Restaurant Industry Suppliers: Time to Retool and Realign

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The entirety of the global foodservice industry has been turned on its head by the most disruptive force to ever hit it. The violent swings in demand and supply have devastated some businesses (restaurants led the U.S. in bankruptcies in 2020). But times of dramatic change can also create opportunities for tremendous upside (if you know where to look and have the wherewithal to build and execute on a bold and decisive strategy). Restaurant industry suppliers are one segment experiencing such opportunity now — equivalent to the sellers of picks and shovels during the era of the Gold Rush.

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    While many only think “restaurants” when thinking “foodservice,” we look at the entire global food ecosystem of $14.6T. COVID accelerated shifts that were going on for quite some time affecting the supply chain and restaurant suppliers including food distributors, service companies, technology, equipment, and more. 

    And while dining out won’t be quite the same any time soon (in fact, our prediction is that as much as 20% of the global industry will see a dramatic swing in revenue from old ways to new alternatives), it will mean a boon for those among the supplier community that are able to retool, reformat, and quickly redesign and align their business for this next normal.

    Selling to restaurants can be challenging. The industry is becoming more fragmented. Massive disruption is impacting nearly every aspect of foodservice. And operators are often (understandably) overwhelmed by the number of products and services available and being sold to them each day. 

    Selling more means getting to the right people at the right time with the right message. It’s not easy to unlock the share of the global food ecosystem. Here, we touch on several points what are the challenges and opportunities and how suppliers can better understand the mind of restaurant chain buyers. 

    Restaurant Industry Suppliers: Who Will Win the Most

    Who benefits the most in the industry in the aftermath of COVID-19? Just as with any devastating storm, the real money is made in the cleanup and rebuilding (construction, infrastructure, modernization, beautification, etc.). And while the pandemic was not a weather storm, it was far more destructive (and will require cleanup in the tens to hundreds of billions of dollars range for the foodservice industry alone).

    Sure, there was money to be made in panning for gold during the gold rush, but it was the landowners and supplier community (selling the picks, hoes, pans, and transport) that made the most in that period of time.

    Today, that will mean those selling the new training systems and protocols, personal protective gear, and tools for modernization (touchless and contactless, robotics and automation systems, and other technology that improves safety, productivity, and profitability).

    The Opportunity for the Foodservice Supply Chain: Address the Main Challenges Operators are Facing

    It’s one of those areas that the average restaurant customer may not normally think about: how food gets to the dining room. From “farm to fork” has been a discussion for a while (we’ve started using the slightly less-sexy phrasing of from “seed to sewer” to really capture the full production to disposal process).

    There are a whole host of challenges involved along the way. And just like many operators, the foodservice distribution model hasn’t been disrupted, pretty much since it started. By our estimates:

    • The global foodservice supply chain represents close to $1 trillion.
    • Up to one-third of U.S. restaurants could close permanently due to COVID-19, which results in a significant revenue decline for foodservice distributors.
    • Margins for suppliers and distributors are often even thinner than restaurants: Sysco and U.S. Foods have net income of lower than 3% of revenue, while the median for U.S. publicly traded restaurants is higher than 5%.

    foodservice distributor margins

    Here are some of the biggest areas that we see as concerning (and areas of opportunity) within the foodservice supply chain:

    Foodservice Safety

    Food Safety

      • Recall cases cost companies an average of $10 million (including only direct costs).
      • Food safety can be compromised due to poor warehousing/storage, transportation shortages, and even bad weather.
      • Between 2015 and 2017, Chipotle had a series of foodborne illness outbreaks related to compromised food safety. As a result, between September 2015 and January 2016, the company lost $10.5B in market cap.

    Sanitation

      • Effective sanitation practices restore cleanliness to prevent illness, ranging from safe manufacturing, processing, and packing.
      • Sanitation controls include cleanliness of food-contact surfaces and cross-contamination.
      • The perceived importance of sanitation by both operators and customers has increased (understandably) since the onset of the coronavirus pandemic.

    Traceability

    • Tracking the food throughout the supply chain allows consumers to know the ingredients’ origin and enhances food safety.
    • Starbucks’ traceability tool (which employs blockchain technology for the tracking process) launched this year to allow customers to learn about the origins of their coffee and to comply with responsible sourcing.
    Working with suppliers of all types — from foodservice technology companies, OEMs, brokers, manufacturers, distributors, and more — we cut through the clutter, bureaucracy, red tape, and long-lead sales cycle to help companies more effectively sell to restaurants. Some of the ways we help include: 
    • Evaluating products through the mindset of a buyer
    • Providing actionable feedback for potential enhancements
    • Facilitating top-to-top introductions for enterprise accounts
    • Generating global exposure for products and services
    • Identifying capital providers and strategic partnerships

    Restaurant Logistics

    Purchasing

    • The ability distributors have to procure a consistent supply of safe, quality food, and other supplies at competitive prices will determine their reliability and success.
    • This has led to a small competitive space with few buyers with a strong purchasing power.
    • Restaurants’ purchasing power also affects what they can get from suppliers and the prices they can get.
    • Darden, for example, works with more than 1,500 suppliers from 35 countries.
    • There are fewer suppliers for naturally raised proteins and organic ingredients, increasing the chances of food shortages.

    Receiving

    • The most critical logistics of managing food reception are related to timing — having the resources in place to receive the items at the right time, to avoid having personnel “on stand by” waiting, as well as organizing the loads based on their destination and type of product (refrigeration needs).

    Storage

    • The food preservation process is challenging, influenced by a set of variables such as temperature, light, mixture and cross-contamination, organization to access loads, pest control, etc.
    • Control systems to mitigate product damage and optimize the flow are some of the key components.

    Inventory Management

    • Effective inventory control allows companies to keep costs down and maintain quality and availability.
    • Inventory management companies are hot across industries, as new technologies are coming to commercial usage (with some companies raising rounds in the hundreds of milliions). 

    Distribution

    • Maintaining the link between producers and restaurants, distributors manage supply to feed demand.
    • Forecasting plays a key role to avoid price variability (that could scare away customers or cut into thin margins).

    Fleet Management

    • There are several challenges affecting fleet management, from the need for technology to keep track of the fleet (rather than paper forms and spreadsheets), to standardized inspection processes (for what’s been delivered and for fleet maintenance), to managing fuel pricing, consumption, and timing.

    Last-Mile Delivery

    • A buzzword of late, pertaining to the journey the product makes from the warehouse to the customer.
    • This is usually related to restaurants’ deliveries, but can also be associated with suppliers delivering food parcels to individual restaurant locations.
    • Last-mile delivery is traditionally the most expensive part of the distribution (some estimates put it at 53% of the overall delivery cost) since it implies multiple stops for small loads.
    • Some researchers are even starting to focus on the “last 50 feet”as the most important element of distribution management.

    Restaurant Efficiency

    Make/Buy Decisions

    • To outsource or to produce in house? That is the question.
    • When it comes to finding the right balance between quality, price, and control, a make/buy analysis is the best place to start.
    • With many labor reductions made and lower production levels needed during the coronavirus crisis, we expect plenty of make/buy decisions to be made in Q4’s planning season.

    SKU/PLU Counts

     

    • One of the best KPIs for purchasing departments that we like to pay attention is number of SKUs per employee.
    • It’s easy for SKU counts to become bloated over time with long-forgotten items, which can then drive up the cost of overhead while decreasing output and making processes more complex and time-consuming.

    Comparability

     

    • The average adult makes roughly 35,000 decisions a day. Naturally, many of those are on a more subconscious level, but it can certainly get exhausting.
    • Supply chain managers are faced with huge choices with lots of variables factoring into the choice (price, quality, timelines, etc.).
    • Having apples-to-apples comparisons for smart benchmarking often leads to opportunities to optimize.

    ERP Systems

    • Business process management software enables integrating applications (modules) and automation of back-office functions.
    • Most organizations implement new ERP solutions because their previous ERP is outdated or to replace other (non-ERP) systems.
    • Integration, relevant reporting (tracking the right KPIs), and order and supply management are some of the key challenges businesses are still facing today.

    Agricultural Production

    • There are 7 billion of us on the planet now, and projections of up to 11.2 billion by the end of this century.
    • Scientists estimate that the Earth’s capacity is likely somewhere between 9–10 billion people — based on a number of figures including food production and access to fresh water.
    • Growing enough food safely is increasingly becoming an area of concern.

    Yields

    • In short, how much usable product is produced as a percentage of total output.
    • Agricultural yield has increased historically with productivity gains increasing 5 fold since the 1940s, thanks to technological advancements.
    We help suppliers effectively communicate the differentiators in their products and turning outbound sales strategies into inbound interest.

    Global Trends Affecting the Foodservice Supply Chain

    Driver Shortages

    • Estimates indicate the shortage of truck drivers reaching close to 60k positions in the U.S. alone during 2019 (across industries).
    • Though the pandemic put a pause on that, it’s a problem that gets worse as the current drivers start to retire.
    • While autonomous vehicles are still not populating our streets, driver-assist technologies coupled with last-mile logistics and other considerations for breaking down cargos could help incentivize a change to the format (think fewer CDLs needed and more “Uber for distribution”).

    Commodity Price Fluctuations

    • For all of the benefits of increased usage of data and analytics, some experts think that fluctuations in commodity prices (which have a myriad of downstream implications including economic growth and consumer buyer power — particularly in developing nations) may actually be a byproduct, or exacerbated by, the level of information available and speed of communication.
    • Now, patterns are less predictable which has led to much higher volatility and uncertainty.

    Natural Disasters

    • While there a host of implications that come with natural disasters, food security is one of the biggest.
    • When people are displaced from their homes, access to food is one of the most critical and immediate challenges.
    • The wake of a hurricane, forest fire, or other disaster can decrease agricultural output (and thereby increase food prices) for years to come as producers work to recoup their losses.

    Invested in the Status Quo

    • One of the most dangerous phrases in business is “we’ve always done it this way.” It’s a great way to get lulled into a false sense of complacency and blindsided by an upstart who’s doing something you never thought of.
    • Food distribution is ripe for disruption because of this mindset, versus thinking of how it should be done.

    The Opportunity for Foodservice Equipment Suppliers: Everything Is Getting Smarter

    As Henry Ford famously said, if he’d given people what they wanted it would have been faster horses. This is a fitting sentiment when we think of the global consumer Foodservice Equipment landscape.

    When we hear talk about technology, there’s rarely a focus on the Foodservice Equipment industry. For the players in this industry, growth has come primarily from acquisitions and incremental growth achieved through the expansion of key accounts. Technology has not been widely adopted primarily because incumbents have done little to innovate and bring to market compelling reasons to switch.

    foodservice equipment market landscape

    Those operators that are driving innovation are doing so within their own brands (and this is happening just among the very largest in the world). Little to no innovation is driven by operators in the middle market and below.

    However, a multitrillion-dollar industry that has historically grown by inches has been hit with the most disruptive force it has ever encountered, and brands large and small are realizing they must look to technological advances to improve and modernize the unit economic model. Both the supply side and the demand side are looking to the other to go first and show the way forward.

    restaurant equipment market size

    In short, the global foodservice equipment category is ripe for disruption and it is up to the supply side to demonstrate the virtues of the product and attract demand. 

    Foodservice Equipment Statistics

    • The foodservice equipment industry represents close to $37 billion in annual sales.
    • The top five players account for close to a third market share: Hoshizaki Electric, ITW, Middleby, Ali Group, and Welbilt.
    • North America is the largest market but not the fastest-growing region.
    • Go-to-Market strategies attractive for QSR chains are requisite for success.

    At this point, large foodservice equipment companies can become platforms for bolt-ons. There is an opportunity to take something dumb and mature, something smart and yum, and put them together. In this line, with AACP we’re looking into some interesting investment opportunities that totally alter the foodservice equipment landscape.

    How to Sell to Restaurants

    Suppliers trying to sell to restaurants often find that doors get shut before even being able to introduce themselves. The restaurant management is trying to navigate one of the most demanding businesses on earth and responding to multiple demands. There are ways though to cut through the clutter, to communicate the value of the product and help improve food quality, optimize processes, and innovate the back-of-house.

    Here are some of the questions we help restaurant suppliers answer. 

    • Where is the industry headed, and how does the supplier’s product fit into that future?
    • How do operators evaluate and decide on investments and supplier partnerships? How is this different in chains and independents?
    • How do we evolve our offering to stay relevant to the operators of tomorrow?
    • What motivates the buyer decision-making process in chain operations?

    Thinking through some of these is a good exercise for suppliers as a first step towards communicating effectively.

    How We Help Foodservice Industry Suppliers

    We work with OEMs, supplier, manufacturers, brokers, distributors, technologists, and other product and service providers seeking to better understand and serve the dynamic needs of the global foodservice industry.

    State of the Industry Analysis | Enterprise and Key Account Strategy | Total Addressable Market | Go-to-Market Strategy | Segmentation Analysis | Brand Strategy | Product Strategy | Channel Strategy | M&A Strategy | Cross-Border Expansion | Distribution and Logistics Strategy | Financial Forecasts | Due Diligence | Business Plans | Investor Presentations | Board-Level Business Case Development | Thought Leadership & Exposure | Joint Ventures and Partnerships | Capital Introductions | and more

    Frequently Asked Questions about Foodservice Industry Suppliers

    What companies supply food to restaurants?

    Some of the largest food suppliers in the U.S. are Sysco, US Foods, McLane Foodservice, and Gordon Foodservice.

    What companies supply equipment to restaurants?

    Some of the leading players in foodservice equipment are: Hoshizaki Electric, ITW, Middleby, Ali Group, Welbilt, Electrolux, Fujimak, Cambro Manucaturing, Dover, and Duke Manufacturing.

    What are the main categories of products in the foodservice equipment industry?

    Cooking Equipment and Storage and Handling (including refrigerators and freezers) are the largest categories based on sales. Other large categories are Warewashing Equipment, F&B Preparation Equipment, and Serving Equipment.

    Who are the main buyers of foodservice equipment?

    Full-Service Restaurants and Hotels tend to have the highest spend on restaurant equipment. However, the opportunity in limited service (QSR and fast-casual) is attractive for equipment companies because of the predominance of chains (franchisees that have to follow the standards of franchisors) and general standardization.

    About Aaron Allen & Associates

    Aaron Allen & Associates works with leaders of global foodservice and hospitality companies on strategic issues related to growing and optimizing performance and value. Specializations of the firm include multinational expansion, system-wide sales building, brand and portfolio strategy, modernized marketing, industry trends, technology, and advanced analytics. Aaron has personally led more than 2,000 client engagements spanning six continents and 100+ countries for companies collectively posting annual revenues exceeding $200 billion.

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