By: Wade Hanson, Principal
August 22, 2022
Introduction
Senior executives from leading financial institutions have been predicting that an extended economic downturn is becoming more likely by the day. But despite declining GDP and still-surging inflation, many executives have been hesitant to use the term recession when describing the prospects for the second half of 2022. This hesitancy is largely due to the fact that—despite all of the warning signs—there are also indicators such as consumer spending and low unemployment that defy historical conditions for a recession. So, where does that leave foodservice? How do we interpret the signs?
Since 1966, Technomic has developed in-depth insights on the foodservice industry and has experience in analyzing the impact of recessions on the foodservice business. This whitepaper summarizes the Technomic perspective going forward.
The Consumer
Ultimately, the consumer determines foodservice industry performance. And, at present, consumers report that, while they have reduced their use of foodservice visit frequency from the highs of summer 2021, they continue to spend when they do eat out. Although occasions are down, consumers choose not to deny themselves of restaurant experiences and satisfying their cravings. Therefore, they are not skipping extras or trading down to lower-priced venues (at least not yet), suggesting there continues to be pent-up demand for away-from-home experiences from the pandemic.
So, despite spending much more on necessities ($460 more every month for the average U.S. household*), the consumer is holding mostly steady in their spending on foodservice, driven primarily on inflation spikes.
What Does History Tell Us?
Over the past 40-plus years, the U.S. economy has been through six recessions. And, in only two of those periods did foodservice decline (slightly during the collapse of the housing bubble in 2009 and 2010, and dramatically during the period of stay-at-home orders associated with the COVID-19 pandemic). Data shows that recessions may lead to foodservice dips, but declines are no guarantee.
One reason for the resiliency of foodservice is that some of the core segments of the industry are rather protected from recessionary conditions. Healthcare operations do not see declines in the number of patients and residents. Education segments’ foodservice operations proceed normally (though K-12 may actually see increases due to more children using free and reduced-price meal programs). Additionally, the need for convenience and experiences do not reflexively abate during a recession, which are foundations on which the restaurant industry has been built.
Further, in 2022 and beyond, consumers do not have the option of less-expensive food and beverages in the grocery channel. The inflation rate for food at home continues to exceed that of foodservice inflation, making the perceived value of foodservice purchases appear even greater than during past economic downturns.
What’s Next?
It is widely accepted that the downturn in the economy will continue into at least the early part of 2023. And for many companies and consumers, it will certainly feel like a recession. But over the period of COVID-19, the American public accumulated excess savings of $2.4 trillion through government checks, deferred debts and reduced spending, among other things.** A higher percentage of the population has a savings cushion that they did not have pre-pandemic and household debt is at record lows.** Combine these factors with a sense of job security and/or abundant employment opportunities and you have a consumer that continues to be comfortable spending on food away from home.
Now, just because the foodservice consumer will continue to visit restaurants, bars and noncommercial venues, that doesn’t mean they are interested in spending frivolously. Expect delivery fees to be scrutinized. Expect any unusual charges on one’s bill to be questioned. Demand for foodservice will come with demand for reasonable value.
How Should the Industry Respond?
Foodservice operators will continue to face rising costs (particularly energy, occupancy, labor and food and beverage costs), and will likely encounter more pushback from consumers toward increased menu prices. The days of the understanding customer may be coming to an end. Meanwhile, the operator has already suffered a 2-point margin erosion since 2020—making a challenging business even more so.***
Given these circumstances, the operator will need expanded support from its distributor and supplier partners. There will need to be a higher-value response to the high menu prices facing the diner if we expect consumers to continue to maintain a steady use of foodservice. The industry has to re-examine the price-value equation as it relates to all product, menu and service solutions. The value must at least equal the increasingly high menu prices.
The operator will, therefore, continue to focus on convenience, speed of service and ambiance. But the support will have to come in the form of such things as differentiation, variety and limited-time offerings. Technomic data shows that permanent menu items have been on the decline while LTOs have surged in recent years.**** Expect this trend to accelerate as the customer demands new and exciting in exchange for their hard-earned dollars.
Technomic’s View
Over the foreseeable future, it is highly likely that consumers will feel greater economic pressures due to higher prices, rising interest rates, energy costs, a depressed stock market and durable goods shortages. The savings cushion built up by many will prove highly beneficial as will the prevalence of open positions during this time of low unemployment. And consumer foodservice behavior may not change dramatically compared to behavior during previous recessions.
Similarly, foodservice operators will feel a stinging financial pinch given that most currently problematic costs will remain problematic into 2023. But, at the same time, the industry is forecasted to grow in real terms in both 2022 and 2023.
The foodservice industry has always weathered downturn storms rather effectively. During the Great Recession of 2009-2010, the industry saw an annualized decline of only 0.1%. And, within only a couple of years, the business was in a robust growth phase. The industry will likely weather this storm as well in large part due to consumers’ unflinching desire to keep ordering from their favorite restaurants.
*Source: Moody Analytics, June 2022
**Source: Federal Reserve
***Source: Technomic, Inc.
****Source: Technomic Ignite Menu data, Top 500 chain resturants