How Big is B&I?

Foodservice is a fragmented, segmented — and to many, mystifying — business when it comes to estimating the size of particular markets. For decades, manufacturers have come to rely on annual forecasts released by Technomic at its Forecast and Outlook seminars each September.

Using surveys, economic and demographic data, the Chicago-based consulting firm estimates annual F&B purchases for virtually every foodservice segment. These and other numbers (including a “retail sales equivalent” (RSE) that permits rough comparisons between commercial and onsite segments) are widely referenced.

From year to year, the numbers have been remarkably consistent, although Technomic does make significant methodology changes from time to time. Such was the case this year, when sharp-eyed marketers noted a significant drop in the RSE Technomic now forecasts for the Business and Industry (B&I) segment in 2008 and 2009.

B&I's RSE projections for 2008 are forecast at $14.9 billion, when they had been tabulated as between $20 and $21 billion for the last four years. Similarly, the number of B&I “contact points” was adjusted from last year's 41,000 to just under 11,000.

So what gives? B&I has certainly been under duress, but no one believes it has shrunk 30 percent in one year. FM editor John Lawn interviewed Technomic vice president Joe Pawlak for the following update.

Let's get right to it. What's caused the changes in your B&I market retail sales equivalent estimate?

Pawlak: “B&I has always been the segment we've had the most difficulty getting our arms around. The volume numbers reported by management companies reflect P&L contracts, fee contracts, hybrid contracts and sometimes non-food services they provide. Also, the definition of B&I — originally, food prepared and consumed away from home by people at their places of employment — doesn't reflect today's B&I reality as well as it once did.

“The methodology we originally developed goes back many years. Traditionally, our national estimates were based on the number of work locations with at least 500 employees. We used census data to identify that universe and matched it with food purchase data we obtained from surveying operators of actual locations. We didn't ask operators for sales data, but what their food purchases were from distributors. Then we used a food cost multiplier to estimate a retail sales equivalent. Our main intent was always to estimate food purchases or manufacturer shipments to the segment.”

So what changed?

Pawlak:“It became apparent that we needed to look at B&I differently. For example, basing the number of locations simply on the number of employees there and the percentage of those locations that offered foodservice would include operations that aren't what most people define as B&I today — say a deli or sandwich operation run by an independent operator on an office building's first floor. Virtually 100 percent of its business might be the building's employees, but most foodservice marketers wouldn't call that B&I. Statistically, it created a model with a lot of ‘noise.’

“To address that, we changed the way we looked at these contact points. In the past, the number changed based on the size of workplace populations management companies told us they were targeting. So during the time when they targeted populations of over 1,000 employees, that was the basis for our estimates. In recent years, many have said they've looked for ways to serve populations of 500 or less — a much larger theoretical universe.

“Now, we have re-defined how we estimate contact points to take out some of this uncertainty. Since the vast majority of B&I business is operated by management companies, the number of contact points we cite for it is based of the number of actual B&I contracts we estimate exist. It is different from what we do with commercial restaurants, where unit counts are the primary measure.

“In B&I, we now define a contact point as a contract with a provider, not in terms of how many locations are represented. If a client splits the contract between three providers, it becomes three contact points. It is similar to how we estimate the size of the K-12 school market. Contact points there represent school districts, not actual school buildings. We think this approach results in estimates that are more definitive in the onsite market. It eliminates most of the ‘noise’ in earlier estimates and represents a truer picture of B&I as people define it today.”

Just for the record, what is your definition of B&I?

Pawlak: “Technomic defines B&I as employee feeding in offices, factories and plants, with the exception of healthcare, education and vending, which we treat separately. It includes public and private companies as well as government buildings that are not healthcare or military facilities. So a location like the Pentagon would be B&I because it is not a military base. What we define as military includes operational military facilities in the U.S. only.”

How do you reconcile the fact that Technomic's B&I estimates have been flat or declining in recent years while management companies have generally reported increases?

Pawlak: “There are two key dynamics: the populations in B&I generally have been in decline because of layoffs, retrenchment and outsourcing; but at the same time, as people have become more price sensitive, onsite meals can offer a better value than they may get on the outside. Also, to cope with population declines, contractors have spent a lot of effort to become more efficient and to find ways of increasing check averages without necessarily increasing their costs.

“Remember — our estimates are of food purchases. A contractor is reporting sales volumes that represent food, labor, overhead and profit. So an operator's dollar sales could increase even though food and beverage purchases may not go up in tandem. What we release as a “retail sales equivalent” is just a number to allow rough comparisons with the commercial restaurant world. It is not equivalent to what a contractor would report as sales.”

With all of that said, and recognizing the effect the economic downturn is having on B&I, what is the general outlook for this segment relative to recent years?

Pawlak:“We estimate both nominal and real growth. Right now, on a nominal basis, we estimate that B&I increased 1.3 percent in 2007, will have declined 3 percent in 2008 and will decline another 3.3 percent in 2009. In real terms, taking inflation into account, the declines are several points greater.

“The financial sector is obviously under tremendous duress right now. Many economists say the national unemployment rate could reach 8 percent by the end of next year. A global recession will mean that exports decline, and that is bad news for manufacturing. So the short-term picture is not very good. We will be re-visiting all of our forecast numbers in January and will issue our best revised estimates then.”

(Editor's Note: FM reports Technomic's revised annual forecast numbers each year in its February issue, along with other segment-by-segment trend data that will affect business in the coming year. Stay tuned.)