How Foodservice Operators Are Finding Opportunities to Fuel Growth

Executive Insights

How Foodservice Operators Are Finding Opportunities To Fuel Growth

Foodservice has been a bright spot in the U.S. About the 2019/2020 L.E.K. Consulting US economy for more than a dozen years, propelled Foodservice Operators Study by steady growth. But as the menu choices • This longitudinal study is conducted roughly every three that consumers demand continue to evolve and years to track changing sentiment digital-based delivery provides consumers with an • More than 240 U.S. foodservice operators took the survey ever-widening array of vendor choices at the click online of a button, foodservice operators’ expectations • Respondents are responsible for, or directly involved in, for growth have begun to recede. purchasing decisions for their companies • Establishments range from those with fewer than 10 In this Executive Insights, we highlight key findings from L.E.K. employees to those with more than 10,000 Consulting’s 2019/2020 U.S. Foodservice Operators Study that • Both commercial (48%) and noncommercial (52%) make clear how operators can best compete — and succeed — operators participated in this increasingly challenging environment.

Areas of focus As in prior years, operators remain primarily focused on reducing According to our latest study, foodservice operators remain the cost of both food and labor. Meanwhile, rapidly changing optimistic about the future of food industry growth, but less so consumer preferences have them constantly working to diversify compared to respondents in our 2017 and 2014 studies. Whereas their menu offerings, and an already overcrowded online ordering 78% of the operators we surveyed in 2017 were forecasting and delivery market has made it harder to compete in this area. the industry to grow over the subsequent three years — a slight uptick from the 76% of operators who expected continued 1. Rising food and labor costs. Rising food costs from suppliers industry expansion back in 2014 — that number fell to 56% are seen as the No. 1 barrier to growth between now and 2022- among this year’s survey respondents (see Figure 1). 23, with 35% of our survey respondents putting this barrier at the top of the list (see Figure 2). Operators believe that the cost

How Foodservice Operators Are Finding Opportunities To Fuel Growth was written by Rob Wilson, Maria Steingoltz and Manny Picciola, Managing Directors in L.E.K. Consulting’s Food & Beverage practice. Rob, Maria and Manny are based in Chicago.

For more information, contact [email protected]. Executive Insights

Figure 1 Expected nominal growth per year in food industry — by segment (2014, 2017, 2019)1

100

More than 7% increase

60 4%-7% increase 1%-3% increase No change 40 1%-3% decline 4%-7% decline Percentage of respondents of respondents Percentage More than 7% decline 20 Net

(20)

(40) 2014 2017 2019/2020 (N=228) (N=230) (N=242) Expected growth next 3 years vs. past 3 years

Expect increase 76% 78% 56% Expect no change 7% 11% 29% Expect decrease 18% 10% 16%

Source: L.E.K. Foodservice Survey

of food will rise approximately 3%, surpassing the 2.7% rise 3. A crowded field. The rise of online ordering and delivery they expected in 2017. Meanwhile, due to a combination of services has been a boon for consumers, in terms of both choice cost-of-living increases and minimum wage laws, 26% of the and convenience, and for operators, as it has greatly widened the operators we surveyed said higher labor costs were their primary pool of potential customers. But not all operators have maximized concern. Such a worry is far from unfounded: Between 2015 and the opportunity yet, and the delivery market is already overcrowded 2018, wages in the U.S. foodservice industry grew 5.3% while and highly competitive as key players vie for dominance. the median rise of wages overall stood at just 2.5%. Minimum wage laws being implemented across the country will further Strategies for remaining competitive exacerbate this issue. The challenges that foodservice operators face have shifted somewhat over the past two to three years. While food and 2. Changing consumer tastes. Consumers are increasingly labor costs remain issues, retail competition and the difficulties demanding healthier foods, particularly those with claims such as of complying with food safety standards are no longer top of “no artificial ingredients,” “no preservatives,” “all natural” and mind, replaced by changing consumer tastes and an already “locally produced.” Plant-based alternatives in particular are in overcrowded delivery market. But there are still a number of ways high demand. But the shifts in consumer preferences can be hard to grow sales and cut costs and at the same time maintain or to keep up with. even increase market share.

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1. Develop signature offerings. Operators are continuing customer access such solutions provide outweighs both the cost to respond to consumer demands for healthier foods by savings and direct communication they get from handling orders implementing a host of menu changes. Meat substitutes, along and delivery themselves. Whether the delivery is being outsourced with organic and nutrient-rich options, are the most common or handled in-house, 74% of all operators — in particular additions, with the number of operators offering those options commercial establishments — now offer online ordering, which up 6%, 4% and 4%, respectively, from 2017 (see Figure 3). can yield higher order volumes and revenues. Over the next three years, some 50% of our survey respondents say they expect to The percentage of meat products they are replacing with take steps toward increasing their delivery offerings. branded, plant-based meat products is also forecast to continue rising, to 37% in three years vs. 34% today and 33% in 2017 3. Employ digital tools. Online ordering and delivery is just one set (see Figure 4). of digital tools that operators can use to attract and retain customers by increasing their purchasing convenience; social media is also 2. Outsource to third-party or operator-managed proving to be invaluable. Facebook remains the social media tool delivery services. In an effort to acquire new customers while of choice, but it has fallen (to 57% of operators, down 7% since retaining existing ones, operators predominantly use third- 2017) along with use of company websites (to 43% of operators, party aggregators and delivery apps, believing that the greater down 11% since 2017), while the use of Instagram has surged

Figure 2 Most common barriers to growth over the next 3 years (prompted) — 20192

Rising food costs from suppliers 35%

Rising labor costs 26%

Economic recession 24%

21% Increasing competition

Pricing pressures 21%

Decreasing consumer spending in restaurants 15%

Cost of employee healthcare and other benefits 15%

Lack of customer demand 14% Operating cost Economic environment Consumer preference for more convenient foods 13% Competition Consumer behavior

Consumer preference for “niche” foods 13%

0 5 10 15 20 25 30 35 Percentage of respondents (N=242) Source: L.E.K. Foodservice Survey (N=230 for 2017 survey)

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Figure 3 Health-related menu changes over the past 3 years (2019)3

80 48 67 65 64 65 62 61 60 58 58 57 Claim type 53 55 50 49 50 48 Natural

38 Ethical 40 32 Enhanced Less of 20 Alternative dietary lifestyle Percentage of respondents (N=242) of respondents Percentage 0

Menu changes vs. 2017 Notable increase Low-fat Organic Notable decrease Low-carb Cannabis or poultry All natural Non-GMO allergy free Gluten free Low-calorie Nutrient rich Grass-fed beef Locally sourced protein products protein Meat substitutes Free-range cattle cattle Free-range Cannabidiol (CBD) No antibiotics ever Lactose intolerance/ Lactose intolerance/ Vegetarian or vegan Vegetarian Change Branded plant-based since 2017 (%) 4 (2) 1 (6) 1 – 1 4 n/a n/a (1) (3) – 1 (5) 2 n/a 6

2017 (%) 58 63 52 71 54 50 48 64 n/a n/a 65 61 58 66 70 55 n/a 42

Source: L.E.K. Foodservice Survey (N=230 for 2017 survey)

(to 34% of operators, up 6% since 2017). Twitter also remains a Figure 4 potent force, as proven by Popeyes’ use of the platform to needle Expected change from meat to branded, plant-based rivals and increase demand for its wildly popular chicken sandwich. meat alternatives (2019)4 4. Use pre-prepared and private label products. Purchasing 100 4% 6% 4% >90% pre-prepared foods gives operators a way to offer comparable 9% 5% 6% 76%-90% quality at a lower price, in terms of both food and labor — 41% of our survey respondents say the cost of labor is too high to prepare 12% 14% 61%-75% 80 11% food in-house. And as the quality of private label foods rises while consumers remain largely unaware of how these foods differ from 12% 12% 16% 41%-60% branded products, operators are also increasingly shifting to private label alternatives, particularly for commodity items. 60 12% 14% 5. Reduce labor, limit working hours and leverage automation. 20% 26%-40% To further combat higher labor costs — especially as the 13% 40 17% possibility of a recession continues to loom — operators are reducing both the number of full-time employees and the 18% 10%-25% number of hours all employees are asked to work (43% and 35%

Percentage of respondents (N=167) of respondents Percentage of the operators we surveyed, respectively). They’re also using 20 39% 34% automation (20%) wherever possible. 22% <10% Another tactic they’re using to lower labor costs is the purchase 0 of pre-prepared food (see Figure 5), by finding food with a level 3 years ago Today 3 years of quality comparable to that prepared in-house. As such, the from now pre-prepared food category is expected to grow 17% year over 33% 34% 37% Net year, surging from 7% growth in 2017.

Source: Aramark; Sodexo; CNN; L.E.K. Foodservice Survey

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Although the sentiment among foodservice operators is somewhat Figure 5 5 less optimistic than in previous years, they are proactively taking Reasons for purchasing more pre-prepared foods (2019) steps to counter the headwinds they face. From expanding their Labor costs are too menu options while reducing costs to beefing up their delivery high to perform food 41% options with the help of digital tools, foodservice operators are preparation practices well poised to continue growing for the foreseeable future. Quality and consistency of prepared foods is high 40% enough compared to food 1 Survey question: Overall food service industry revenue has grown at 4.6% per year prepared “in house” since 2004 (including price increases of 2.5% per year). What growth do you expect per year going forward (including price increases)? Pre-prepared foods are less expensive 33% 2 Survey question: Which of the following are the most significant growth barriers facing your company over the next three years? 3 Survey question: What menu changes have you needed to make due to recent It takes too long for me health trends over the past three years? to prepare the food 30% “in house” 4 Survey question: What percentage of meat products are you replacing with branded, plant-based meat?

5 Survey questions: How have your food preparation practices changed over the past Other 3% three years? Why are you purchasing more pre-prepared foods?

0 10 20 30 40 50 Percentage of respondents that are purchasing more pre-prepared foods (N=96) Source: L.E.K. Foodservice Survey

About the Authors

Rob Wilson is a Maria Steingoltz is a Manny Picciola is a Managing Director Managing Director Managing Director and Partner in and Partner in L.E.K. and Partner in L.E.K. L.E.K. Consulting’s Consulting’s Chicago Consulting’s Chicago Chicago office. He office. She joined office and serves specializes in the L.E.K. in 2003 as an as the Global Co- Consumer Products Associate and works Head of the firm’s and Retail practices, in the retail consumer Consumer sector. with a specific focus sector with a special Manny has extensive on the food and focus in food and experience managing beverage sector. beverage, as well as and directing Rob advises clients on a range of critical beauty and personal care. Maria advises clients projects in corporate and business unit strategic business issues, including growth on a range of critical strategic issues, including strategy, channel management, consumer strategy, price pack architecture strategy, growth strategy, consumer segmentation, segmentation, corporate turnaround, and trade spend optimization, M&A support, international expansion, pricing, and mergers merger and acquisition transaction support profitability enhancement and organizational and acquisitions. across multiple industries. transformation.

About L.E.K. Consulting L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and rigorous analysis to help business leaders achieve practical results with real impact. We are uncompromising in our approach to helping clients consistently make better decisions, deliver improved business performance and create greater shareholder returns. The firm advises and supports global companies that are leaders in their industries — including the largest private- and public-sector organizations, private equity firms, and emerging entrepreneurial businesses. Founded in 1983, L.E.K. employs more than 1,600 professionals across the Americas, Asia-Pacific and Europe. For more information, go to www.lek.com.

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