A Decade of Change and Challenges

May 2001

A Decade of Change and ChallengesBy William P. MasonContributing Editor

For the foodservice business, the next decade promises dramatic industry change as consumers shift their food spending from retail to foodservice. To be successful, industry players must adapt the way they do business to this changing environment. Operators will continue to be burdened with a declining labor force, with 15% fewer available foodservice workers predicted 10 years from now. This decline in labor is coupled with more demanding consumers who want innovative new menu items even as operators deal with fewer people and their decreased culinary skill levels.Consolidation will continue throughout the supply chain. The distributor community continues to consolidate into larger national players with tremendous reach; and restaurant chains are diversifying their concepts, as evidenced by McDonald’s recent acquisitions of Donato’s Pizza, Boston Market and Chipotle Mexican Grill.Technology is driving change at all foodservice-industry levels. Consolidation and the influence of technology will force manufacturers to undergo significant change in the products and services they offer and the way they interact with all of their customers, including distributors, operators and consumers.Expect to see the following trends evolve as all supply-chain participants strive for continued growth and reinvent their organizations to become better, different and more competitive in this turbulent foodservice environment.The consumer is kingShifting demographics and lifestyles will continue to drive change as consumers demand the ultimate in convenience — individually prepared food served anytime and anywhere. Individual customization will include product size, flavor profile and specific ingredients included or excluded. Successful manufacturers will stretch their capabilities to provide operators with the product quality and flexibility to meet these changing demands.Explosion of new formatsTo meet the need for food anytime and anywhere, new retailing formats will emerge, including the continued growth of prepared foods in non-commercial settings, and commercial concepts in non-traditional settings, such as carts and kiosks inside retail stores, airports, subway stations, hospitals, universities and office buildings. These non-traditional venues will put an added strain on manufacturers. The equipment available in a kiosk is not the same as in the full restaurant, but consumers expect products to look, smell and taste the same. Operators want the manufacturer to solve these and other problems without adding complexity to the system.The takeout trend will continue. According to a survey by the National Restaurant Association, Washington, D.C., 54% of full-service-restaurant operators are receiving more takeout requests than five years ago. Menu items consumed off-premise must maintain all of their key attributes while undergoing packaging, holding and delivery — very different requirements than simply making the trip from kitchen to table. The challenge for operators and manufacturers is to design menu items that perform as well in takeout as they do in the restaurant’s dining room.Non-commercial operators also are looking at ways to build their business by expanding into new concepts, such as kiosks, extended hours, multiple day-part menus, vending, branded concepts and ethnic cuisines. These extended operations require new products and concepts, given the anticipated reduced availability of labor in general, and skilled labor in particular.Operators shift strategiesDespite the explosion of new formats, operators will strive to simplify all areas of their business to ensure clear positioning and profitable market position. All products and services will be evaluated for their profitability and ability to differentiate the operation from the competition. Menu offerings that are too skill- or labor-intensive will be changed or dropped. Manufacturers will be called on to develop products and components faster, and in formats tailored to the specific needs of the operation.The big get biggerContinued consolidation in all corners of the foodservice industry will lead to the emergence of “mega” customers, suppliers and competitors. The field of manufacturers will continue to narrow as more companies are acquired, resulting in competitors that offer wide product portfolios across many different categories.Distributor market consolidation also will continue. In 2000, the top 10 distributors represented 30% of the total market, and by 2010, they will represent almost 40%. A manufacturer’s ability to grow profitably will depend on a limited number of key relationships with mega customers — both operator and distributor. Customized approaches and a deep understanding of the customer’s business will be required to effectively sell to and retain these big customers. Developing and implementing such a focused strategy will require organizational changes and resource reallocation. Dramatic changes in successful manufacturing organizations will include:

Supply-chain efficiency requiredIn the past, foodservice manufacturers could differentiate from the competition by being the low-cost producer and providing on-time delivery. Not in the future. Low-cost and on-time delivery will become “table stakes” — required, but not a point of differentiation. Customer satisfaction will become the point of difference for successful companies. Manufacturers that partner with their key customers and provide value-added and/or unique products and services that impact and grow their customers’ businesses will succeed.Different forms of brand equity The growth of distributor brands over the past five years has changed the rules. Sustaining a business based solely on the strength of national brands is increasingly difficult. Foodservice, unlike retail, is moving towards a brand continuum, which runs from national-manufacturer brands and specialty-distributor brands (that may have a higher quality level than national brands) to distributor brands and the last vestiges of private-label products.Each of these brand equities will require different product-performance characteristics. Astute manufacturers will be participating across all levels of the brand continuum. This requires viewing the distributor as a partner, and developing new products, brands and services to meet their specific needs. This level of partnering will ensure the survival and success of the national manufacturer.Threat of commoditizationOperators want manufacturers to provide labor solutions through more finished products. At the same time, distributors are working hard to contain SKU proliferation. As a specific product technology becomes more widespread, it will commoditize the category. One producer of oven-ready french fries is unique — five producers of interchangeable product have commoditized the category, making it price-driven. As a result, distributors will refuse to stock multiple SKUs of interchangeable products, putting even more pressure on manufacturers to continuously reinvent their product lines with innovative products. This will help to maintain distribution and awareness within the operator community.Reinventing the organizationCompanies of the future will be forced to reinvent their organizations to maintain success. In the past, companies have tweaked their organizations, mostly along traditional lines, but have resisted making major changes.As the role of key mega customers places increasing demands on manufacturers’ internal resources, an organization must think about how best to be structured. The acquisition of US Foodservice, Columbia, MD, by the retail organization Royal Dutch Ahold, The Netherlands, is an example of customers that cross traditional market boundaries. Ahold is the first organization to play a significant role in both the retail and foodservice marketplaces. Organizations need to further develop their internal relationships to balance and coordinate sales and marketing, research and development, manufacturing, logistics and finance into a cohesive, focused unit that can respond quickly to customer requests. Some organizations are experimenting with front to back organizational structures to improve their effectiveness across an array of products or categories in dealing with mega customers.In the future, we will see more examples of the following:

Technology drives changeTechnology will be a critical, finely tuned and seamlessly integrated component of a foodservice business strategy. The strategic application of technology will impact virtually every function, including product development, packaging, customer service, distribution and marketing. However, technology means more than the Internet; every organization uses multiple technologies in different ways, from process and formulation to information to packaging and environmental technologies. Linking technologies to the business strategy will not be easy — it will require organizations to utilize a defined process that includes the following steps:

Measure the outcomeClearly, one aspect of technology that will continue to impact all businesses is e-business. It will allow industry supply-chain participants to more effectively and efficiently communicate with and service customers. Further, e-business, and the immediate product-performance feedback it engenders, will be the basis for product customization and refinement based on real-time market-performance information.Immediate product-performance feedback from the market will allow manufacturers to do a better job of production scheduling and inventory maintenance. Once the information flow is fully integrated from customer to manufacturer to ingredient and packaging supplier, tremendous increases in service levels and supply-chain efficiencies will be realized.For the product developer, real-time feedback will allow quicker response to products that are not generating the anticipated market acceptance. Products can be quickly reformulated to match competitive and market demands. This real-time performance information also will help manufacturers to focus R&D resources on products that have the greatest impact on the total business. While consumer demand will drive the continued growth of food purchased away from home, the foodservice industry will undergo significant change due to consumer demographics, ongoing consolidation and rapidly changing technology. Companies that continually reassess their internal organizations, market approaches, product lines and customer needs will achieve long-term success and defensible, differentiated market positions.

William P. Mason serves as principal and managing director of The Hale Group Ltd., Danvers, MA, a strategic consulting firm specializing in the food industry. He has more than 20 years experience working within the food industry, including strategic planning and implementation, distribution systems, and the development of e-business strategies. Mason received his M.B.A. from Harvard University, Boston, and his B.A. from Santa Clara University, Santa Clara, CA. He may be contacted at [email protected]. For more information about The Hale Group, visit www.halegroup.com.

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