(Feb. 20, 4:45 p.m.) As restaurant operators report their worst business outlook ever, produce suppliers and distributors echo their woes and also look for ways to counteract the recession.

“We’ve never seen marketing conditions like this in the foodservice industry or in the foodservice supply chain,” said Russ Wingo, director of sales and marketing for Produce Alliance, a Nashville, Tenn.-based network of produce suppliers and distributors.

“Sales volume is definitely being impacted. Economic conditions are affecting all foodservice operations with maybe the exception of very few,” Wingo said.

The National Restaurant Association’s latest Restaurant Performance Index showed the lowest overall restaurant performance in the association’s history at 96.4. A score of 100 on any of the NRA’s indices shows a standstill, while a score above 100 shows growth in a category.

Not all bad news

The association’s December industry outlook for 2009 reported an increase in overall sales for the restaurant industry, up $8 billion from last year to $566 billion.

Quick-service restaurants are expected to claim $164 billion, up 4% from 2008, while full-service restaurants are expected to post a sales gain of 1% with $183 billion, all predicted before factoring in inflation. After inflation, the entire industry is expected to see a decline of 1%.

With quick-service restaurants leading the way, McDonald's is holding its own, reporting a sales increase of 5.4% over the same time last year in the U.S. in January.

Some full-service restaurants are seeing positive growth, as well. Olive Garden, a chain owned by Orlando, Fla.-based Darden Restaurants, racked up 7.2% sales growth over 2008 and a 1.7% same-store sales increase in the first two quarters of fiscal 2009.

Fewer people dine out

Overall same-store sales, however, were the lowest the association has ever seen, with two-thirds of operators reporting lower sales in December compared to the same month last year.

That result is 6% higher than the previous three months’ reports of 60% of operators. Traffic is down, along with sales, with 68% of operators reporting a traffic decline. That figure is also a record for the industry.

Wingo said although he has seen a drop in the volume of produce sold, he has not seen significant changes in the types of commodities sold.

“Produce needs are the same,” Wingo said. “We haven’t seen any significant changes moving away or moving toward different items.”

However, Tim York, president of Salinas, Calif.-based Markon Cooperative, said he has seen demand change toward different produce supplies. His company, a produce buying agent for distributors, is working to carry the widest variety of produce at multiple price points possible.

“What we do see is a shift in buying patterns,” York said. “Maybe they use a choice orange when before they would have used a fancy, or a size B potato to save money.” That’s what we’re seeing is a trading down in some cases.”
York said the company is trying to expand its product offering for customers looking for the lowest-cost items.

“Especially on the big four, the lettuce, tomatoes, potatoes and onions,” York said.

Lloyd Ligier, vice president of business development for Monterey, Calif.-based Pro*Act, said he has seen a shift toward using value-added produce, but cannot yet say whether that shift is related to the recession.

“People are looking at value-added to cut labor,” Ligier said. “But you can’t just do one. If you switch to value-added, you’ve raised your food cost, so you have to cut somewhere, and I hate to say it, but that place is labor.”

York said fresh-cut business is growing for Markon, as well.

“I think that’s somewhat symptomatic of the times, but pre-cut really delivers,” York said. “Operators can save money in the back of the house, and it helps with presentation.

Consolidation of routes

Distributors are also trying to save themselves and their foodservice customers money by consolidating and reducing the number of deliveries.

“Operators understand their customers are impacted by the number of deliveries,” York said. “So I think broadline distributors are seeing their business pick up.”

Wingo said operators’ solution lies in aligning themselves with the right distributors and suppliers.

“The suppliers and distributors that can deliver a value offering will ultimately be successful,” Wingo said. “People are looking for a company that can consolidate distribution, manage pricing and deliver other services.”

Ligier said Pro*Act has been consulting with customers to cut costs.

“We’re going to fewer deliveries per week, doing night deliveries and everything we can to hold costs,” Ligier said.

National sourcing and distribution chains help customers stay alive during harsh economic times.

“We’re seeing that despite the challenging time, our numbers are pushing ahead,” York said. “We’re growing in single digits, not the double digits like we were, but still seeing growth.”

Wingo said Produce Alliance look at this as an opportunity to go to a multiunit national chain to become companies’ produce supplier in hard times.

Don’t build it, sell it

Mike Donohue, vice president of media relations for the restaurant association, said although the restaurant industry is hurting, it’s not dead.

“When disposable income declines you see a decline in how much people go out, but there are still millions of people eating out every day in America,” Donohue said. “So restaurants are looking for ways to reward existing customers and attract new ones.”

The NRA’s December report showed a record low of restaurant operators making capital expenditures for equipment, expansion or remodeling, at 34%. Only 37% planned to spend similarly in the next six months, down from 40% in November and matching the lowest level on record.

“The No.1 thing that happens when the national economy slows down is that businesses hold back on new construction and expansion and focus on consolidation and increase marketing or look at new ways of marketing,” Donohue said.

Kevin Moll, chief executive officer of Denver-based National Restaurant Consultants Inc., said restaurants need to make a three-point attack to stay alive in this economy. The first is to control cost, the second to improve marketing and the third to clarify the restaurant’s niche to stand out from its competitors.

“Capital dollars have gone from equipment to marketing,” Moll said. “I don’t know any operator that has not completely analyzed every dollar spent on marketing.”

The biggest savings operators can find, though, are in purchasing.

“We always find lots of money in purchasing,” Moll said. “Frankly, though, there’s not that much money you can find (save) in produce. It’s more in canned products and supplies.”

Moll said produce usually has a small mark-up when compared to other items, including the dairy, meat, canned, dried, paper and chemical supplies restaurants require.

“There are a few reasons you can’t save as much on produce, and one is because you can’t really buy in bulk the way you could with, say, bleach, or even dairy or meat products because it’s (produce) fresh,” Moll said. “The other reason is there are not really manufacturers to negotiate with.”

Moll said produce is usually bought in smaller quantities, so there is not a large financial savings possible. Mid-range, fine dining hit

In the NRA’s Foodservice Industry Forecast in December, the association predicted that only quick-service restaurants would see growth in 2009, at 0.4% after inflation is factored in. Full-service restaurants are predicted to see a decline of 2.5% after inflation, and the overall category is expected to shrink 1%.

The U.S. Foodservice Industry Forecast from Technomic Inc., a Chicago-based food industry research and consulting company, also predicts quick-service, or limited-service, restaurants would not see a decline or increase in growth. But it predicts a 6% drop in nominal growth for the full-service category, factoring in inflation.

A survey from Farmington Hills, Mich.-based Morpace Inc., a consumer research group, divided the categories even further. It found that 36% of respondents reported plans to eat fewer times at casual dining restaurants, like Applebee’s and Olive Garden, and 30% planned to eat less at fast-casual restaurants, like Panera and Qdoba, while 10% planned to eat less at quick-serve restaurants.

At the other end of the scale, 32% reported plans to eat at midscale restaurants, like PF Chang and California Pizza Kitchen, less and 28% planned to eat fewer times at fine dining restaurants. The fine dining category was the one in which consumers reported the lowest probable growth, at only 1.5%.

“It’s a difficult time for restaurants,” Donohue said. “Consumers may make different choices. Americans like going to restaurants, but they may go to a different kind of restaurant or not as much.”