The best that could be said about the foodservice industry these days is that the market is in a lengthy holding pattern. Over the past year, overall growth has continued to be marginal, with some sectors not moving the needle in any significant way.
Not surprisingly, the market is highly correlated to both the economy and consumer spending, says Lin Ai, an economist with the Conference Board of Canada in Ottawa. “In 2012, we had a weak domestic economy; Canadians were highly in debt, and unemployment rates were at seven per cent. That affects their willingness to spend on everything, including food.”
“The heavy debt load is an aftermath of a period where consumers used credit to finance activities during the recession,” says Benjamin Tal, deputy chief economist with CIBC World Markets in Toronto. “With interest rates and house prices rising, people will [continue to] think twice before spending on luxuries. People who may have spent $30 at a restaurant will now spend $25.”
Tighter purse strings have taken their toll on the full-service dining sector especially, while QSR has fared better as consumers have “traded down” when eating out.
Chris Elliott, senior economist with the Toronto-based Canadian Restaurant and Foodservices Association (CRFA) reports that the commercial and non-commercial foodservice market in Canada stands at $68 billion. When you remove the non-commercial component (accommodation, self-operating institutions, retail foodservice and stadium/vending machines), the commercial market is actually $55 billion.
To date in 2013 the commercial market has remained on a 4.4-per-cent growth track, compared to 5.1 per cent last year. “Factor out inflation, and you’re looking at 2.3 per cent real growth right now,” Elliott notes.
The full-service segment was the hardest hit during the recession, which means it is seeing slightly stronger returns than some sectors in 2013 simply because it had some room to grow. “Traffic, however, is still low compared to pre-recession times,” Elliott explains. “Any growth in the full-service segment is largely driven by strong economies in Saskatchewan, Alberta, Newfoundland and Labrador.”
The quick-service sector and catering fared the best in 2012, he adds. QSR experienced fairly strong growth in 2009 to 2011, with moderate growth in 2012 and 2013 (estimated to be 3.2 per cent for this year).
“What’s interesting is that prior to the recession full-service was always the largest segment of the foodservice industry by sales,” Elliott explains. “After the recession, QSR became the biggest
segment in 2010, 2011 and 2012. In 2013, full-service has inched a bit higher than QSR in sales, but it remains to be seen if that holds out.”
One of the fastest-growing sectors over the past few years has been catering, a segment expected to see sales grow by 6.8 per cent in 2013. “A lot has been driven by the natural resource industries. There has been astonishing growth in foodservice sales in remote camps,” Elliott explains. “With the aging population, we’re also seeing a lot of growth in hospitals, retirement homes and long-term care.”
Drinking establishments have been struggling for the most part, although the segment is showing a 1.2-per-ent growth rate in 2013. That number represents the first year of growth since 2008.
While some predict the beginnings of a recovery in 2014, there are many challenges restaurateurs will need to overcome. The top two issues are higher food and labour costs, according to CRFA surveys. The weak economy continues to rank third in terms of most important issues.
Expectations are that the market itself will not grow. Rather, the battleground will involve stealing market share from competitors. “If you’re an operator in today’s market, your growth plan is literally about stealing customers from your competitors,” says Robert Carter, executive director of The NPD Group, Inc., in Toronto.
For all intents and purposes the market is flat, Carter notes. “It’s not even keeping pace with the rate of inflation. We’re expecting the same for 2014, largely because of a continued decline in restaurant traffic. In fact, the numbers are still below 2009 levels.”
The analysts agree that lack of confidence will continue to plague consumers in the coming year. As a result, operators will have to step up their game to win them over and stay competitive. This means focusing on menu innovation, finding ways to increase margins and responding to changing demographics in a timely way.
Price increases are not an option for operators, notes the Conference Board’s Ai. “They will have to keep prices to a minimum…. Right now [they] are absorbing a large share of the increased costs. Some are even reducing their portion sizes while others are promoting higher margin items like drinks to compensate.”
As consumers become more cost-conscious, price will continue to be a driving force, says Darren Tristano, EVP at Technomic, a Chicago research firm. “It’s the lower income group that will move the needle going forward.”
Demographic shifts are worth noting. For example, for the first time, the latest census shows that single Canadian households have surpassed couples with children. Also, while baby boomers represent a significant portion of restaurant sales at 26 per cent, millennials, in fact, represent 28 per cent of all restaurant meals consumed, NPD’s Carter says. “A lot more operators are targeting that [group], because it’s the largest cohort next to boomers.”
As always, labour continues to be a challenging issue for an industry that is the sixth largest employer in Canada, according to Statistics Canada. The CRFA predicts 35,000 staff positions will have to be filled by 2015. One item of note is that skilled labour shortages have jumped from 30 per cent to 38 per cent in the second quarter of 2013. “As the economy starts to recover, and we see lower unemployment rates, it will be harder and harder to find labour,” the CRFA’s
Elliott says.
Despite the sluggish market, expansion plans are moving to the forefront, Technomic’s Tristano notes. “We’re starting to see expansion pick back up again, especially with operators that performed well during the last five years and have the financial means to take the opportunity
to expand.”
We can expect to see more U.S. companies moving to Canada due to market saturation south of the border, he speculates. Much of that expansion will be smaller locations that represent a lower cost investment. “An 800 to 1,500-sq.-ft. frozen yogurt or subway store is easier to open, and the risk is smaller.”
“Subway, Starbucks and A&W all have aggressive expansion plans,” Carter confirms. “However, smaller regional players are really getting hammered, because they don’t have the same market awareness or culture that drives menu innovation. It’s pretty hard for a smaller company to take a chunk out of someone like Tim Hortons that has a 28-per -cent market share of all restaurants.”
In the battle for a bigger share of the consumer mindset, perceived value and differentiation will become increasingly important, Tristano notes. “Restaurant brands will have to connect with consumers and appeal to them emotionally.”
The menu focus for 2014 will be on ethnic foods, health and wellness and beverage items, Carter predicts. “We will also see strong growth on the grocery side in the home-meal replacement category, which will put pressure on the restaurant segment.”
While projections for 2014 show numbers will likely stay the same course, Ai says that U.S. and Eurozone economic growth, barring any problems, may help the cause as well as the growth in tourism, especially from China as a result of the Air Transport Agreement extension. “We’re really hoping for a better year ahead.”
