Spending spurs industry growth: buoyed by increased consumer confidence and income, operators project solid incremental sales gains to offset fluctuating costs

Nation's Restaurant News,  Jan 29, 2007  by Michael Strong

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The economy is still strong, and many economic forecasters say restaurants can expect a robust year, especially in the first half, as a drop in oil prices allows consumers to spend less money filling their gas tanks.

The University of Michigan's preliminary index of consumer sentiment for January jumped to its highest level in three years, 98.0, up from December's reading of 91.7. The index came in much better than expected, beating economists' consensus forecast of 92.8.

Consumer confidence remains underpinned by solid economic fundamentals, increasing personal income and better job opportunities. Moreover, energy prices have fallen to their lowest levels since May 2005. Consumer spending is a key factor for the economy since it accounts for roughly two-thirds of U.S. gross domestic product.

That bodes well for restaurants, and lower transportation costs could provide some relief for foodservice providers. However, rising raw material costs for some grains and other foods could pose difficulties for foodservice companies, forcing them to mine for new sources of revenue.

"We've started bidding on senior living center contracts," says Matthew Prentice, head of the Matt Prentice Restaurant Group. One of Prentice's biggest customers, Ford Motor Co., cut its contract with him for the North American International Auto Show in Detroit this year, representing a loss of $400,000.

Prentice says that in addition to moving into the senior living arena, where he is competing with Morrison Food Services, he has expanded his consulting business to country clubs. His catering business has been up in January over year-ago levels, after he saw a 10-percent increase in December.

Large foodservice distributors like Sysco, and other contractors like Aramark are expected to perform well in 2007. Several Wall Street analysts say in reports that they expect the supplier and contractor sectors to show improvement in 2007 over 2006.

"The industry as a whole remains healthy," says Jerry McVety, president of McVety & Associates Inc., a Farmington Hills, Mich.-based consulting firm. "However, foodservice providers are going to be more cautious than in previous years with any expansion."

He says he expects to see lower capital expenditure numbers for foodservice companies as they try to ensure that they can rationalize their business plans and models for the year. He adds that foodservice companies' chief financial officers are looking closely at how well their companies are doing regionally. Operations in economically strong geographic regions, such as the Southeast, where retail and real estate are still flourishing, are going to continue to see money pumped into those places. The Midwest, where the auto industry and other manufacturers continue to struggle, would see capital budgets shrink substantially, McVety says.

While foodservice companies are expected to produce solid results, restaurants are going to do far better than "solid," according to some estimates. The National Restaurant Association predicts a record year for 2007: $537 billion in sales for 2007--a 5-percent increase over 2006 sales. The association made the prediction as part of its 2007 Restaurant Industry Forecast.

According to the NRA's outlook report, the nation's 935,000 restaurant and foodservice outlets will employ 12.8 million individuals and will need to add another 2 million positions in the next decade.

"Restaurants touch millions of lives every day by serving quality meals, providing abundant career and employment opportunities for individuals of all backgrounds, and being a driving force in the U.S. economy and local communities nationwide," Steven C. Anderson, the NRA's president and chief executive, said in a statement. "The restaurant industry will enter its 16th consecutive year of real growth in 2007 and will have a total economic impact that will exceed $1.3 trillion."

Sales at full-service restaurants are projected to reach $181.6 billion in 2007, an increase of 5.1 percent over 2006. Sales would be fueled by continued gains in consumers' disposable income--especially among baby boomers in their peak earning years--and the ability to deliver experiences that meet and exceed the demands of restaurant-savvy diners.

Full-service restaurant operators are expected to continue their focus on increasing productivity, expanding takeout options, and integrating more technology solutions, both in dining rooms and kitchens, according to the NRA forecast.

Quick-service restaurants are projected to register sales of $150.1 billion in 2007, a gain of 5 percent over 2006, offering increasingly busy Americans convenience and value, often while incorporating technology solutions that save diners time and money. Quick-service operators will focus on diversifying their menus while promoting "better-for-you" food and beverage choices and enhancements of their drive-thru, takeout, delivery and catering options. Gift cards also will present growth opportunities in the quick-service sector, according to the forecast.

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