l e k . c o m

ExEcutivE insights Volume XVI, Issue 21

l.e.k. consulting / executive Insights insights @ WORK®

2014 L.E.K. Consulting U.S. Foodservice Operators Study: Optimism and Opportunities was written by Manny Picciola, managing director and head of L.E.K. Consulting’s Food & Beverage practice, and Rob Wilson, a senior manager in L.E.K. Consulting’s Chicago off ice. For more information, contact consumerproducts@lek.com.

After several years of relatively modest growth, foodservice

operators across all segments of the industry are now feeling

strongly optimistic about the future. The 2014 L.E.K. Consulting

U.S. Foodservice Study found several leading indicators of that

optimism, including that three out of four senior foodservice

decision-makers and executives believe business will be better

over the next three years than it was in the past three. In L.E.K’s

view the market now has strong tailwinds behind it and there

are numerous growth opportunities for foodservice operators.

Operators believe that healthier eating is here to stay and say

changing their menus to support that trend will be their biggest

priority for 2014. Farm-to-fork, operators say, matters: they

expect growing demand for healthier foods, locally sourced

items, cleaner ingredients and value products. Similarly,

operators say they are convinced that gluten-free dining is

not a fad. A remarkable 56% say they have already changed

or are changing their menus to include gluten-free items.

See also the L.E.K. Executive Insights “Fresh-Food Nation:

The Economic Promise of the ‘Farm-to-Fork Strategy” for

more perspective on this key food industry trend.

However, Sysco’s announcement in late 2013 of its intention

to acquire US Foods is a big concern for operators. The owner

of a bagel restaurant noted, “[t]here was definite panic in the

restaurant industry among small businesses when the merger

was announced. I have used bids from US Foods to negotiate

2014 L.E.K. Consulting U.S. Foodservice Operators Study: Optimism and Opportunities

lower prices from Sysco. We know that we are going to get

squeezed…”

Most operators who participated in the L.E.K. study agree:

60% of them think consolidation of the two biggest suppliers

will mean higher prices. Fifteen percent say they expect

the combined supply giant will take preferred products off

the shelves and offer them pricier house brands instead.

Operators are also not happy with their relationship with

manufacturers. It is time, they say, for food makers to start

paying closer attention to operators’ needs and preferences.

Operators told us that what they really want is more customized

solutions to their problems.

Growth Accelerates: Four Key Trends Driving it

For all the economic headwinds of the Great Recession,

foodservice has grown over the past decade, significantly

outpacing retail. The U.S. foodservice industry had a 4.9%

compounded annual growth rate from 2003 through 2012,

as compared to 3.5% for the retail industry.

Like much of the rest of the economy, though, foodservice

has experienced the “hourglass effect”: growth at the top and

bottom ends of the market and contraction in the middle. Since

ExEcutivE insights

l e k . c o minsights @ WORK®Page 2 l.e.k. consulting / executive Insights Volume XVI, Issue 21

ExEcutivE insights

2007, the fastest growth has been among quick service

restaurant (QSR) and fast casual brands, with middle-of-the-

road sit-down chains shrinking.

A large majority of operators across the board say they are

optimistic that business will improve over the medium-term

future. Seventy four percent told us they expect that growth

over the next three years will be stronger than in the past three

(see Figure 1).

Operators say they think the growth they’re expecting will come

via four key trends: healthy food, locally sourced (farm-to-fork)

food, clean ingredients and value. In fact, these trends are

already driving operator behavior. More than 50% of

operators say that in the past three years they’ve added gluten-

free, vegan or all-natural items to their menus (see Figure 2).

60

Source: L.E.K. Foodservice Survey

health-Related Changes in Menus and Purchasing habits

50

30

0Perc

enta

ge

of

Res

po

nd

ents

wh

o h

ave

mad

e ch

ang

es

40

20

10

Figure 2

Glu

ten

Fre

e

Veg

etar

ian

o

r V

egan

All

Nat

ura

l

low

-Fat

low

-cal

ori

e

low

-car

b

lact

ose

Into

lera

nce

/ A

llerg

y Fr

ee

Free

Ran

ge

cat

tle

or

Pou

ltry

No

n-G

mo

5652 51

4947

41 41

34

28

consumer Purchasing Habits Have changed

menu change Implemented

Expected nominal growth Per Year in Food industry – By segment

Figure 1

100

80

40

-20

Perc

ent

of

Res

po

nd

ents

60

20

0

-40

Expected growth next 3 Years vs. Last 3 Years

Expect increase 76% 71% 77% 71% 74% 55% 76% 74%

Expect no

Change7% 18% 14% 11% 10% 36% 16% 12%

Expect Decrease 18% 11% 9% 18% 16% 9% 8% 14%

more than 7% Increase

4-7% Increase

1-3% Increase

No change

1-3% Decline

4-7% Decline

more than 7% Decline

Full service Quick service

Fast casual Pubs, clubs and Bars

Non- commercial

contract managers

Distributors All

Source: L.E.K. Foodservice Survey

ExEcutivE insights

l e k . c o minsights @ WORK®l.e.k. consulting / executive Insights

Operators also say they don’t think those shifts in consumer

tastes are going away anytime soon. The trend towards

farm-to-fork, for instance, is only expected to grow – and

rapidly (see Figure 3).

Meanwhile, the biggest obstacles to growth, operators told

us, would likely be on the cost side of the business, especially

labor and supply prices. Forty-four percent said they expect the

biggest stumbling block over the next three years will be higher

labor costs. Forty-one percent said the biggest headache would

be upward pressure on prices.

The Fallout from the Sysco-US Foods Deal: Fewer Choices and Higher Prices

Meanwhile the Sysco–US Foods deal is very much on operators’

minds (see Figure 4). If approved by regulators the deal will be

completed later this year.

The main decision maker at one small non-commercial opera-

tor told L.E.K. “Sysco has always been one to supply their

own labels and minimize the choices of alternative brands…”

Some operators believe that a hardball approach means not

only high prices for them, but also fewer of the kinds of

products customers want. The chief decision maker at a small

full-service restaurant said, “We will lose choice by being

pushed into private labels with higher profit margins for

distributors who are less concerned with local, sustainable

and artisanal products.”

The effects of the deal are already being felt. One small

restaurant operator noted, “[i]n our area, Quandt’s Foodservice

was bought up by US Foods. They have already dropped the

ice cream line we prefer, changed the portion size on our sliced

beef liver we have used for over 30 years, and we no longer

have access to some of our locally produced items.”

Sysco has acknowledged some operators will take their business

elsewhere, creating opportunities for other distributors and

second tier outlets, like Restaurant Depot. According to Sysco

CEO Bill Delaney, “Sysco and US Foods together collected about

27% of the revenue in the U.S. food-distribution market last

year. Some customers that use both Sysco and US Foods may

now look elsewhere to diversify their sourcing. As a result,

combined market share is expected to start out around 25%.”

50

Source: L.E.K. Foodservice Survey

Locally-sourced Food – By segment

40

25

0

Perc

ent

of

foo

d p

rod

uct

s so

urc

ed lo

cally

35

15

10

Figure 3

large

Three Years Ago

small commercial

contract managers

Distributors

45

30

20

5

Today Three Years From Now

31%30%

34%

30%

38%

47%

18%

29%

40%

24%

29%

34%

INDusTRY AVG. NeXT 3 YeARs (44%)

INDusTRY AVG. ToDAY (36%)

INDusTRY AVG. lAsT 3 YeARs (29%)

30

Source: L.E.K. Foodservice Survey

Effect of Us Foods Acquisition by sysco on industry Prices

25

15

0

Perc

ent

of

Res

po

nd

ents

20

10

5

Figure 4

Dec

reas

e b

y m

ore

th

an 7

%

Dec

reas

e b

y 5%

-7%

Dec

reas

e b

y 3%

-4%

Dec

reas

e b

y 1%

-2%

No

ch

ang

e

Incr

ease

by

1%-2

%

Incr

ease

by

3%-4

%

Incr

ease

by

5%-7

%

Incr

ease

by

mo

re t

han

7%

01

4

8

2627

21

9

5

AVeRAGe: INcReAse BY 1.5%

62%

ExEcutivE insights

l e k . c o minsights @ WORK®Page 4 l.e.k. consulting / executive Insights Volume XVI, Issue 21

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© 2014 L.E.K. Consulting LLC

L.E.K. Consulting is a global management consulting firm that uses deep industry ex-pertise and analytical rigor to help clients solve their most critical business problems. Founded more than 30 years ago, L.E.K. employs more than 1,000 professionals in 22 offices across the Americas, Asia-Pacific and Europe. L.E.K. 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. L.E.K. helps business leaders consistently make better decisions, deliver improved business performance and create greater shareholder returns.

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Operators to Manufacturers and Distributors: More Attention, Please

Operators told L.E.K. that they purchase private label products

from distributors mostly for commodities (eggs, fresh fruit and

vegetables, etc.) and brand name products for pre-prepared

and manufactured foods. Most said they purchased brands

mainly because consumers recognized and preferred them,

not because they were of higher quality than private labels.

But despite the expectation that a merged Sysco-US Foods will

be pushing private labels, few operators expect to be buying

significantly more private product over the next three years.

As for manufacturers, operators believe that food makers

aren’t paying enough attention to them. If manufacturers want

more of operators’ business they need to do three things:

1. “A better understanding of my needs”

2. “More customized solutions, less off–the-shelf”

3. “More frequent visits from manufacturer reps”

Digital promotions offer another way for manufacturers to

build stronger bonds with operators. Twenty-two percent

of operators told us they used digital coupons and blog

promotions, two effective yet underutilized online sales tools.

Now is a time of great opportunity and optimism in foodservice.

Operators are challenged to evolve their businesses to better

meet consumers’ needs and manage labor costs while

navigating a consolidating supply chain. At the same time,

manufacturers have an opportunity to better help operators

succeed in this complex landscape through a stronger

understanding of their needs and by delivering solutions

tailored to address their primary concerns. As always, deep

experience and knowledge of the players and the changing

dynamics will be necessary for success.