Based on numerous reported sources, restaurant traffic, most notably in the quick service restaurant chain segment, has been soft and average check growth has been decelerating. This is having an adverse impact on industry participants – including the Big 3 foodservice distributors1 – who are experiencing increasing growth challenges.
Despite lacking any discernible boost from inflation, the Big 3 managed to achieve growth in sales, volume (cases) and gross profit during the first quarter of this year (see Exhibit 1 for details). However, as shown in Exhibit 2, the growth in these metrics has slowed considerably. Fortunately, the Big 3 were able to improve gross profit per case based largely on a better product and customer mix. In part, this is reflected in the higher growth in independent cases the Big 3 achieved in aggregate. They were also able to control operating expense growth fairly well.
While industry performance has been surprisingly robust over the past several years, driven in large part by aggressive menu price increases, pent-up demand and a largely favorable economy, we have long expected consumers to “push back” on high menu prices. This appears to be happening now. We are hearing growing vocal displeasure with the sharply higher cost of a restaurant meal and/or snack from consumers at all income levels, and several notable industry stalwarts, like Starbucks, have recently reported disappointing results. In addition, the media have covered the subject extensively (often dramatically). It appears that consumers’ dissatisfaction with pricing levels is more acute relative to chains vs. independents (and on restaurants more than retail).
Independents appear to be doing a good job in adapting to the demands and constraints of today’s consumers and are now seemingly outperforming the chain restaurant segment. Along with intense focus on the segment, this likely explains why independents are such a growth driver for the Big 32.
A key strategic question for the industry, and the Big 3, is whether the “push back” is transitory or longer-term. Given labor and other cost pressures (including high borrowing costs), restaurants will be compelled to continue to raise prices (albeit at a more modest rate) for the foreseeable future while they seek to new ways to deliver better value to their price-fatigued consumer base. At the same time, high menu prices (and food prices in general) will remain a major (and perhaps disproportionate) consumer irritant. This being the case, market growth will moderate, and distributors will be less reliant on the “rising tide” effect.
As we have repeatedly noted, the Big 3 have the huge advantage of scale and the financial and human resources to improve their market position. However, they are now so large that certain growth initiatives, such as most M & A activities, will only have a limited accretive impact (at least for the short- to intermediate-term) and others, such as new technologies, have a frustratingly long adoption cycle. Therefore, we expect them to “double down” on productivity enhancements and cost optimization while elevating their emphasis on “most profitable” customers and products.
By: Barry Friends and Bob Goldin