Taking the Measure of the Market

John Lawn

As the foodservice industry enters 2007, hiring is on an uptick, consumer spending is growing at about 2.8 percent, and fuel prices are moderating. Interest rates will likely remain stable and inflation numbers have moderated.

Altogether, not a bad environment in which to operate, although one that does suggest somewhat slower economic growth than we've had in recent years (Fig.3). Still, several noncommercial segments are forecast to have significantly higher growth rates in 2007 than even the benchmark full service restaurant segment. These include colleges, hospitals, K-12 education and CCRCs (Fig. 1).

We'll take a closer look at issues significant to specific noncommercial segments later in this article. But first, here's an overview of some of the macro trends affecting almost all noncommercial operators.

Financial constraints are tighter than ever. Customer demand for increased value, administration demands for increased "contribution" and declining subsidies are all putting pressure on operators.

"The largest issue for noncommercial operators is the challenge of making money in a tough P&L environment," says Joe Pawlak, vice president of Chicago-based Technomic, Inc. To compensate, operators are looking to operate and buy smarter, manage labor costs more tightly and promote and merchandise offerings more effectively.

Another result: contract management companies are increasingly targeting segments like education and healthcare where they have more penetration potential. "These segments are where contractors will look for new business—after that it is a market share game," says Pawlak.

Wholesale food prices are looking mixed. They increased about one percent more than was forecast last year but are predicted to rise less than that this year (Fig.4). Prices for pork and turkey should decline, with beef and chicken remaining stable or slightly increasing (Fig. 5). Milk and cheese prices are likely to rise and coffee prices are already climbing, a result of increasing global demand and poor crop projections in Brazil. The freeze in California will likely play havoc with prices of produce items ranging from oranges to avocados, in some cases lasting well into 2008.

Procurement sophistication is increasing. Group purchasing organizations (GPOs), which until recently had a significant presence primarily in healthcare, have made significant inroads into higher education. Some are also predicting that GPOs will soon target K-12 schools, partly in response to new government procurement record-keeping regulations (more on this later).

Health and wellness concerns are having a real impact, reflected not only in broad new local wellness policies governing K-12 foodservice but also across the board. Efforts to remove trans fats from food have taken on tsunami-like proportions in schools and colleges, a trend that is rapidly spreading to other segments like B&I.

This has implications beyond the menu, says Technomic's Pawlak. "If a B&I client tells its contract service provider it wants all products to be trans fat free, the contractor has to be ready to deliver that—and quickly determine which products have to be replaced and what impact that may have on the menus and recipes managers use at those sites. It is better to be proactive than reactive, because this is coming."

Sustainability and other "green" initiatives are becoming mainstream. Products and menu items that reflect what Technomic tags as "social consciousness" are on a growth spurt. Large grocery chains have noted the success and higher margins of retailers like Whole Foods and Wild Oats and are jumping on the bandwagon, raising consumer consciousness of the category.

U.S. organic food sales are now a $14 billion business, with sales quadrupling between 1997 and 2006. The decision by Wal-Mart to begin offering organics in most stores will significantly up the ante. Although the premium paid for some organics, like leaf lettuce, has declined because of these higher volumes, increasing demand could well outstrip supply for many other items, keeping prices high.

Some of the biggest implications may face manufacturers, "who are not really set up to offer organic, hormone- and antibiotic-free, locally sourced, free trade and other socially-conscious products," says Technomic's Pawlak. "While they can't suddenly become ‘the local farmer,' many will find ways to develop sub brands in various parts of the country to satisfy these customer demands."

Redefining ‘all natural.' Thousands of ‘all-natural' products, a less strictly regulated term, have become available in recent years. USDA's Food Safety & Inspection Service now has hearings underway to redefine that term, which had its last significant revision in 1982. The sugar and other industries have a huge stake in any such change and lobbying interests are geared up for major battles in the coming year.

The Farm Bill as Lightning Rod. The massive Farm Bill now in Congress will pit—as always—many interests against one other—farmer price supports vs. global trade proponents; grain growers vs. fruit and vegetable farmers; the sugar lobby vs. the ethanol industry; and, let's not forget, subsidy-weary taxpayers against special-interest largesse.

One focus of attention is corn prices, nearly double what they were a year ago due to demand from ethanol producers. That is putting pressure on feed prices (and thus chicken, pork and beef prices) and is discouraging some farmers from growing soybean varieties that are in demand to replace trans fat oils.

Toss in the shift of Congressional power to a new majority, concerns about excessive commodity index funds trading and the possibility that new Farm Bill riders could address everything from competitive foods in schools to food safety. As they say, stay tuned to this station.

Finally, food safety issues will more aggressively drive public policy. Recurring food contamination incidents like those that made headlines in 2006 could cause Congress to revisit legislation like the never-passed Safe Food Act of 2005. It would have looked to consolidate the food safety responsibilities now shared by more than a dozen federal agencies.

HIGHER EDUCATION
Technomic forecasts that College and University foodservice will increase five percent in 2007, the second straight year the segment has had one of the best growth projections in foodservice.

Upgrades help operators penetrate the customer base. "A big reason is the major upgrading going on at college campuses," says Technomic's Pawlak. "Customers there are spending more on food and more people are eating at campus facilities, coffee shops and c-stores." The student population is growing, "but more importantly, operators are doing a better job of penetrating their existing customer potential," he adds.

Up the down staircase. College tuition and room and board charges continue to rise well above the inflation rate, a result of increasing benefit costs and the decline in state and federal aid to education. The room and board component of a typical undergraduate school's bill has risen significantly faster in public institutions than private ones, and fastest in the Midwest (Fig. 6). Many think this reflects the larger contributions state college dining departments are being asked to make to school operating funds and to covering campus overhead costs.

The gender gap is widening. Over the last decade, undergraduate women have come to outnumber men, 56 percent to 44 percent according to the latest census data. Among undergraduates age 25 or older, women lead almost two to one. A primary reason is the larger female share among low-income whites and Hispanics, according to studies by the American Council of Education. It's a gap expected to widen over the next decade (Fig. 9), and one that has obvious implications for college menus and meal plans.

Capital investments are improving productivity. "The benchmarking numbers generally suggest very consistent cost management by directors over the past six years," says Art Korandanis, director of auxiliary services for College of the Holy Cross and a long-time member of the NACUFS' Benchmarking Committee.

"Even as wages and benefits have been going up 3-5 percent every year, you see that labor costs as a percentage of total revenues appears to be trending down. If you talk to directors, you will usually find that every time they renovate or make a capital investment, they are also making decisions that will reduce labor costs over time."

Students are demanding more food value. "This is more obvious today than ever before," says Jim Bingham, director of foodservice at Rochester Institute of Technology and also a member of the NACUFS Benchmarking Committee. "You can't fool the customer, and students today very closely evaluate alternatives in the meal plan options. They can do the math—and when they do, you'd better not come up lacking."

That value takes other forms as well, he adds. "It means small kiosk operations in parts of campus where we've not had service previously, more convenience products in c-stores, more opportunities to use flex dollars off-campus. But these kinds of changes have to be managed carefully to avoid negative financial implications."

RIT is also one of a number of schools that have introduced meal plans with unlimited access to all-you-care-to-eat facilities. "We charge more for it, but parents and students see it as a better value. And more upperclassmen now buy the plans than before," he says.

Labor costs are an ongoing challenge. For board and retail operations, labor costs remain more volatile than food costs (Fig. 7) although their impact is easier to control in cash operations, where pricing can be more easily adjusted to compensate.

"In New York, our minimum wage went up three percent in 2005, 12.5 percent in 2006, and this year, another six percent," says RIT's Bingham. "We either have to overcome the impact this has on operations or find a way to make it up at the end of the year."

Kathleen Gianquitti, director of dining and retail foodservices at the University of Rhode Island, another NACUFS benchmarking committee member, says this "is causing many schools to rethink past policies about the balance of full-time and part-time workers. It is also causing wage compression issues that affect traditional wage bands that were above the minimum. Also, when wage rates increase, it increases the cost of retirement and other benefits schools provide to employees."

College "contribution" expectations are still growing. "We are now expected to help pay security and grounds-maintenance fees," says another FSD. "Last year we were asked to contribute to the financial aid fund to help the school make up for reductions in Pell grant monies. These are overhead costs we never had to bear before and they're making it very difficult to keep meal plan increases reasonable or to upgrade our facilities."

Board plans are becoming more "hybridized" with retail operations, an ongoing trend that often entails restructured meal plans with more equivalency credits that can be used in cash operations. This also appears to be causing cash transaction averages to increase.

Still, directors often find equivalencies are losers in terms of margin generation and students also typically think they're a bad deal, according to Korandanis. He believes that many schools will find they can increase perceived value and spending flexibility more effectively with modified block plans with debit card dining dollar credits.

C-stores remain popular; they're essential on most campuses, but also problematic because labor and cost-of-goods-sold are typically higher than in other operations. They can also be difficult to benchmark because the model varies so much in the college market. That's one reason NACUFS has changed its definition in the benchmarking survey this year, "to better distinguish what is a c-store and what is primarily a retail foodservice operation," Korandanis says.

A survey conducted by Y-Pulse underscores the wide variances that exist in college c-store customer habits. 21 percent of its college student respondents say they visit a c-store daily and another 33 percent make a c-store purchase at least once a week. But over 20 percent say they never make c-store purchases, suggesting that significant penetration potential exists. (Fig. 8).

Administrations are paying close attention to the numbers. "Presidents are talking to trustees about performance metrics and benchmarks, and are forming institutional assessment offices," says Korandanis. "Directors need to be out in front of that curve. To not have this information at your fingertips is like committing professional suicide."

K-12 SCHOOLS
K-12 school enrollments are still climbing, but at a slower pace than in the 1990s (Fig. 10). Still, Technomic forecasts that in 2007 school foodservice will continue the 3.5 percent sales growth it has had for most of the past five years. Enrollment growth is focused in the South and West, with many districts in the East and Midwest posting declines.

At something of a cyclical mid-point, federal school nutrition programs will not face re-authorization until 2009. School operators are intent on implementing wellness policies, HACCP programs and the menu and ingredient challenges required by the last reauthorization bill and new the USDA nutrition standards.

Going with the grain. One of the biggest changes has been the need to include more whole grains in food offerings. Industry has responded with a broad range of new products geared to helping directors satisfy this requirement. The resulting changes in food color, texture and taste make this a bigger challenge than some assumed. The good news: as kids come to accept whole grain formulations the going will get easier. By the time today's kids reach college age, whole grains will likely be, well, "ingrained" as a food preference.

The story on trans fats is much the same. But, from a food technologist's point of view, an even bigger challenge when it comes to replacing them in baked goods and other offerings. Operators will see hundreds of new trans fat-free products in coming months, but only the best will survive to become school menu staples in the future.

Breakfast is where the growth is, with the number of school breakfasts served increasing four to five percent annually over the past five years while lunch remained mostly flat. Free breakfasts to low-income students dominate (Fig. 11). On an average morning, 7.7 million free and reduced-price breakfasts were served in U.S. schools last year. With paid breakfasts included, 9.6 million breakfasts are served daily.

More schools are serving breakfasts from hallway carts, letting students eat them in classrooms. In some states, breakfast mandates for low income schools have generated dramatic participation increases. (In New Jersey, such a program resulted in a 39 percent statewide increase in breakfast participation in 2004-2005). Many advocacy groups are pushing hard for the expansion of such programs, noting that regional disparities vary widely (Fig. 12).

Summer programs have declined somewhat in terms of meals served since their peak in 2003, a trend that also concerns nutrition advocates. They will be pressing Congress and districts to do more on this front. Again, regional participation differences are pronounced (Fig. 13).

Meanwhile, wellness policies are having a major impact on school food dynamics, a result of mandates in the 2004 Child Nutrition Reauthorization Act. Many policies go beyond USDA requirements for reimbursable meals; a large majority address a la carte and vending sales (Fig. 14).

Some also look to restrict foods that can be used in schools for fundraising efforts and "classroom rewards and celebrations," although the rules in these areas often remain voluntary. As such policies have been implemented, many schools have seen participation in reimbursable school meal programs increase at the expense of a la carte sales, sometimes with unexpected results. In districts where the school meal program had been cross-subsidized by a la carte, formerly balanced budgets have sometimes suffered. This has put a renewed emphasis on having school meal programs designed so they can pay their own way.

In search of a national standard. As dozens of states and thousands of districts have issued their own rules for what food can be sold in schools, it also has become more difficult for suppliers to develop and distribute products to the market.

"This has led many to reach a consensus that a single, national standard on competitive foods is in the best interests of the school nutrition community," says Cathy Schuchart, vice president of the School Nutrition Association's Child Nutrition and Policy Center. "We will be pressing for an Act of Congress to support one in 2007." She emphasizes that SNA does not endorse particular requirements, but that USDA as an agency should be responsible for writing them.

Other legislative initiatives are also on the horizon. Schuchart says there is significant support for expanding the USDA program to help schools obtain more fresh fruit and vegetables. She also thinks funding for a proposed pilot program to eliminate the "reduced" category of subsidized low-income meals by re-categorizing them as free may gain enough support to become funded.

Proposals to give school directors more influence over the sale of competitive foods outside of school cafeterias are still on the table from the last Congress. The Child Nutrition Promotion School Lunch Protection Act—often referred to as the "Harkins Bill"—was sidetracked, but could be revisited. It would have extended the so-called "time and place" rule and further restricted competitive food and vending sales during school hours and on school grounds.

The GPOs are coming. New rules governing school food procurement are about to be finalized and could mean big changes in the way procurement money is used and accounted for, according to John Purcell, managing partner of K12 Services Inc. a wellknown consultant in the field.

The original notice, published for review in the Federal Register two years ago, would standardize definitions for procurement and accounting in the myriad of federal regulations governing school food programs. It is presently undergoing a final review and could become law as early as this month.

"A key issue for schools would be that any funds comingled with federal funds in a bank account would now be considered federal funds for compliance purposes," Purcell says. "That could affect money used for or earned from concessions, catering and other activities."

Another change would provide guaranteed funding for state enforcement to ensure that school bids encourage "fair and open competition." This will put many local procurement policies and procedures under the microscope, he predicts.

"I believe the added complexity will encourage GPOs (group purchasing organizations) to target independent school foodservice programs, as they can put sophisticated procurement programs in place that will provide compliance," he says, noting that a new GPO specifically targeting K-12 schools has recently entered the fray.

"Alternatively, the complexity could cause some school boards to consider outsourcing school nutrition programs to contractors," he adds.

BUSINESS & INDUSTRY
The B&I segment has emerged from the negative growth legacy of 9-11 but will grow only 1.5 percent in 2007 according to forecasts. The downsizing of the typical workplace remains a problem, with many more smaller locations that have populations under 1,000. This has business dining providers struggling to develop new financial and operating models that can help them provide limited foodservices to such locations.

Benchmarking numbers from the Society for Foodservice Management shows that smaller population locations are particularly handicapped if they have high labor costs, which significantly increase the cost of a meal transaction and make the account more likely to run a deficit. (Fig. 15).

B&I's other big challenge is the continuing loss of the subsidies that historically supported dining as a productivity-enhancing benefit. The most recent SFM benchmarking report makes the extent of this loss undeniably clear, suggesting that over $500 million in subsidy dollars have been taken from the segment since 2002. That puts the burden on operators not only to run very tight P&Ls but also makes it difficult to keep meal pricing competitive.

Given that reality, "contract service providers really need to be complimented for the success of their cost management in very difficult times," observes Tom Newcomb, president of Corporate Dining, Inc., the consulting organization that manages the survey and which also conducts extensive market research for its own clients.

In general, the benchmarking report provides a much more detailed look at the dynamics of B&I foodservice than ever before, a result of committed work by SFM's benchmarking committee over the past several years to improve its methodology and sort capabilities.

"The membership can now drill down to a level of detail that was never available in the past," says Newcomb. Data can be sorted by population size, client type (e.g. office vs. manufacturing environment) and other key indicators that can help operators better compare their performance with that of others. Among key findings:

Lunch participation rates in B&I are continuing their slow decline although breakfast participation has remained relatively stable. One reason is that "the loss of subsidies has hurt the value proposition" perceived by many customers, says one director. "A breakfast for under $2 is still seen as a value. But if you compare the price of a B&I lunch to that of a fast food value meal, it is pretty hard to come out on top if the client doesn't support onsite dining as a benefit."

B&I check averages have been rising for both breakfast and lunch, a reflection of rising price points and efforts by service providers to recover costs and compensate for declining subsidies (Fig. 16).

Labor costs are continuing to increase, and have moved well beyond food costs as the biggest challenge in terms of achieving profitability and in managing the variable costs associated with a particular account (Fig. 17). Beyond the numbers, a variety of other forces are changing the nature of the B&I business. Among them:

Tightened contract terms. Especially in larger accounts, liaisons now specify much more tightly defined service level agreements (SLAs) with their contractor partners, looking to specify staffing levels, benchmarked pricing models, policies, procedures, hours of operation and other details to a much more detailed level than in the past. In a P&L environment, this allows a greater measure of client control over service levels that was not required when accounts were subsidized.

Risk shifting. Contracts today also shift more financial risk to the contract provider if projected sales, participation and margin terms aren't met. This is one of many reasons management companies have turned to their corporate procurement operations as a profit center, since operations themselves are not generating the margins they once did.

The changed nature of the B&I liaison. Today, it is increasingly rare to find a B&I liaison who is a foodservice specialist. Where liaisons of the past partnered with contract providers to develop programs based on a common understanding of operating dynamics, "the challenge today is to educate liaisons whose expertise is rooted in other disciplines," says Carol Bracken-Tilley, manager of hospitality services for Motorola, Inc. and an active member of SFM's benchmarking committee.

"SFM is devoting much attention to finding new ways to address the needs these kinds of members have in terms of learning the best ways to manage food programs, merchandising, financial metrics and other aspects of this business."

An eroding lunch daypart. Another challenge: the role and definition of the traditional "lunch hour" has changed for many workers. A recent Steelcase Workplace Index Survey found that it "has become much more of a lunch break—just 31 minutes" for more than half of all workers. Also noted: women are much more likely than men to take shorter lunches (61% vs. 48%).

Of the reasons cited, most add up to the "harder, faster, leaner, cheaper" demands of corporate America. Beyond that, time pressures also drive more workers to use lunch time for errands and other personal business than ever before, a trend that grows as workers age.

"Left off the list" of what people use lunch time for these days, according to Steelcase? "Building collegial relationships, mentoring others, and simply using lunch as a means to get work done in a more casual, more comfortable atmosphere."

Since these are activities that improve workplace productivity, they are also benefits savvy operators can promote to HR departments and administrations as a reason corporations should seek to encourage a return to traditional B&I cafe dining.

HEALTH CARE
Hospital foodservice seems to have finally escaped the negative-growth period that dogged it as it coped with huge cutbacks in the 1990s. Nationally, the number of community hospitals increased for the second year in a row and significant new hospital construction is underway in many parts of the country. Modern Healthcare magazine reported that the hospital industry itself had a record year for profits and the highest margins since 1998.

Hospital foodservice grew 3.5 percent last year and will have similar growth in 2007, according to Technomic. Although foodservice in nursing homes is growing at half that rate, CCRCs (continuing care retirement centers) are booming and should see foodservice sales grow 7 percent in 2007, once again the best performing segment in the noncommercial sector.

The overall number of CCRCs continues to increase (Fig. 23) and analysts say the senior housing segment compares favorably with the hotel industry in many respects, including size and market capitalization. (For a detailed look at the CCRC market, go to http://www.foodmanagement.com/article/9203).

Some specific trends of note:
The nature of the director's job in acute care has changed dramatically over the past decade. A large recent survey of the membership of the National Society for Healthcare Foodservice Management (HFM) found that one in five directors has multidepartment responsibilities. Two in five manage multiple locations (Fig. 19). As more hospitals have formed regional networks, it is increasingly common for a director to oversee foodservice not only at multiple hospitals, but also in extended care facilities.

Retail sales to employees, staff and visitors increasingly drive the typical department's revenue, with operations looking more and more like a B&I environment. 37 percent of respondents to the HFM survey reported retail sales of $1 million or more, and 19 percent reported cash sales in excess of $2 million (Fig. 20). At the same time, a large majority offer significant employee discounts for meal purchases, a handicap their B&I colleagues typically do not have to deal with (Fig 21).

For most, though, patient meals remain the core business. Because of their significant effect on patient satisfaction scores, directors continue to explore ways to improve the service level provided. Twenty-five percent employ a spoken menu, relying on direct interaction with patients to improve their meal experiences. Twenty-two percent offer room service programs now and another 17 percent plan to offer them within the next 12 months (Fig. 22).

Liberalized diets for patients are attracting a lot of interest, another example of how hospital directors are focused on improving the satisfaction of patient customers while still emphasizing nutrition education (see related story at www.food-management.com/article/11968).

Cashless payment and point-of-sale systems are catching on at a rapid pace, as directors employ technology to speed up lines, better analyze customer purchase patterns and make retail sales a more convenient option for employees.

Long-term care is changing to a more resident-centered model. That entails offering more choice and control to residents and will mean more buffet-style, even "food-court" dining in some facilities.

Trends in College Pricing, The College Board, www.collegeboard.com
Gender Equity in Higher Education: 2006; American Council on Education, www.acenet.edu School Breakfast Scorecard 2006, Food Research and Action Center, www.frac.org
A Foundation for the Future II: Analysis of Local Wellness Policies from 140 School Districts in 49 States; School Nutrition Association, www.asfsa.org