Understanding Food Markets Outside Retail Part 2: Trends Shaping Foodservice by Steve Spencer

Understanding Food Markets Outside Retail Part 2: Trends Shaping Foodservice By Steve Spencer

Understanding Food Markets Outside Retail Part 2: Trends Shaping Foodservice

by Steve Spencer

December 2016

RIRDC Publication No 16/041 RIRDC Project No PRJ-010142

ISBN 978-1-74254-887-6

Understanding Food Markets Outside Retail. Part 2: Trends Shaping Foodservice Publication No. 16/041 Project No. PRJ-010142

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Researcher Contact Details

Name: Steve Spencer Address: Unit 2.04 17-19 Yarra Street Abbotsford VIC 3067 Phone: 03 84140904 Mobile: 0417 969873 Email: [email protected]

In submitting this report, the researcher has agreed to RIRDC publishing this material in its edited form.

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Electronically published by RIRDC in 2016 Print-on-demand by Union Offset Printing, Canberra at www.rirdc.gov.au or phone 1300 634 313 UNDERSTANDING FOOD MARKETS OUTSIDE RETAIL

Part 2 TRENDS SHAPING FOODSERVICE Trends: channel & outlet competition

Megatrends and impacts on foodservice The combined megatrends themes have been applied to provide a basis for considering future trends affecting the protein sectors.

Settings more complex • Lingering economic and financial uncertainty • Fear of reducing household income and financial security sustains a preference for Diverse influences on “value” demand • Pressure on supply chain costs • More complex segments and • Food commodity prices pressuring local preferences affecting choices suppliers to foodservice channels - ethics, health and indulgence • “Value” still a major focus for consumers • Greater demand for $ convenience in many forms Volatile world Technologies influence • Higher regard for safety costs & markets • Aging demographics • Digital tools and platforms affecting eating out patterns are changing engagement, and pressure on aged-care Disruptive behaviour and lifestyles – models technologiesC affecting “choose, book & pay” Discerning$ • Advances in know-how and applications increasing consumers the segmentation of consumers • Advances in automation Evolving for processing and meal valueC chain assembly are improving models scope for planning and Greater drive to reduce Moree from sustainability impacts less • Greater consumer concern for sustainable production systems in food products • Sustainability agendas Redefining traditional value chains balancing “3Ps” (people, • New business models improve scope planet, profit) changing value for cost reduction chain relationships • Emerging online retail models • Increasing pressure to reduce waste

Understanding food markets outside retail Page 2 Trends: channel & outlet competition

The intersecting trends The five megatrends do not stand alone, and intersect on many levels. These examples come from the foregoing outline, but when you take these into an industry or market context, many more will become apparent.

Big data industry Redefining trust Platforms create vast Online engagement has for fields of data on many consumers quickly gained interaction to mine for more trust than buying through improving food retailer traditional retail intimacy and empathy for greater loyalty

$ Tools drive Volatile world immediacy New platforms fuel the need for immediacy, Shrinking product forcing greater costs demands in Disruptive Emerging 3D printing convenience technologiesC capacity is shrinking equipment and Discerning$ processing costs and consumers will create new nutritional food Value trade-off products Weighing up the Evolving compulsion to act on valueC chain higher-priced sustainable models products, and the cost to Moree from the household less

Changing tasks Packaged wants The expanding influence of Ways to cut waste are social media redefining marketing functions and being packaged into food Fragile farming tasks and creating new and brand propositions Variable profitability business models undermines the appetite for investment in sustainable practices

Understanding food markets outside retail Page 3 This section

Three levels of trends shaping Section 1 foodservice markets • Household spending This report breaks major trends into • Competition from grocery three layers as outlined, which are • Changing lifestyles explained in the following sections. • Demand for convenience These trends intersect and overlap to • Advances in technology some extent, as described on the • Deregulation of outlets following page. Trends that define total • Spending on health care and aged care market size • Espresso coffee fix • Leisure and travel • Corporate policy

Section 2 • Price competition • Effective marketing Trends shaping • Embracing technology Trends that influence • Gourmet and quality foodservice • Healthy eating competition between markets • Authenticity channels and outlets • Experience • Travel patterns • Diversity • Ethical priorities Why does this matter? • Understand what shapes the size and value of the market • Understand what alters shape and shares over time Section 3 • Understand which segments Strong pressures on • Staff costs are most at risk • Waste • food service operators Understand which • Information voids consumers are responding to change and why • If you decide you wish to focus on a channel, understand what drives it over time

Understanding food markets outside retail Page 4 1. TRENDS AFFECTING MARKET SIZE

Page 5 Trends affecting market size

1.1 Trends in household spending Figure 1.1 – Food spending as a % of household outlays Growth in incomes • ABS says that total spending in restaurants, cafes and hotels was $60.8bn in 2015, which includes food, drinks and other services. Other components of the market which involve meals eaten out of the home add an estimated $3bn to this. • Households provide the majority of incomes to the foodservice sector, although there are other providers including corporate and government agencies. • The growth in affluence through rising household incomes and associated lifestyle choices has funded expansion of the size and available variety in the Source: Derived from ABS foodservice sector over past decades. Figure 1.2 – Eating out share of total food spending • While household incomes have risen much faster than the cost of living, a greater share of spending has shifted toward meeting rising costs of living (housing, transport) and discretionary non-food items (recreation). • Household incomes rose 209% between 1980 and 2015 – spending on meals rose just 124% over this same period. • Spending on food by Australian households over time has, as a result, represented a gradually diminishing portion of total household incomes according to a long-term data series maintained by ABS. The total spending on food and drinks (meals eaten at home and out of home) has plateaued at close to 17% of household outlays. Source: Derived from ABS • According to ABS measures, food purchased for consumption out of the home has held at close to 40% of Figure 1.3 – Components of household spending total food and drink spending by households over the long term, rising and falling based on overall economic conditions.

Figure 1.4 – Total outlays on food and drink ($bn)

Source: Derived from ABS

Understanding food markets outside retail Page 6 Trends affecting market size

1.1 Trends in household spending Figure 1.5 – Australian household saving ratio Sensitivity to economic conditions • Overall, economic conditions have a material effect on the available market for eating out. While food has gradually held a smaller share of spending, some parts of the food market remain discretionary to a significant part of the population. • Since the onset of relatively sluggish economic activity since the global financial crisis struck in 2008, households have exhibited greater concern about protecting their financial positions through greater savings, limiting discretionary outlays. • Figure 1.6 shows the curbing on household outlays, and the extent to which savings have been built and at times used to affect overall spending. Source: ABS • Consumer sentiment per Figure 1.7 – which, according to surveys undertaken by major banks, is highly influenced by the perceived threats to employment and/or housing values – has remained subdued over the past three years. Figure 1.6 – Changes in quarterly household spending ($/week) • These fears have directly affected household outlays on eating out, as well as choices made in supermarkets and other specialty stores for food taken home for meals. • Weaker consumer sentiment affects discretionary spending on food in a number of ways: • There are typically fewer meals eaten per week out of the home • There is “trading-down” to cheaper dining-out options • There is a preference for cheaper takeaway or fast Source: Derived from ABS food options • Breakfast and lunch occasions decline in sales as workers opt for cheaper meals or snacks

Figure 1.7 – consumer sentiment v interest rates

Figure 1.8 – year on-year changes in eating out spending

Source: ABS

Source: Reserve Bank/Westpac Understanding food markets outside retail Page 7 Trends affecting market size

1.2 Competition from grocery Capitalising on desire for “value” • In the period since the global financial crisis erupted in 2008, the share of food spending won by supermarkets has gradually increased. • Major grocery chains responded to weaker sentiment by increasing the focus on promoting their stores as safe havens providing better value for money in the cost of meals eaten at home. The increased intensity of competition between the major grocery retailers added to the pressure on food service. • Research over time showed that food shoppers actively sought opportunities to take advantage of savings where available, in food and other areas of spending. Through this period, “value” has become entrenched as a priority for an increased number of people across household segments – not just those in lower income groups. • This resulted in both increased shopper “traffic” numbers, as well as the capture of a higher share of the spending on fresh produce, meat and bakery lines, where previously shoppers spent a higher portion of their weekly outlays in specialist stores driven by value and quality. • As a result of the perception that “eating at home is cheaper”, there was a discernible increase in the average number of meals eaten at home per week for most consumer segments. • The average weekly food expenditure on eating out has fallen, with a higher share generally won by fast food outlets. • The share of spending on take home food has increased marginally overall in recent years, but the movements and shares vary per socio- economic segment, with lower eating out percentages for those with more sensitivity to household savings risks – generally in lower income segments.

Figure 1.9 – Average household weekly spend on food 2008 to 2013

Source: Freshagenda analysis of multiple panel data sources, adjusted for ABS survey data

Understanding food markets outside retail Page 8 Trends affecting market size

1.3 Changing lifestyles Changing lifestyles changes meal habits • Over time, there has been an increased preference for more leisure time. A much higher portion of household spending is outlaid on recreation, and there is a greater Figure 1.10 – Reasons for eating takeaway food demand for entertainment events and experiences. The growth in sports entertainment for families has been a key part of this, especially catered events. • Changes in the nature and structure of work has resulted in more demanding careers, but at the same time a demand for greater flexibility in work styles. Advances in technology affecting workplace communication ensures people “switch off” for less time of day with email and social media interaction. This adds to the “time poor” pressure – explained in more detail on the next page.

• People seek more holidays and have, over time, generally Source: Ipsos 2014 spent more of their available money on them. • As a result, there is generally greater mobility in daily routines. Changing households Figure 1.11 – Household types (% of total per ABS Cat. 4442) • Over time per Figure 1.11 there have been gradual changes in the structure of households that has added further dimensions to the complexity of the consumer segments. Over time we’re seeing a greater percentage of working couples in the economy. • These changes affect the lifestyle choices being made and the role that meal preparation and shopping play in those lifestyles, in turn affecting propensity to spend, on attributes such as convenience and other values. • Over time, housing has become denser in cities. Smaller houses are being provided through “in-fill” development with closer proximity to city centres and clusters of eating venues. Smaller house are typically fitted with smaller kitchens, which has also encouraged more eating out.

Source: ABS

Understanding food markets outside retail Page 9 Trends affecting market size

1.3 Changing lifestyles Declining skills • Over time, there has been a gradual decline in traditional skills associated with preparing meals as well as other household skills. • In terms of the market for meals, the decline in skills effect has had several broad impacts: • Increased demand for more convenience grocery lines has made it easier to prepare meals, snacks and desserts; • Increased demand for “ready meals” – although in Australia there has not been a widespread response from grocery retailers to satisfy this trend; and • Increased scope for meals eaten as takeaway or eaten out of the home when people – especially those in higher income groups – are time poor. • As a result, there is generally greater mobility in daily routines. I can cook - The “Masterchef effect” • The impact of a highly popular home cooking reality TV program that launched in 2009 has been credited with creating a revival in interest in preparing meals at home. • This also coincided with a tightening in consumer spending as mentioned earlier. • While this program spawned a number of similar contest formats, the effect generally sustained broader interest in home cooking according to some consumer panels in the years after the peak in viewing.

Figure 1.12 – Masterchef ratings

Source: TvTonight.com.au

Understanding food markets outside retail Page 10 Trends affecting market size

1.4 Desire for convenience Many ways to save time • Lives, careers and household agendas have generally become more complex and busier. Working slightly less, but people are gradually cramming more into their lives and agendas. • People generally perceive that they are time poor – pressured by work, commuting, making time for family and staying connected and online. As a result, there has been a greater demand for immediacy in many activities and to save time on mundane tasks. • Food retail and foodservice channels and outlets have been forced to respond by providing options to save time: • Reducing time for home meal preparation • Reducing the time spent dining – the fast-casual dining segment has flourished out of a greater need by diners for a shorter time at the table • Improving the speed of delivery of takeaway meals • Improving access to a wider range of snacking options that replace or supplement conventional mealtimes. Convenience back up the supply chain • The convenience need has forced significant change back up the supply chain from the point of sale or delivery, to save time and costs in meal preparation in eating outlets. • Fast-casual dining outlets have been made time and cost competitive by access to convenience in the form of meal ingredients, as well as the technologies in preparing and assembling meals. Overcoming the challenges of providing fast quality meals that can be prepared and consumed faster than the in-home option has grown the overall market. • Convenience is also used as a strong differentiator (based on location – see page 31) by dining and for takeaway establishments (see page 24).

Understanding food markets outside retail Page 11 Trends affecting market size

1.5 Advances in technology Food processing increases the choices • Technology in food processing has had a material impact on the available options for eating out but increasing the diversity and safety of food delivered. • Food processing technologies have improved the ability for expansion of the food service sector: • Enabled Quick Service Restaurants (QSR) to offer uniform low-cost meal portions for customers. This especially enhanced the growth of the poultry sector, ensuring a competitively priced meat protein could be offered across meal occasions. • Improved the safety of foods, enhancing shelf life and the scope for inclusion in meals giving consumers greater confidence in eating out. • Facilitated “industrial-scale” preparation, storage and assembly in kitchens • Provided better nutrition by retaining more nutrients when food is cooked • Improved technologies to provide quick heat-and-serve meals • Improved technologies to preserve cold-chain conditions • Ingredients technology for better and more diverse functionality of grains and dairy ingredients in bakery and QSR sectors. • Improved packaging aids processing innovation in a number of ways, both in ensuring food reaches a kitchen in better condition, and to improve delivery to the household. Engagement • Technology also provides a vital means for food service establishments to engage with and promote to consumers, increasing the awareness and excitement of dining experiences for a growing number of younger consumers. • This is also used as a competitive weapon – see page 22

Understanding food markets outside retail Page 12 Trends affecting market size

1.6 Deregulation of outlets Improved the supply of outlets • The regulation of outlets types – regarding the serving and consumption of alcohol - has stimulated the growth in the supply of dining establishments by making it easier for venues to be created and operated selling drinks within the law. • This has generally led to an increase in the number of casual dining outlets, although the pace and extent of expansion has varied. • A range of approaches have been taken by state governments to deregulate laws around this issue, and changes have been made on different timelines. • Victorian laws were changed earliest to a relatively liberal regime that provided a wide definition of a licenced premises, and saw a boost in small outlets that could sell food and drink. Between 1986 and 2004, it is estimated there was a 10-fold increase in the number of cafes and restaurants with on-premises liquor sales in Victoria (according to ABS data). • Other states have followed this development by several Fig. 1.13 - Population per café, restaurant or takeaway years, but with tighter regimes and a relatively slower outlet , June 2014 market development. Taxation changes • In the past, changes in taxation treatment of money spent by corporations on entertainment of its employees had a significant impact on the amount spent on dining out at company expense. • This originally removed tax deductibility for meals as part of entertainment, with subsequent changes to regulate the fringe benefit treatment of such outlays.

Source: Bankwest & ABS

Understanding food markets outside retail Page 13 Trends affecting market size

1.7 Spending on healthcare and aged care • The total size of the food market through the institutional health and aged care markets is governed by several factors: • The size of the health and aged care budgets, affecting overall capacity for facilities that cater for meals • The nutritional management regime administered within individual or group institutions • Administration of food budgets within individual facilities • There were 1359 hospitals in June 2014. Over the previous five years the number of institutions had changed little, growing at just 0.5% per annum. Average available bed numbers had grown at about 1.4% per annum. • Meal provision varies between in-house kitchen facilities at major hospitals; central kitchen facilities supplying a number of hospitals or the supply to facilities of pre-prepared meals to institutions. • Private hospitals tend to outsource their food requirements, typically engaging catering and facilities management to Figure 1.14 – Share of provided aged care places in 2014 provide full service. Public hospital systems vary by state. The administration of diet tends to be localised. Public hospitals spent $485m on food in 2013/14. Given the relative size of private facilities, it is likely the total hospital food market did not exceed $700m in that year. • The aged care market is defined by the capacity of government-funded residential and home-care facilities which totalled 255,000 persons in 2014. The total food market in this sector is probably larger (at about $1.0 to $1.1bn) than the hospital market based on these numbers and estimated average daily food costs. • The market through these channels is accordingly somewhat disjointed. Gradual change is occurring over time as the trend is for fiscal pressure to tighten, limiting the average meal cost while attempting to meet (competing) nutritional demands. Source: ABS

Segment Nature Meals

Hospital care Admission to total care hospitals Hospital service

Residential aged care Accommodation and care Full provision, partially (between low and high) self-funded

Home/community care Home help care funded by Delivered meal services, at government least partially funded

Retirement village Residential villages with little or no Self-funded care, user pays

Understanding food markets outside retail Page 14 Trends affecting market size

1.8 The espresso coffee fix • There has been a strong growth in demand for finer quality espresso coffee in a number of developed world economies, and in the Australian market this has been one of the strongest and most pervasive trends affecting the structure of the food service market in the past decade. • The biggest growth came from out-of-home consumption of espresso coffee with more consumers embracing the associated café culture. The retail coffee market has been valued recently at $3.2bn. Social interaction • However, cafés in Australian cities have not followed some European traditions, and offer much more than a quick-stop caffeine fix. Australian coffee drinkers prefer to spend time drinking coffee in cafés making them places for leisure and business gatherings. • Cafés have quickly evolved into important casual meeting places and gained an important share of the dining out market. Food sales – at breakfast, lunch and snacking occasions – have flourished in the café model. • The coffee scene has become highly sophisticated, driven by the independent outlets, and has become the basis of status and followings, regarding espresso machines, techniques, best outlets, as well as coffee brands and origins. What has it driven? • The importance of a “coffee offering” has affected most channels in food service, including QSR, takeaway and convenience outlets. • The growth in the Australian coffee market and preferred styles has been a significant market for milk, which had been previously battling waning consumption. • There has been a flourishing in skills – coffee roasting through to the barista are now viable well-paying careers.

Understanding food markets outside retail Page 15 Trends affecting market size

1.9 Leisure and travel • Recreational events and entertainment activities are in much greater demand – covering sport, music and other activities. Spending – as a portion of total outlays on recreational goods and services – has climbed almost 50% since 1990. • This has increased the demand for such events to be Figure 1.15 – Tourism nights (million 2006 to 2015) catered. Major catering and facilities services businesses have developed in anticipation of these demands, and have generally added to the attraction of these outings for patrons, with the knowledge that meals and drinks will be available, generally with good quality and choice. The effect of tourism • The extent of travel – from both international and domestic travellers – has, over time, contributed more to the overall spending on food and drink in food service channels. It was estimated that 15% of money spent by overseas travellers in 2014/15 was on eating out.

• However domestic tourism by Australians has plateaued. Source: Tourism Australia While people are spending a higher portion of their available incomes on recreation, they are choosing other activities and touring overseas. Trips by Australian residents have doubled in the past decade, despite Figure 1.16 – Reasons for international visits, year to Sept 2015 fluctuating spending power of the Australian currency in destination markets. • There has been a decline in the number of nights per capita by domestic tourists, while international visits have steadily increased. In the case of day trips by domestic tourists, the average number of days per person has also declined since 2000. • Both declines have limited food spending in the Australia market.

Source: Tourism Australia

Figure 1.17 – Overseas travel by Australians (million trips) v $A value

Source: Tourism Australia

Understanding food markets outside retail Page 16 Trends affecting market size

1.9 Leisure and travel Airports • Domestic air travel has grown steadily over time but itself is sensitive to business and consumer confidence. • Airport terminals have become significant retail and food service precincts to capture spending of travellers. • Sydney Airport reported in 2015 that despite economic cycles, spending per passenger has continued to grow over the past decade. • While total passengers handled has grown, the capture of food service spending at airports has increased with the greater use of airport real estate for food service outlets to provide meals for travellers.

Figure 1.18 – Airport movements at Australian airports (‘000) 2006 v 2015

Source: ABS

Understanding food markets outside retail Page 17 Trends affecting market size

1.10 Growth in Business Event spending • A large number of events are staged in Australia comprising meetings and conferences, exhibitions and incentive travel. Figure 1.19 – Spending and patronage at business events in 2013/14* • An EY report* in 2015 estimated total direct spending in Australia on such events totalled $28bn in 2013/14, which catered for 37 million participants in that year at more than 400,000 separate events. • EY estimated that such spending has been rising at a rate of 4.5% since 2003 when the sector was last measured in substantive detail. This is despite the fact that between the two large studies, total delegate numbers fell 7%. • While this growing market is helping shape the scale of food service opportunities to cater for these events, the competition between major cities to host such events is influencing the relative growth of food service markets in those regions. Figure 1.20 – Spending ($b) at business events in 2013/14* • Events mostly cater for local attendees, as EY estimated that just 3% of attendees come from overseas and 20% from interstate. Food spending • Spending by participants and organisers/hosts of such events is a significant component of the overall spending incurred each year, although the portion varies across event types and the origin of the attendees (out of town visitors spending more in foodservice meals). • The sector represented a total of $5.3bn in food and drink spending in 2013/14 based on the survey results, which will include some spending caught in other segments of the market – such as restaurants, cafes and function centres as set Source: Business Events Council out on page 2 of Part 1 of this report package. • The growth in this segment has gradually increased the demand for large-scale meal preparation and supply to hosting venues, especially large capital-city events with delegates of more than 100.

* The value of business events in Australia, prepared by Ernst Young in February 2015 for the Business Events Council of Australia

Understanding food markets outside retail Page 18 Trends affecting market size

1.11 Corporate policy • A number of Australia’s large corporations provide in- house canteen facilities for staff. The provision will generally be governed by office location and size, and the existence of nearby takeaway or dine-in facilities. • These facilities are generally operated as commercial facilities – employees pay for their own meals at (generally) subsidised prices. Mining a major component • The mining sector has been a major component of this commercial catering market in recent years, given the expansion in the use of fly-in-fly-out staff and contractors at remote mining sites – most commonly in major mining centres in Western Australia and Queensland. • This sector has largely been serviced by contracted commercial catering and facilities managers, to whom the entire kitchen operation and food procurement services were outsourced. Those providers generally provide a range of other services to mining facilities. • Those services expanded significantly with the boom in mining investment and operating capacity, while metal commodity prices were high, providing fully-paid meals and snacks. The total estimated provided-meals market in the mining sector alone was thought to be worth $3- $4bn nationally. • Since the decline in those commodity markets, the services market has declined markedly due to the reduction in investment activity (affecting contracted and employed labour), reduced staffing on operating mines and greater cost control in continuing operations which has reduced meal costs.

Figure 1.21 – Mining employment (‘000 jobs) 2005 to 2015

Source: ABS

Understanding food markets outside retail Page 19 2. TRENDS AFFECTING CHANNEL AND OUTLET COMPETITION

Page 20 Trends: channel & outlet competition

2.1 Price competition • Consumers remain sensitive to prices in their choices of eating out – especially at the cheaper end of the casual dining and takeaway segments. • While “value” has been an overall determinant of the total size of the available food service market in recent years, it is also a strong basis for competition between outlet types – both between sub-channels (i.e. attempting to lure customers away from higher-priced, more gourmet-themed casual dining and takeaway options) and between participants within specific channels (between QSR chains). Price competition remains strong • The strongest incidence has been seen in the pricing of meals by major QSR players – pizza and burger chains. • Price-based offers remain a major promotional weapon for large QSR chains, affecting pricing of core menu products as well as “limited time only” promotions, which may be seasonal or cuisine-specific variations from a standard menu. Value focus pressures costs • Major chains have limited menu price rises in recent years, relying on lifting volumes and managing ingredient costs to maintain margins. • The strong focus on keeping prices competitive has ensured strong pressure on food ingredient costs. • This has in some cases – where input costs of key dairy and protein ingredients have risen over time due to the influence of commodity markets – caused reductions in the volumes of cheese and meat toppings used on pizzas.

Understanding food markets outside retail Page 21 Trends: channel & outlet competition

2.2 Effective marketing • In the current age, marketing a café or restaurant is a very difficult challenge. Food media has increased in prominence with greater interest in cuisine, but it has also increased in versatility given the different media platforms available. • Despite having greater capacity to tailor communications, it is more difficult to reach, influence and reason with consumers. This has created a new platform for consumer activism that is setting its own rules, and new emerging advocates on food issues. • There is much greater interest in food and people wish to talk about it more often. New tools provide the means to help them to do so. In a competitive food environment, every outlet needs a strong story to sell to customers. Figure 2.1 – % of internet services by type Harnessing mobile • Digital technology has become a source of differentiation for agile food service operators in a number of ways. • Almost half of internet accounts were mobile wireless in mid- 2015, while an Australian Communications and Media Authority survey showed that over 20% of Australians (and a higher proportion of young people) rely solely on their mobiles to access the internet, creating an emerging challenge for outlets to get noticed online. • Many small business food outlets do not have the resources to leverage new tools that come with the digital age, such as search engine optimisation.

Social engagement Source: ABS • The effective use of social media to build and sustain a major following in customers present and future is an important ingredient in the success of many cafes, pubs and restaurants. • This will often involve use of more than one social media platform (Instagram, Facebook and/or Twitter) to drive a proactive engagement with customers as part of a strategy to provide updates, new releases, menu specials and events. Figure 2.2 – % of people using the internet to book where to eat

Source: Restaurant and Catering Australia Understanding food markets outside retail Page 22 Trends: channel & outlet competition

2.2 Effective marketing • Presence in this media is generally intense and its use must be part of a well-resourced, attentive engagement program as part of the business strategy that closely manages appropriate images and messages and monitors feedback. • While may outlets do not engage in these platforms, in the current and future market they are at somewhat a disadvantage in sustaining attention and profile due to the proliferation of those platforms in the food market. The power of peer review • The rise in the importance of the objective review through publications, such as Broadsheet, and Time Out, has seen a new, youth-focused media voice grow in prominence in the industry. The power of these publications to build awareness of a new or existing outlet is significant. • Traditional food criticism continues to operate, through specialist publications, newspapers and travel guides, creating a hierarchy of winners and losers according to critics. • Digital media flattens this vertically, decentralising the authority with anonymous critics. Bloggers are passionate obsessives first and foremost, and amateur in the true sense of the word. • Peer influence is growing as an influence on consumer choices. While there are a number of on-line review sites such as Zomato and Trip Adviser in Australia, social media platforms have become the engines for convenient and easy- access peer review and acceptance/rejection of products and services, including places to eat. • The risks with the internet and social media landscape, of course, is that negative reviews can surface, damaging reputations. This doesn’t have to be the end of the world if you convey the message that you are listening to customers by responding to unfavourable comments. • Venues which encourage feedback and address issues arising will generally gain greater credibility.

Understanding food markets outside retail Page 23 Trends: channel & outlet competition

2.3 Embracing technology Engagement • Use of technology is a strong device that some have harnessed as a competitive weapon to engage with customers. Convenience - order and deliver • A further significant dimension of technology-based competition capitalises on other tools. • In recent years, QSR groups have had a range of successes in mastering technologies to improve their appeal to customers through the ordering to delivery processes. • Domino’s has grown its market share in Australia due to the strong customer acceptance of the convenience and simplicity of its ordering and delivery smartphone app which has kept it ahead of rivals. • The group claims that more than 60% of sales are made online. • Other smaller QSR chains are improving the speed and accuracy of on-line ordering to compete with the benchmarks being set by groups such as Domino’s.

Technologies here and on the way? There are a large number of technologies that are in-use or on the way that will continue to reshape and stimulate the interface between consumers and foodservice outlets: • Mobile payments systems accessible across channels • Loyalty programs to improve their engagement • Improved business operating systems for small outlets through tablets and mobile devices to reduce cost • Improved data mining to enhance the understanding of consumer habits and eating preferences • Rapid-delivery gourmet and set-menu meals ordered through mobile apps

Understanding food markets outside retail Page 24 Trends: channel & outlet competition

2.4 Gourmet and quality • There has been a large shift in preferences to better quality Figure 2.3 – The diversity of Australia’s restaurant market - % food. of outlets that promote a specific cuisine • There is greater awareness and expectation of better quality food and ingredients, and over time there has been more interest in cuisine styles. This has partially been aided by increased coverage in food media including reality TV programs that profiled different cuisine styles. • At the upper end of the fine dining market, this is also driven by the desire for a better dining experience – see page 30. • People generally sustain a need for convenience but they also want these meals of better quality. The burger • One of the significant trends has been in the proliferation of the gourmet burger. Just as in the case of espresso coffee, a large number of casual dining outlets have been compelled to have a burger offering, and usually with higher quality Figure 2.4 – Per-capita consumption (litres) of beef – such as Angus. alcohol 1981 to 2014 • The burger has been one of focal points in menus of pubs as casual dining venues, despite the steady decline in beer consumption. Explosion of choice in QSR and takeaway • This trend has over time provided opportunities for the entry of a wide range of cuisine-based takeaway chains to the market, which has increased the diversity of the options for consumers and significantly diluted the growth for big QSR brand chains. • The chart on the following page provides examples of the expansion of choice across the category/cuisine offerings over the past few decades. • This has forced major chains to continually offer excitement in their menus (that respond to cuisine specialities), but also cause some re-invention and re-styling of certain outlets.

Concept stores from QSR brands Concept or test stores are used from time to time to trial innovations – or to mimic the offerings creating interest in competing outlets. KFC Urban and The Corner by McCafe reflect a number of emerging food trends: the love of cafe culture, a departure from mass-market food, a commitment to healthier eating and ethically sourced ingredients, and the rapid uptake of technology.

Understanding food markets outside retail Page 25 Trends: channel & outlet competition

2.4 Gourmet and quality The gradual “gourmetfication” of takeaway has occurred across the spectrum. This chart illustrates some of the typical directions of change.

1970s 2015 takeaway takeaway

McDonald’s KFC Red Rooster Kentucky Fried Grill’d Burger and Chicken O’Porto chicken Charcoal Chicken Nando’s McDonald’s

Pho Cuisine Golden Palace Chinese Taco Truck Momo Sushi Restaurant Siam Kitchen Ajisen Ramen

Crust Pizza Hut Kensington Pizza Pizza Domino’s Pizza Hut

Hooked Fish & chips Fish and Chips Tank Sea Salt

Other Subway (arrived from US 1988) Sumo salad

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2.5 Healthy eating • Many consumers choose certain outlets if they feel there is a healthy eating advantage or ethical proposition that comes from the experience. • The rise in consciousness of healthy eating has been brought about by the profile given to obesity and overweight conditions, but also greater awareness of the causes of heart disease and high blood pressure. The complexity of influences on consumer requirements and food menu and product offerings is shown on the following page. • The trend towards healthy eating has strongly shaped the foodservice market over time. Reducing alcohol consumption over time has been one of these trends, affecting patronage of traditional drinking venues, but has also seen the repositioning of the pub as a quality eating venue. • While conveying product features is somewhat easier in grocery and other retail channels through product branding and labelling, it is more challenging in the supply of ingredients for meals. • The healthy-eating trend has created a basis for the entire proposition offered by some types of takeaway outlets – such as certain QSRs offering salads – but has also seen major chains expand menu selections to cover perceived healthy options. There has generally been increasing provision for and information on menus for preferences such as vegan, vegetarian, and for other needs such as gluten-free. • The provision of healthy options is challenging for these large QSR groups, as it fuels the perception that fast food and much of the choice available in takeaway is not healthy. • There is significant pressure on large-scale fast food operators to be more accountable for the impact of their menu items on consumer health. Regulation has underpinned this in some regions, requiring nutritional panels covering menu items. • Many large grocery and QSR brands are changing ingredients – implementing lower salt use, removing trans fats, reducing sugar in processed foods.

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There are an increasingly complex set of influences on food products and menu options provided to consumers, from governments, advocates, food manufacturers and retailers.

Mass and Social Media Celebrity Advocates Filmstars, fitness experts, food bloggers, chefs as ready-access opinion sources

Consumer HOUSEHOLD Advocates Greater awareness and personal Seeking truth and concern, demand for healthier simplicity in labelling options, risk aversion to allergies and disease, reduced portions

GOVERNMENT Expansion of healthy Pressured into being seen to product positioning, Preferring take action through regulatory labelling and options regulation of change – major focus on within categories label clarity and reforming product labels consistency

Food industry preference FOOD for more detailed approach rather than MANUFACTURER/MARKETER simplistic messages, Demonstrating social responsibility, focused on practical and responding to consumer demand. cost-effective information Implementing salt reduction, more low-fat options.

Source: Ipsos, 2014

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2.6 Authenticity • There are a number of sub-trends that we group under this heading, which are strongly featured by many outlets to create a point of difference: • Promotion of ‘local” products or ingredients • Focusing on “provenance” – the origins or “story” of the food • Using products and ingredients that are not mass- produced • The appeal of supporting the “local producer” has generally worked because it satisfies a number of needs, but it is vulnerable to widespread and varied interpretation. • A proliferation of terms in widespread use without any regulation of their use and definition ensures they have almost become wallpaper and lost much of their meaning. Figure 2.5 – Frequency of consumers choosing organic products • Despite this the trend remains strong, supported by a wider theme in society of the rejection of “establishment” and large brands or factories, applied here to suppliers of food and other goods. • This trend might be seen as affecting discretionary segments of the dining out market, where entire outlets have been themed to provide a “crafted experience” while others in takeaway have simply created more diversity in menu offerings. Large-scale US QSR chains – Chipotle, Shake Shack – have based their propositions on this theme. Source: Ipsos, 2014 • Large QSR in Australia have been forced to respond, allowing customers to style their own creation, rather than limit them to a standard menu. See page 32. • For a café or restaurant, it might just be part of the proposition but also a means of the outlets knowing exactly what they are getting and being able to commit more seriously in supplier relationships. • Technology will continue to provide enabling tools to support propositions in this area, allowing customers to connect to the story of the ingredients.

Craft: only ever a niche? Craft beer is one of the hallmarks of the “artisan” movement, with a global explosion in small-scale beer brands. Yet despite more than 100 small breweries now operating in Australia, craft beer by industry definitions makes up less than 4% of the volume of sales.

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2.7 Experience • The need for better dining experiences has been a consumer want that has grown over time, but this trend sits behind many of the trends outlined here: • Gourmet food • Better quality takeaway • Outlets providing or meeting greater social engagement • Experience itself is a key differentiator for many fine-dining establishments. These have been given higher profile by reality TV programs and food media that have promoted fine dining experiences, exciting cuisine and dishes, and the leading identities themselves that achieve success as chefs, themselves developing into celebrities in their own right. This is a global phenomenon, and the interest in leading chefs crosses borders and regions. • These programs have enjoyed long runs on TV but have made a lasting impact on consumer desires for greater involvement in food – both in dining at home and out. • There has been excitement created by many successful outlets through constant changes in meals on offer, through seasonal menus and creative dishes. • Many “name” chefs have taken advantage of the following created by expanding their outlets across different cuisines, formats and locations. These have extended into their influence in retail food products as well as in menus in catering and tourism channels. • The rising importance of “experience” has also been a contributor to some of the challenges encountered by those that fail to act on the experience trend, the undifferentiated rump in the middle ground of the café and restaurants scene which in many cases struggled to keep pace with the changes in fine dining and in low-cost casual dining segments.

Understanding food markets outside retail Page 30 Trends: channel & outlet competition

2.8 Traffic patterns • Changing foot or commuter transport traffic has been a large determinant in the success of casual dining outlets. Traffic zones can change over time and directly affect the health of an outlet. • People in passing traffic can easily notice and access venues and consume meals or snacks as part of their outing. • Traffic changes can be driven by the needs of daily commuting, available facilities (such as parking or public transport access) or by other local attractions, which may include other successful food outlets, but also other forms of retail and/or other leisure pursuits. • The appeal of major anchor tenancies and variety of speciality stores within centres or precincts will have a significant bearing on the local food market. • Food courts within large shopping centres maintain an important role in the casual food market but have evolved over time as the range of cuisines styles and format options has expanded. • The overall health of the outlets in these courts closely reflects the attraction of the centres themselves, but the quality of the options available can enhance the competitiveness of a shopping destination. • Significant foodservice groups – such as the listed Retail Food Group – have grown the size and diversity of their franchise models in response to the opportunities created by major retail clusters and traffic zones, offering a range of outlets, meal and snacking options, supported by centrally managed systems to support their outlets.

Figure 2.6 – Westfield shopping centres – comparable sales by category (12 months trailing)

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2.9 Diversity • The expansion of cuisine-based fast food chains as well as the proliferation of the “gourmet burger” across pub and café channels has in part driven a response by major QSR chains to increase the customisation of their menus. • Customisation has become a strong desire– to give consumers a feeling of greater control, as well as providing a departure from what might be perceived as worn-out offerings with so much other variety coming onto the market, especially in the QSR space. • In recent times, major chains such as McDonalds have provided customisation options as one of the strategies in reviving sales growth in its global business. • Menu variety has long been a tactic to stimulate sales. QSR chains have long used the short-term special menu item (see page 21) to stimulate or sustain interest in their brand, but the “design your own” burger or pizza has now become a mainstream feature to allow customers further variety. • Several examples of this exist – McDonalds “Create Your Taste” and Domino’s Pizza Mogul pizza-design app are leading concepts. • Major chains also run such short-term promotional offers over much of the year aimed at specific price points for products which tend to have a specific cuisine variation. • These offers are critical to maintaining consumer interest in fast-food brands, as these offers strongly influence choices during these promotional periods. • These offers present a planning and logistical challenge in creating and meeting a short-term demand response, which is difficult to predict, while aligning ingredient volumes so as to reduce waste.

Australia: A complex test market Our work in the area of international food investment indicates that many large overseas food groups view Australia as a useful test market due to the diversity of ethnic cultures and consumer palettes. McDonalds in the Australian market has frequently led innovations within the global McDonalds franchise, including the McCafé coffee expansion and more recently the “Create Your Taste” innovation in custom meal ingredients, both of which have been taken to the global business.

Understanding food markets outside retail Page 32 Differentiators between outlets

2.10 Ethical priorities • The interest in the range of ethical themes and concerns Planet varies across channels depending on the sensitivity of • Environmental issues to consumer segments and the importance of the impact brand proposition. • Animal welfare • • There are various themes that can be captured within a Water use wider definition of sustainability in terms of the 3 P’s – • Biodiversity planet, people and profit – which is shown at the right. • Major food brands – QSR chains and branded food manufacturers that supply much of the foodservice market – have sustainability platforms and sourcing People policies that typically encompass these three limbs. • Health & nutrition benefit • The strongest priorities for ethical or sustainability • Social justice agenda are in channels where food producers are • Animal welfare supplying the brand of the food retailer or manufacturer. • Skills and In these cases, the buyer is seeking a commercial capabilities engagement with suppliers that presents no risks to the • Rural/regional brand reputation. development • While the highest priorities in such arrangements are given to food safety and quality assurance (which directly addresses human health), the influence of issues in other elements of the 3Ps is increasing, Profit especially in animal welfare, environmental footprint, • Sufficient income for suppliers social justice and fairness. • Encourage capital • The size of the initiatives that gain the commitment of investment these brands can and has had a pervasive impact on • Champion innovation some supply chains. The impact of the Global • Risk management Roundtable for Sustainable Beef, and sustainable sourcing of palm oil are two that have a significant impact on food service ingredients that impact large segments of the market. These measures will increasingly be used to support the promotion of their impact on sustainability agendas. • There is a small segment of the market that plays strongly on the themes associated with ethical sourcing and environmental credentials.

Ethical stances can backfire Attempts by some QSR chains to deploy strong ethical positions are risky. The example of Chipotle in the US is a timely reminder of the importance of making a promise but also being able to stand behind a promise (in their case promotion of GM-free ingredients which it could not prove), but also whether the stance is consistent with the channel (offering health for the consumer v health for the planet). The group’s reputation has been damaged in 2015 and 2016 as a result of these issues.

Understanding food markets outside retail Page 33 3. OTHER MAJOR CHALLENGES

Page 34 Major challenges

3.1 Skills and labour costs • People costs are a high percentage of the operating cost of Figure 3.1 – % increase in labour costs v CPI 2005 to 2015 food service venues. The Australia Restaurant and Catering Association’s 2015 Industry Benchmarking Survey found wages and staff on-costs can represent up to 42% of an outlet’s expenses. • Food outlets operate in a market where most meals are consumed in out-of-hours trade for most other sectors, which drives the setting of penalty rates for labour. • For many outlets the nature of the trade means the unpredictability of patronage at each meal occasion adds to the complexities of managing the costs of preparing and serving meals. • While the overall changes in costs tracked by the ABS shows Source: Restaurant and Catering Australia changes in alignment with other parts of the economy and costs of living, the industry points out that the increase in Figure 3.2 – costs and outlays as a % of total costs award rates has been much stronger in recent times. • There is strong support for flexibility on the use of penalty rates for weekend trade, where the greatest patronage typically occurs. The industry claims that this flexibility would add to employment. • High costs of staff places significant pressures on small businesses in the food service market. The Fair Work Ombudsman, which enforces Australian workplace entitlements, reported in 2013-14 that food services and accommodation had 12% of all complaints of breaches of payment conditions – more than any other single industry. • High staff turnover – the hospitality sector has the highest Source: Restaurant and Catering Australia turnover of any industry in Australia according to ABS data – also adds to staff costs through retraining. Cost structures demand innovation • High staff and other overhead operating costs have however driven many innovations in kitchen design, ingredient sourcing and form, and the menu options that have eased work flows, reduced food handling and curbed the requirement for longer hours in preparation.

Figure 3.3 – Turnover in outlets – exits and entries as a % of total restaurant and café outlets

Source: ABS

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3.2 Waste • The unpredictable nature of the food service trade – not knowing how many meals will be served at each sitting and occasion – adds to the incidence of food waste in the sector. This adds substantially to the costs of purchased food ingredients. • Studies by RMIT in Victoria have estimated in 2015 that restaurants and cafes throw away nearly a quarter (23%) of the food they purchase for their business. This includes not just product trimmings, but also overproduction, spoiled items, burned items, fresh produce leftovers and incorrect orders. • The amount of greenhouse gas emissions created by food waste going to landfill is 5.25 million metric tonnes of CO2-e every year in Australia • Waste reduction measures have long been a focus of innovation by food service outlet operators in all channels to consumers as well as their ingredients and food product suppliers. • These sources can be preventable through oversight, tracking and basic system changes. • Post-meal food waste also makes up a huge part of the foodservice industries waste stream, being much harder to control, but is manageable through portion size, both in the item recipe itself and kitchen staff's portioning control. • Recycling and composting are sources of initiatives at a local government and business level with varying commitment and uptake. • Food donations schemes are also growing in their scale and reach.

Avoiding the no-show There has recently been a trend by some leading outlets to introduce a no-bookings policy or to take a credit-card deposit for bookings to avoid the incidence of no-shows by customers.

Understanding food markets outside retail Page 36 Major challenges

3.3 Information voids • The foodservice sector is radically different to grocery and convenience channels in terms of information availability. While grocery sales can be tracked in detail through scan data, which is also available for a large number of convenience outlets, such luxury does not exist in the foodservice sector. • There are many contributing factors to this – including the sheer diversity of the sector in terms of suppliers and outlets; the lack of dominant concentration points despite the existence of large distributors; but also the lack of investment by agrifood sectors themselves in sales into these channels. • While this may not be a major challenge for individual operators or franchise owners of large chains of outlets, the biggest challenges come for suppliers and distributors, who have limited visibility of the total market in their chosen channel or food category. • The table on the right identifies some of the lost opportunities of better information access to suppliers in the sector. The lack of visibility through to end-user outlets creates further challenges for suppliers – which is identified and discussed in Part 4. • A number of research providers offer commercial products to suppliers in the industry offering analysis of the size of respective channels and categories. These are typically based on surveys of consumers and outlets to assess: • Trends in consumer spending on different meal occasion and in outlet types • Trends in sales volumes by channel • Trends in product usage in outlets types • Trends in the demand for certain food categories • While these analyses are available on commercial terms, the entry cost for SME suppliers evaluating an entry to foodservice channels is often regarded as prohibitive.

The opportunities from better information Improved information could offer the following opportunities to foodservice suppliers and participants: • To understand the financial health of the specific channels and food categories which they supply – which are growing and which are not – and to align these signals to other indicators. • To justify investments in innovation alongside priorities in supplying measurable grocery or convenience retail trends (where performance can be readily tracked). • To validate market shares for food category supply into certain channels, to assess whether growth or contraction comes from market share or market size. • To better understand the sources and significance of various forms of competition, including for local suppliers to understand the impact of imported product supply. • To understand the scope for potential market diversification to improve business sustainability.

Understanding food markets outside retail Page 37 NATIONAL RURAL ISSUES

Understanding Food Markets Outside Retail Part 2: Trends Shaping Foodservice by Steve Spencer

RIRDC Publication No 16/041 RIRDC Project No PRJ-010142

Bookshop: 1300 634 313

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