it's the end of cheap food as we know it (and i feel fine)
TRANSCRIPT
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Prepared by:
It’s The End of Cheap Food As WeKnow It (And I Feel Fine)
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The Ferdinand MetzFoodservice Forum isproudly supported by
Visit Booth 1354
It’s The End of Cheap Food AsWe Know It (And I Feel Fine)
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Leading foodservice industry organization
Proprietary, multi-client consulting and research firm
Food industry publications
Technomic, Inc.
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Sample of Technomic Clients
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The Technomic Operator Practice
Operations Improvement
OperationsAudits
New ProductDevelopment
Food WasteAudits
ConsumerResearch
Operating SystemUpgrades
CustomerSatisfaction
Studies
MenuEngineering
KitchenProductivity
CompetitiveAnalysis
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Today’s Agenda
Overview offoodservice industry
Current CommoditySituation
Commodity Cost CopingStrategies
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Foodservice IndustryOverview
8Source: Technomic Top 500 Chain Restaurant Reports
Share by Segment has Changedin the Last Decade
FSR49%
LSR51%
FSR46%
LSR54%
2001
Sales $269.4
B
2006
Sales $350.2
B
2011
Sales $370.2
B
FSR51%
LSR49%
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Major LSR Segments Show Improvement
Top 500 LSR Category Sales Growth vs. Previous Year
Source: Technomic Top 500 Reports
Segment 2007 2008 2009 2010 2011
Bakery Café 13% 13% 4% 3% 7%
Coffee Café - - - - 7
Sandwich 6 9 1 2 5
Mexican 6 5 3 4 4
Chicken 5 4 0 2 4
Hamburger 5 4 1 2 4
Pizza 2 2 -2 5 3
Frozen Desserts 0 -1 -1 -1 0
Family Casual - - - - -2
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Top 500 FSR SegmentsTurning Around
Top 500 FSR Category Sales Growth vs. Previous Year
Segment 2007 2008 2009 2010 2011
Steak 5% 5% -1% 2% 5%
Seafood 5 5 0 0 5
Varied Menu 10 5 2 -1 3
Asian 10 14 9 3 3
Italian 7 5 2 1 2
Family Style 3 2 1 -1 1
Mexican 3 -5 -2 0 0
Source: Technomic Top 500 Reports
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Consumers Report an ImprovedFinancial Situation
Same
Worse
Better
Overall Financial SituationApril 2012 (April 2011)
20%(31%)
24%(13%)
55%(56%)
Source: April 2012 Technomic Consumer Survey
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0
20
40
60
80
100
120
2005 2006 2007 2008 2009 2010 2011 2012
Consumer Confidence Up Slightly but StillWell Below Historic Highs
Index
Base: 1966 = 100Source: Conference Board
Feb200925.3
Feb200925.3
Jul2007111.9
May201264.9
Confidence is a directional indicator for the healthof foodservice spending
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Financial Situation ImpactingFoodservice Behavior
Budget prevents me from eating out more
Going to lower priced restaurants
Ordering less expensive items
Taking advantage of chain deals
Source: April 2012 Technomic Consumer Survey
66%
56%
54%
54%
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Retail Value Perception Is Trending Down
Value Perceptions vs. Year Ago
Better Same Worse
Chain restaurants 19% 62% 19%
Independent restaurants 18 68 14
Grocery stores 17 49 34
Source: April 2012 Consumer Survey
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Restaurant Industry Improved in 2011
2011 Restaurant IndustryTotal = $370B
Sales Growthvs. Previous Year
-3.2%
-0.8%
-7.1%
0.4%1.8%
-2.2%
2.5% 3.5%
0.8%
Industry Top 500 All Other*2009 2010 2011
Top 100$213B57%
AllOther*$129B35%
Chains#101-500
$28B8%
*Restaurant chains, independents, with <$37.5MM in salesSource: 2010, 2011, 2012 Technomic Top 500 Reports
Top 500 drives industry growthIndependent recovery begins
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Revised 2012 & First Look at 2013
2.5%
3.9%
1.5%
CPI-FAFH
Nominal Growth
Real Growth
2.5%
4.3%
1.8%
CPI-FAFH
Nominal Growth
Real Growth
2012 (P) 2013 (F)
(P) = Preliminary(F)= ForecastSource: Technomic
Strongest industry growth since 2007But still lower than 2003-2007 Real CAGR (2.8%)
Current Commodity CostSituation
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“For as long as most people can remember, food has been getting cheaper and farminghas been in decline. In 1974-2005 food prices on world markets fell by three-quarters inreal terms. Food today is so cheap that the West is battling gluttony even as it scrapespiles of half-eaten leftovers into the bin.
“That is why this year's price rise has been so extraordinary. The Economist's food-priceindex is higher today than at any time since it was created in 1845 . Even in real terms,prices have jumped by 75% since 2005.”
The End of Cheap Food:The Economist – December 6, 2007
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Food commodity prices since January 1980:Reversal of a 22-year downward trend
0
50
100
150
200
250
19
80
M1
19
82
M1
19
84
M1
19
86
M1
19
88
M1
19
90
M1
19
92
M1
19
94
M1
19
96
M1
19
98
M1
20
00
M1
20
02
M1
20
04
M1
20
06
M1
20
08
M1
20
10
M1
20
12
M1
Index: January 2002 = 100
Source: International Monetary Fund:International Financial Statistics
Down 1/3 in 22 years Doubled in 10 years
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Non-food commodity prices haverisen even more
0
50
100
150
200
250
300
350
400
450
500
550
600
650
700
Jan 80 Jan 85 Jan 90 Jan 95 Jan 2000 Jan 05 Jan 10
Crude oil All commodities Food commodities
Index: January 2002 = 100
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Factors contributing to higher foodcommodity prices
> Exchange rate (LT & ST)
> Oil price
> Economic growth
> Increasing population
> Cost of energy
> Weather production
> Stock-to-use ratio
> Exporters’ policy response
> Importers’ policy response
> Meat & dairy consumption
> Global biofuel production
> Productivity growth
> Natural resource constraints
Short-termdisruptions
Long-termtrends
Economy Wide Agriculture Sector
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150
200
250
300
350
May10
Jul10
Oct10
Jan11
Apr11
Jul11
Oct11
Jan12
Index: January 2002 = 100
Primary factors affecting crop prices1
(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
duty
U.S. cornyields drop
(high temps)
Mexicofreeze
Argentine& Brazildrought
14-crop monthly price index: Wheat, rice, corn, & soybeanprices; based on IMF price and trade share data.
Russia endsexport ban
U.S. $ appreciates
Favorable weatherIn Europe & FSU
Higher estimated global grain stocks
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0
2
4
6
8
10
12
14
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1980/81 1985 1990 1995 2000 2005 2010 2015 2020
Corn, wheat, rice, and soybean pricesprojected to remain historically high
$ per bushel (per cwt for rice)
Corn
Wheat
Source: USDA Agricultural Projections to 2021, February 2012.
Rice
Soybeans
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30
40
50
60
70
80
90
100
110
120
130
1990 1995 2000 2005 2010 2015 2020
$ per hundredweight, nominal, U.S. markets
Beef cattle: Steers, 5-area
Broilers: 12-city market price
Hogs: National base
Source: USDA Agricultural Projections to 2021, February 2012.
Future prospects: Livestock prices
2525
Weather
Stock levels
Policy changes by food commodity exporters & importers
Exchange rates
Agriculture production costs
Extent of global economic recovery
Import demand:
– Who will be the importers?
Near-term factors that may influencefuture agriculture prices
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Biofuels production
Food consumption patterns
Technology advancements
– Continued slowing of growth in productivity?
– R&D investments.
– Role/acceptance of GMO products.
Natural resource constraints
– Land: Ability to expand cultivated area; productivecapacity of new land
– Water: Ability to continue rate of growth in irrigated areas
Climate change
Longer-term factors expected to influencefuture agriculture prices
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Expect prices to fall from recent peak, but to remainhistorically high
– Global economic recovery and renewed growth in demandfor crops, animal products, and energy
– Some additional growth in global biofuels output
– Slower productivity growth
– Declining value of the dollar
World agriculture production can keep pace with demand
– In short-run: Production can respond to higher prices within4 months to 2 years – if the weather cooperates.
– Over next 10 years, global production growth rates projectedto be sufficient
– Longer-term brings increased uncertainty?
Conclusions
Commodity Cost CopingStrategies
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The Menu
The Kitchen
Supply Chain
Consumer Make-up & Mindsets
Commodity Cost Coping Strategies
Commodity Cost CopingStrategies: The Menu
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Alternative Protein Strategies
Center of Plate Strategies
Menu Mix Strategies
– Higher Margin Menu Items
– Pricing Strategies
– Daypart Strategies
Commodity Cost Strategies:The Menu
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Alternative Protein Strategies:Americans Consuming Less Meat
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Chicken consumption in the U.S. will increase 1.7% to 82 pounds a personin 2013, while beef consumption may decline 2.2% next year to 54.5pounds*
Beef Consumption ContinuesDownward; Chicken a Bright Spot
Source: U.S. Department of Agriculture.
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Alternative Protein Strategies:More Poultry on the Menu
Chain
• 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
• Chicken Nuggets
• Whatachick’n Bites
• Chicken Rings
• Turkey Roaster Sandwich
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Alternative Protein Strategies:Less Costly Cuts On the Menu
Value Cuts
Flat Iron
Petite Tender
Petite Tender Medallions
Ranch Steak
Sirloin Tip Side Steak
Sirloin Tip Center Steak
Western Griller Steak
Western Tip
America’s Beef Roast
Boneless Country-Style Beef Chuck Ribs
Delmonico Steak
Denver Cut
Sierra Cut
Since 2008, the U.S. Beef Industry has added13 new Value Cuts:
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91% of consumers said they eata burger at least once a month;44% said they consume burgersat least once a week.
75% of consumers rankedquality of meat as the first orsecond most importantattribute in choosing a burger.
27% of restaurant customerssaid they prefer to purchaseburgers made with Angus beef,compared to 20% in 2007
Alternative Protein Strategies:Gourmet Burgers
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Evolutionary
– Pork
– Turkey
– Lamb
– Chicken (Dark Meat)
– Tofu/Seitan
– Seafood
Revolutionary
– Goat
– Offal
Alternative Protein Strategies: LesserKnown/Less Popular Proteins and Cuts
West Town TavernBBQ Lamb Ribs
The Girl & The Goat Smoked GoatRillette Empanadas
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Ingredients—Pork
Base: 730 Menus among the Top 500 & Emerging Chainsand Top Independent OperatorsSource: Technomic, MenuMonitor
Bridge House Tavern’sPig Wings
631626
652
Jan-Jun 2010 Jan-Jun 2011 Jan-Mar 2012
Incidence of Pork Center-of-the-Plate Entrées
Hot Doug’sThe Brigitte Bardot
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Which dot is bigger?
Center of the Plate Strategies:Perception is Reality
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Fleckage
Divide & Conquer
Ex-Squeeze Me
Plate Geometry
Less is More
The Elongation Effect
Center of the Plate Strategies:Perception Altering Tactics
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Center of the Plate Strategies:Using Less to Create More
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The more elongated, a figure, the larger it is perceived to be.
Center of the Plate Strategies:The Elongation Effect
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Menu Mix Strategies –Focus on Higher Margin Products
July 2010July 2011 June 2008
November2010
June 2008 November2009
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Pricing Coping Strategies: MoreOperators Taking Price Increases
35%44% 47%
2010 2011 2012
Source: Technomic Operator Surveys:May 2010, May 2011, April 2012
Have Taken Price Increasein First 4 Months of Year
Will Take Price Increasein Next 6 Months
28% 34% 37%
2010 2011 2012
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“Commodity basket” costexpected to increaseapproximately 3% during2012
Cost increases expected tobe manageable via menuprice increases andproductivity/cost offsets
2012 menu prices expectedto increase in the 3.0% to3.5% range
A Case Study: BJ’s Brewhouse
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Pricing Coping Strategies:Tiered Pricing to Preserve Margins
Menu Segment Low High
Small Plates & Snacks $4.95 $6.95
Appetizers 8.95 11.95
Appetizer Salads 6.95 12.95
Specialties 12.95 21.95
Steaks & Chops 18.95 29.95
Entrée Salads 12.95 16.95
Sandwiches 10.95 13.95
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Consumers snack muchmore frequently thanthose polled in 2010
Snacking represents 19%of all quick-serve traffic(NPD)
Low risk/high rewarddaypart
35% of consumers arechoosing healthiersnacking options thanthey were two years ago
Daypart Coping Strategies:Snacking Daypart Development
25%29%
48%
27%
More than once aday
Once every day
2010 2012
How often do you typically eat asnack in-between meals?
Commodity Cost Strategies:The Kitchen
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Food Waste Control Strategies
Production Strategies
– Scratch/House Made
– Transformative
Commodity Cost Coping Strategies:The Kitchen
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Food Waste Control Strategies:4% to 10% Waste Produced Pre-Consumer
Inbound SupplyChain Waste
Pre- Consumer WastePost Consumer
Waste
• Receiving andmaterial handlingerrors
• Overproduction• Incorrect product
preparation• Miss/Over
portioning
• Poor inventorystorage/retrievaldesign orprocesses
• Trim waste • Pilferage/Theft • Plate waste
• Ineffective supplychain monitoring& documentationprocesses
• Miss-expediting• Spoilage/Contami
nation
• Productspillage/damage
• Recipe design
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Goals
Can’t Count What YouCan’t See
Individual Accountability
Monitoring Equipment
Documentation (3 W’s)
Food Waste Control Strategies:Control Tactics
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Left Over Tactics
– Vegetable Trim = Stock
– Fresh Fruit = Sauces/Chutneys
– Starches = Thickeners
– Coffee = Iced Coffee
“Must haves”
– Soup
– Pizza/Calzone
– Quiche
Production Strategies: Derivatives
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Benefits
– Labor is a fixed, not avariable cost
– Culinary flexibility
– Cost Saving - Baseingredients less costly thanvalue added/processedingredients
Disadvantages
– Staff skill levels
– System consistency
Production Strategies:House Made/Scratch
Newport School DistrictSpokane, Washington
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Transformative Cooking Methods
– Smoking
– Braising
Benefits
– Cheaper cuts
– On-Trend: 46% of diners findsmoked food appealing orvery appealing
Production Strategies:Transformative Cooking
Commodity Cost CopingStrategies: Supply Chain
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75% of consumers considerthe idea of locally sourcedimportant
47% of operators areconcerned about the ability tolocally source – up 6 points*
Benefits:
– Lower costs
– Proximity
– Consumer alignment
Concerns
– Food safety
– Availability
Supply Chain Coping Strategies:Local Sourcing
Source: 2010 & 2011 F&O Operator Survey
31%
10%
27%
18%
27%
17%
22%
22%
50 miles
100 miles
Thecity/community
The state
Perceived restaurant/retailer defintionConsumer definition
Local Means Close to Home
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Supply Chain Coping Strategies: ContractPurchasing/Prime Vendor Agreements
37%
65%
63%
35%
Sales Profit
Street Contract
Street Sales Shoulderthe Profit Load2011 (E) Share of…
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59% of Distributors viewPrivate Label Brands asImportant or Very Importantto their business
Benefits
– Multiple pricing/qualitytiers
– Better margin fordistributors
Disadvantages
– Transferability
– Underlying producers
Supply Chain Coping Strategies:Private Label Brands
53%
40% 40%
Mfg.Brands
Specified
Sales RepResistance
Lack ofCustomer
Acceptance
Obstacles to Selling DB’s
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Represent 20% of industrypurchasing
Manufacturer issues:double dipping, no volumeguarantee
Distributor issues: loss ofoperator “control,”margin erosion
Operator issues: relationshipinterference
Supply Chain Coping Strategies: GroupPurchasing Organizations (GPO’s)
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Warehouse clubs
– Costco, BJ’s Wholesale,Restaurant Depot, GFS MarketPlace, Sam’s Club
Benefits
– Quality merchandise/Low prices
– No minimums
– Brand names and private label
– “See, touch, smell” before buying
Disadvantages
– SKU continuity
– Lack of delivery, business support
Supply Chain Coping Strategies:Alternative Distributors
Commodity Cost CopingStrategies: Customer Makeupand Mindsets
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Customer Clusters &Menu Innovation
Shifting CustomerEthnicity
Generational Shifts
Commodity Cost Strategies:Customer Makeup and Mindsets
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Customer Makeup and Mindsets: Majority ofGuests Looking for Innovation on the Menu
Everyday - Stick toFavorites
21%
Ready for Trial -Regularly Seek
New Flavors64%
Opportunity - TryNew Ones on
Occasion15%
Attitudes Toward New and Innovative Flavors(Consumer Clusters)
Source: June 2011 Market Brief
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Hispanic and Asian populationshave swelled by more than 40 %since 2000, compared to the 1.5%increase of non-Hispanic whites.
The U.S. white population isprojected to become the minority– an estimated 47% of thepopulation – by 2050.
50.4 % of babies younger thanage 1 were minorities or of morethan one race last year.
Recent immigration patterns inthe US reflect the arrival of anaverage of 104,000 foreigners aday in the U.S.
Customer Makeup and Mindsets:Increasing Ethnic Diversity
9.7%
43.0% 43.3%
12.3%
1.2%
Total Hispanic Asian AfricanAmerican
White
% Change in Population ByRace: 2000 - 2010
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Those of Greek, Middle Eastern,Hispanic, African, Jamaican andNative American descents accountfor the majority lamb or goat meatconsumers.
Based on ethnic populationgrowth trends and recentimmigration patterns , theprospects for an increase ingeneral demand meats such aslamb and goat appear good.
Customer Makeup and Mindsets:Changing Market Means Changing Tastes
% of Households Who WouldProbably or Definitely
Purchase Lamb*
*Source: American Lamb Board
20%
30%
2006 2011
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Millennials are more likely tovisit restaurants which areinnovative than any othercohort.
Although Millennials earn alower income than olderconsumers, a greater percentageof Millennials (42%) than GenXers (33%) and Boomers (24%)report visiting upscale casualdining restaurants at least once amonth.
Customer Makeup and Mindsets:Rise of Millenials
38% 36%
OlderMillennials
(28–35)
YoungerMillennials
(20–27)
“I prefer to visit restaurantsthat offer dishes featuring
new or innovative flavors andingredients”
Conclusions &Recommendations
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Identify key items for evaluation
Multiple strategies available
Take a holistic approach: controlling commodity costs notsingle answer
Look to all supply chain partners for support
Conclusions & Recommendations