza 20.5 2.5

Coffee Café 17.1 6.6

Chicken 14.9 3.6

Mexican 12.6 4.1

Bakery Café 5.2 7.0

Frozen Dessert 5.1 -.1

Family Casual 4.7 -2.0

Asian/Noodle 2.6 5.5

Other** 4.3 1.9

FSR Menu Segments

FSR Segment ‘11 Sales $B ‘11 Growth*

Varied Menu $27.4 2.6%

Family Style 13.3 .9

Steak 8.7 5.1

Italian 7.1 2.2

Seafood 4.9 5.2

Mexican 2.0 .4

Asian Noodle 1.8 2.7

Other 2.2 3.5

Source: Technomic 2011 Top 500 Report*Nominal 171

2Q-11 3Q-11 4Q-11 1Q-12 2Q-12

8.0% 10.0% 9.0% 8.0% 7.0%

5.8 2.5 4.0 2.1 5.4

4.6 4.1 5.6 2.5 2.8

Same-Store Sales Change vs. Previous Year

Specialty LSR Players PerformingWell

2Q-11 3Q-11 4Q-11 1Q-12 2Q-12

10.0% 11.3% 11.1% 12.7% 8.0%

4.4 6.0 5.9 7.5 4.8

5.1 3.7 3.5 3.0 2.1

*Franchised stores

Fast Casual Continues StrongShowing

6 of 10 Fastest-Growing Chains AreFCRs

1,150%

Total % Growth(2005-2010)

Chains over $200MM in sales.Source: 2006-2011 Technomic Top 500 reports. 174

FCR Menus Imply Culinary Touch

Source: Technomic Menu Monitor.

• Mediterranean Veggie Sandwich ontomato basil with peppers, feta,cucumber, lettuce, tomatoes, red onionsand cilantro hummus.

• Teriyaki Charburger with grilledpineapple. 100% lean beef.

• Wild Salmon “Lite” Burrito. Noriseaweed, poblano brown rice, avocado,cucumber, cabbage, fat-free chili, sesameaioli, whole wheat tortilla.

Concept Menu Item

FCR Price Points Attractiveto Consumers

Meal Components FCR CDR* QSR

Boneless Buffalo WingsFriesSoft Drink

$10.58 $15.49 $9.87

½ lb. Bacon CheeseburgerFriesSoft Drink

$9.67 $14.35 $7.59

Chicken QuesadillaSoft Drink

$8.58 $14.35 $5.19

*Includes 15% tip.Source: Technomic MenuMonitor 176

FCR: The Bright Spot in theRestaurant Industry

All Restaurants & Bars

10 Year CAGR 5 Year CAGR

Growth rates nominal.Source: Technomic

Growth to 2011

Chain 2Q ‘11 3Q ‘11 4Q ‘11 1Q ‘12 2Q ’12

- 2.0 - 3.0 6.0 5.0 4.0

4.8 3.0 6.8 2.0 1.7

- 0.1 4.9 1.8 0.5 5.1

0.3 - 6.3 - 3.6 - 4.2 - 2.4

Pizza on the Rise

Chain 2Q ‘11 3Q ‘11 4Q ‘11 1Q ‘12 2Q ‘12

4.5 4.4 7.1 8.9 3.6

2.3 0.7 4.2 0.7 3.2

3.9 - 0.5 0.1 3.5 2.8

3.2 3.1 5.3 4.2 2.8

9.6 2.5 1.8 6.1 2.6

Some Burger Chains Startingto Grow Again

• McDonald's sells more than75 hamburgers every second

• McDonald’s $32B in revenueexceeds the GPD of Ecuador.

• McDonald's is the world'slargest distributor of toys,with one included in 20% ofall sales

• The only place in the lower 48that is more than 100 milesfrom a McDonald's is a barrenplain in South Dakota (N45.45955 W 101.91356)

A Word About McDonald’s

Casual Dining Chains ShowingSigns of Life

Chain 2Q ‘11 3Q ‘11 4Q ‘11 1Q ‘12 2Q ’12

3.5 - 0.4 0.8 1.0 0.5

2.1 1.7 1.4 4.6 2.2

2.7 4.2 5.9 7.2 5.5

- 0.1 - 4.1 - 4.2 - 5.0 - 4.6

Contemporary Casual Doing Better

2Q-11 3Q-11 4Q-11 1Q-12 2Q-12

2.1% 0.8% 2.7% 2.4% 2.1%

5.7 3.5 2.8 3.9 1.9

9.1 10.6 7.8 8.7 2.3

Upscale Showing Renewed Vigor

*Franchised stores

2Q-11 3Q-11 4Q-11 1Q-12 2Q-12

5.8% 2.6% 7.7% 3.7% 6.0%

8.2 5.1 n/a n/a n/a

7.9 7.0 5.7 5.7 2.8

9.9 10.1 na 5.4 3.0

This Just In…

Chain News

Taco Bell• First Meal" set to debut in about 750 locations in

10 states

Taco Bell

• Begins testing an expanded, more upmarketmenu that focuses on fresh ingredients -- thinkChipotle Mexican Grill on a budget

Wendy’s• Testing premium “Black Label” Burgers: Bacon

Portabella and Spicy Santa Fe @ $4.49

McDonald’s

• Twister Fries are only available in the Philippines,where many call the fast food chain "McDo." Butthe fries are only available for a limited time, themagazine reported, costing about $1.43 in U.S.dollars .

This Just In…

Chain News

Golden Corral• Proving not everyone is on the health bandwagon,

offers cotton candy on buffet.

Starbucks

• Will open its first tea-only store in October under theTazo brand. The shop will sell more than 80 varietiesof loose-leaf tea, pastries, baked goods and packagedchocolates.

McDonalds• Will be opening its first two vegetarian restaurants in

India in 2013.

DunkinBrands

• Will begin transitioning to cage-free eggs nationwidewhile requiring its pork suppliers to phase out pig-breeding cages called gestation crates as part of itscorporate social responsibility commitment.

Quiz Time: The Chains

Client Logo

Conclusions

• Consumers starting tospend again

• Most segments to grow ona real basis

• Momentum starting tobuild

• But recovery will be slow,not dramatic

• Niche, operatorprioritization still critical

Conclusions

Today’s Elevator Speech

Necessary Actions

Traffic

Consumer frugality

New value definition

Addressing new legislation

Rising fuel and commodity prices

Work with operators on value offerings

R&D partnerships

Cut costs out of supply chain

Greater transparency

Longer term: business building

Challenges

Thanks for Your Attention Today…Any Further Questions?

Mathew MandeltortSenior Consultant

312-506-3917

mmandeltort@technomic.comhttp:epicureancandidate.wordpress.com

Foodservice Fundamentals Fast Track: Introduction to the Foodservice Industry

Documents