Despite COVID-19-related disruptions, many foodservice suppliers have strong fundamentals and good long-term prospects. Several have even used this time to build new product and packaging capabilities. Buoyed by these strengths, the most innovative foodservice suppliers will emerge more efficient, effective and diversified as the economy rebuilds, further strengthening their positions while becoming more attractive targets for acquisition.
Here, we discuss why now is a great time to participate in the foodservice sector, and which attributes set great assets apart.
Resilient Trends in Away-From-Home Eating
While many restaurants are still in the midst of reopening, the long-term growth potential for the sector is strong. As shown in Figure 1, spending on food has steadily increased since 2006, both at home and away from home. In fact, that trend continued even during the Great Recession of 2008 and 2009. In 2016, spending on away-from-home surpassed at-home for the first time, and that trend continued right up until the COVID-19 crisis.1
Figure 1: Food Sales Show Long-Term Strength and Resilience
In the even-longer term, nominal sales for limited- and full-service restaurants between 1997 and 2017 grew an average of about 5.5% and 5.3% per year, respectively. Nominal sales at full- and limited-service restaurants outpaced the growth in prices, indicating an increase in the quantity of meals and snacks produced and consumed at these outlets.2
“The long-term growth trajectory is positive, and experience in prior recessions also shows that the restaurant industry tends to bounce back relatively quickly,” says Tim Alexander, a managing director in the Consumer Group. As shown in Figure 2, spending on food consumed away from home has remained relatively stable in previous recessions, showing positive year-over-year growth during the 2001 recession and only moderate declines during the Great Recession in 2009. Alexander adds: “The COVID-19 crisis has created a much more drastic decline in away-from-home eating, but the most recent numbers already show signs of a rebound.3”
Figure 2: The Restaurant Industry’s History of Resilience
Likewise, recent consumer research reveals that 40% of consumers had purchased food from a restaurant on the previous day in June 2020, up from a low of 30% three months earlier, but still lower than the pre-COVID-19 average of around 50%. Conversely, among people who eat out, the propensity to consume food on an off-premises basis had skyrocketed from 50% prior to COVID-19 to 88% in June 2020 (Figure 3).4
Figure 3: Consumers Are Returning to Restaurants
Source: Datassential; The NPD Group
According to Brant Cash, a managing director in the Consumer Group, the foodservice providers catering to this resurgence in away-from-home eating are also those that have weathered the pandemic: quick-service restaurants with drive-throughs and casual restaurants with established to-go capabilities, for example. “Other restaurants that were initially hit hard have since made progress toward recovery by shifting their business models for takeout and delivery,” adds Cash. “Changes such as offering fewer items, simplifying kitchen preparation, adding digital capabilities and shifting employees to delivery have contributed to their resilience.”
Looking forward, industry analysts predict that limited-service restaurant concepts will return to pre-COVID levels in the fourth quarter 2020, with full-service restaurants recovering in the second quarter of 2021 (Figure 4).5
Figure 4: Restaurants Predicted to Recover by Q1 2021
Four Ways Winners Are Pulling Ahead
As restaurants work to emerge from the COVID-19 disruption, it’s critical that those in the supply chain help them rebuild. The many changes happening in the sector are creating opportunities for suppliers, as well as for investors looking to capitalize on the long-term growth potential of the sector. Those playing offense by adapting and innovating with their customers can generate outsized returns for their investors. Such innovation comes in many forms; the following four examples are drawn from our recent experience with leading companies in the space.
1. Providing customers with full solutions
As part of their post-COVID-19 rebuild, many restaurants are taking a hard look at their menus, seeking ways to save cost, time and contact in their back-of-house operations. Suppliers who can help stand to build stickier relationships and gain share.
Kronos Foods, Inc., for example, is a very innovative foodservice supplier, notes Cash: “The company uses its culinary expertise to develop unique products, including ready-to-eat sliced and flavored proteins. Restaurants and grocery stores only need to reheat these products, saving labor and providing greater food safety, quality and consistency in preparation. In their bakery operations, Kronos has developed unique products jointly with their customers that solve back-of-the-house challenges and help achieve menu innovation goals. Companies like Kronos that have the flexibility and willingness to explore new ideas with their customers are going to be winners over the long term.”
Other foodservice suppliers are focused on helping restaurants stay on-trend as they re-emerge into the post-COVID-19 world—for instance, by bringing ideas for healthier food items. B&W Quality Growers specializes in premium “superfood” ingredients such as watercress and arugula, and is seeing significant growth as chefs incorporate healthier foods into the menu. Alexander adds that B&W also uses proprietary techniques that extend the shelf life of their products, which can significantly reduce waste. “Fresh, healthy products that offer versatility in the kitchen and the benefit of a longer shelf life are poised for continued growth,” he says.
2. Evolving the product format for better safety, transport and delivery
Suppliers who bring innovation in product format can also do so through food preparation, such as pre-cooking, or in packaging. A product format evolution that brings both safety and cost savings may be, for example, offering authentic, prepackaged individual servings that ship frozen and offer safety and convenience, while taking out labor at the restaurant or store.
“While sustainability has been an increasingly important driver of packaging in recent years, the pandemic has shifted the primary focus to health and sanitation throughout the supply chain and in its interaction with end-customers,” says Brad Morrison, a Managing Director in the Industrials Group. He adds that there are a host of potential packaging innovations for dealing with portioning, food preservation, tamper evidence and hygiene that will be more important than ever.
“Consumers have elevated safety concerns,” adds Morrison. “Products that haven’t been packaged in the past may now need to be packaged—produce, for example. There are also innovations happening in dispensers and applicators for ready-to-consume products. We’re also seeing a shift to substrates that may not harness the virus as long as other materials—plastic versus paper, for example.”
Morrison also notes the significant lift in demand for at-home dining options, including meal delivery, and the related boom for companies supplying this part of the foodservice industry: “TemperPack is a great example of a company whose innovations have positioned it well to take advantage of the rise of home delivery options while keeping sustainability and safety in focus.”
3. Providing services that help meet consumer demand for a safe experience
As consumers begin to be more comfortable with dining out, safety is paramount. Restaurants must demonstrate they can provide a safe kitchen and safe dining experience. “Companies that provide ancillary services to the food industry that make it appear to be cleaner and safer are doing great,” says Taylor Morris, a director in the Business Services Group. “Citron Hygiene, for example, focuses on facility hygiene. Others are innovating with a focus on safety.”
In addition to having a safe facility, restaurants that can make the dining-in component less central will struggle less than those that depend upon the number of feet that come into the restaurant, says Graham Gillam, a director in the Business Services Group. “Restaurants that are new to takeout and delivery can benefit from the ideas, expertise and abilities of their distributors. It’s a critical time for those in the foodservice supply chain to be partnering with their downstream customers. Imperial Dade is one example of a distributor that is helping its customers understand and comply with local health and safety guidelines. It’s working with customers on a consultative basis, and can supply everything from PPE to signage to takeout packaging.”
4. Diversifying across sectors and geographies
Not all sectors or geographies were impacted to the same degree by COVID-19, and innovators are protecting themselves and taking advantage of pockets of opportunity through diversification. That may be adding retail or grocery customers, expanding within foodservice, or increasing their geographic coverage.
Grocery stores are seeking more premium offerings and restaurant-quality food, particularly on the perimeter of the stores, where food is generally unbranded. This is a great opportunity for restaurant foodservice suppliers to try to serve that need. The grocery sector is not as cyclical, and more pandemic resistant, so it’s a good way to balance a portfolio.
Many suppliers are seeing success in the grocery channel with foods designed for restaurants. Products that are typically going in bulk into a restaurant, then divided up in the back of the restaurant and put onto a plate, are a great fit for grocery perimeter delis and bakeries. Containers of food can be divided in the back of the store and put out in clamshells for consumers looking for restaurant-quality food.
Once again, Kronos Foods provides a helpful example. With many grocery stores looking to expand their perimeter departments and create differentiating “groceraunts,” Kronos spotted an opportunity for its heat-and-serve gyros products. This unique, restaurant-quality product is safe, easy to prepare, and satisfies consumer demand for ethnic cuisine, fresh foods and convenience. In fact, the success of the product has helped Kronos gain permanent placement and expanded distribution of the product, as well as sell additional products through the growing grocery channel.
Morris sums it up this way: “Those in the best position have multiple ways to win, providing a range of supplies along with food items, or serving multiple end markets.”
The diverse customer segments served by foodservice suppliers have faced varying degrees of disruption and are in different stages of recovery. Yet long-term industry data suggest that pre-pandemic trends in away-from-home eating will likely resume, and that the long-term prospects in foodservice remain attractive.
Now is an important time for suppliers and service providers to innovate with their customers—whether in the form of new menu items, products, packaging or distribution. It is also an important time for suppliers to balance their portfolios and take advantage of diversification opportunities. Those that are taking these steps and building new products, capabilities and markets are the leaders for investors to watch.