When asked to name the top three margins pressures they will be facing in the last half of 2008, 83 percent of survey respondents named rising commodity prices (corn, beef, chicken, cheese) and energy costs (oil and gas) as the two most influential factors affecting margins. The third greatest concern, with 67 percent in agreement, was an ability to maintain revenue and traffic growth.
"While this is a relatively small survey sample, the respondents are senior executives in charge thousands of restaurants across the country, and their perspectives definitely provide valuable insight into the challenges of the current foodservice market and the need for increased focus on supply chain cost-efficiency and collaboration," said Rodger Mullen, president and COO of ArrowStream, Inc.
Reflecting the impact of rising costs, 45 percent of survey respondents also expect profitability to decrease somewhat over the next 12 months, and 27 percent reported expectations of moderate increases in profitability.
Some of these survey results echo other industry studies, including the Datassential report that was presented at the International Food Marketers Association’s February 2008 COEX meeting. The Datassential study also found that rising commodity and energy prices are putting tremendous pressure on U.S. foodservice chain operators.
The top strategy cited by chain operators for easing pressure on margins to improve profitability was improving procurement processes and inventory control.
"Our customers are established, market-leading restaurant chains and foodservice distributors, and their clear indication that procurement and inventory control are keys to overcoming economic instability is telling," said Mullen. "Because there are no indications that prices will decline in the coming year, chain operators and their trading partner must be assertive in controlling cost across the supply chain."
Other key strategies for strengthening the year’s financial outlook include switching to lower-cost food and beverage products (64 percent), increasing menu prices (45 percent), simplifying the menu (18 percent) and revamping labor compensation practices (9 percent).
"In an environment where consumers are keenly aware of their pocketbook, chain operators must continue to offer value," said Mullen. "It’s clear that chain operators prefer effective supply chain management as a key strategy to mitigating rising costs over increasing prices or reducing service."
Operators Prepared, Cautiously Optimistic about H2 Outlook
The majority of chain operators (83 percent) report being moderately prepared should future changes cause further pressure on margins. Only 17 percent report not being well prepared should margin pressures continue to increase.
Moody’s and ISM business confidence indices suggest that the recession could be ending but changes are still in store. Nearly 55 percent of Market Outlook Survey participants stated that revenue in the second half is expected to stay about the same as the first half of the year. More optimistically, 27 percent of chain operators reported that they expect revenue growth to increase in the second half. Less than one quarter (18 percent) expect a decrease in revenue growth from the first half.
