America’s appetite is changing. Traditionally, food has either been bought at the grocery store and consumed at home, or served up by restaurants and institutional operators and eaten on the premises. Today, however, restaurants are increasingly providing food that is eaten at home or on the go, and the grocery store is selling more ready-prepared food that is eaten at home, on the premises, or on the move. The key issue is not so much where the food is consumed, but where and how it is prepared.

Clearly, Americans want to get out of the kitchen. By the year 2005, many Americans will have never cooked a meal from basic ingredients. Virtually all of the $100 billion in incremental annual food sales expected in the next decade will come from foodservice, including ready-prepared meals consumed at home. To take advantage of this dramatic shift in eating habits, restaurant operators, packaged food manufacturers, and the entire US food distribution system will have to make significant changes. Those who play their cards right—by delivering high-quality prepared foods at reasonable prices—have much to gain. The others may find it difficult to grow or even to survive.

Robust foodservice growth

Largely due to population growth, Americans consumed 40 billion more meals and snacks in 1995 than they did ten years earlier, and 30 billion of these were eaten out of the home (Exhibit 1). During this period, the food industry grew modestly from $630 billion to $685 billion in real terms, growth that was captured entirely by commercial foodservice operators at the expense of grocery stores and other retail outlets.

The next ten years will be equally bright for foodservice operators. The food industry is projected to grow faster than in recent years, approaching $800 billion by 2005, with the commercial foodservice segment both the catalyst and the beneficiary of that growth. Indeed, it could capture all of the $100 billion in incremental sales. Newer concepts such as kiosks, broad menu fast food chains, and prepared food at supermarkets will be the fastest growing segments. Traditional grocery stores are among the most vulnerable (Exhibit 2).

A lifestyle thing

The growth in foodservice spending will derive from new demands. Consumers’ expectations have risen, and views about convenience, fun, family-friendliness, variety, health, and value are all changing.

Americans feel life is becoming increasingly hectic, stressful, and complicated, and are more often demanding convenience foods as a means of lightening the load. But today’s consumers eschew the processed, low-quality foods that were once synonymous with convenience. Instead, they are demanding convenience and quality. In response, foodservice operators are opening kiosks in retail stores and delivering food from local restaurants. In the future, convenience will mean freshly prepared food delivered when and where consumers want it.

Besides convenience with quality, consumers also want fun. So when it comes to eating out, restaurants that offer more than just a meal will be those that satisfy American tastes. At the Motown Cafe in New York City, for example, customers eat home-cooked meals, groove to live music, browse through authentic Motown memorabilia, and buy souvenirs in the retail shop. Eating out here is an entire experience.

Consumers coping with hectic schedules are also looking to eat at restaurants that welcome the entire family, a demand that has already led to the popularity of children’s menus, play areas and other family-focused promotions. In addition, consumers are changing what they eat in response to shifting concerns about health. In the past, health meant "taking the bad out"—less salt, less fat, and fewer calories. But over the next decade, consumers will focus more on nutrition management, demanding the likes of "pharmafoodicals" (foods supplemented with increased nutrition, such as calcium fortified orange juice) and "neutraceuticals" (which bring good taste to foods consumed for nutritional purposes). Consumers may even be able to specify their own requirements (no more than 10 percent fat, extra calcium, or specified protein levels, for example).

Consumers will also demand more variety. American consumers are becoming more adventurous (sales of Asian foods grew by 25 percent last year alone), and foodservice operators will offer an ever-widening array of cultures. "No boundaries, no borders" will be the theme, with all sorts of ethnic food served under one roof.

Finally, while consumers will demand greater convenience, higher quality, more fun and more variety, they will also demand a better deal. All major restaurant groups—from McDonald’s to upscale restaurants—have already shifted their focus toward value pricing. Food consumers of the future will demand more extras, but not be willing to pay a premium.

To grasp the implications of all these changes, imagine a typical family (the Garners) in the year 2005. John and Julie Garner are approaching 40 and have two young children. As working parents, they are both busy, but they take their kids with them everywhere in their leisure time. They are typical of their generation in that they never really learned to cook, having grown up on fast food, and are savvy, critical consumers. On a typical hectic weekday, the Garners take advantage of innovative, convenient foodservice concepts. On weekends, the Garners might "cook" together, though cooking means "meal assembly." For example, the Garners may purchase a fresh omelette mix, a pancake mix, and a pre-cut fruit salad from the grocery deli. None of their meals during the week is prepared from basic ingredients. Of course, some families already have days when they prepare nothing of what they eat. However, families like the Garners will never fully prepare a meal at home.

The future food providers

Companies that have lower cost structures than competitors are likely to be those that benefit from the growth opportunity that lies ahead. Operators that can expand their business concepts by opening new locations or providing more meals during the day (rather than just dinner, for instance) will also receive their fair share (Exhibit 3).

Limited menu fast food operators and kiosks will be here in force. They virtually own the low price point and increasingly provide the consumer with arm’s-reach convenience and the industry’s shortest wait for a hot meal. With anticipated annual growth of 15.8 percent, kiosks are the fastest growing segment in the industry. By 2005, they could have a 4 percent share of the total market.

Casual dining chains such as TGI Fridays, Houlihan’s, and Applebee’s are well suited to provide variety and fun in an increasingly family-friendly environment. They can also capture significantly more unit volume by meeting demand for food throughout the day, and more take-out menus.

Broad menu fast food chains like Boston Market, Atlanta’s Harry’s-in-a-Hurry, and Eatzi’s in Dallas are well positioned to serve the consumer looking for a more complete, fresher meal than that offered by local quick-service restaurants. So too are supermarkets offering prepared foods, though both face major operational and cost challenges. (Exhibit 4).

Foodservice operators with an inherent cost advantage are also well placed to grow. Contractors, for example, benefit from buying scale, better utilization, and more efficient operations than the non-commercial foodservice operators that they are displacing.

Other segments of the foodservice industry, such as traditional convenience stores and cafeterias, are not well positioned to capitalize on growth opportunities; in fact, emerging consumer trends pose real threats to their core businesses. Retail grocers may need to consider bold changes just to maintain their core business. Some, for example, are considering organizing their store layout around meal occasions rather than by arranging products grouped by category in aisles.

Supply chain implications

With so much change on the horizon, foodservice operators will look to distributors, manufacturers, and brokers to meet new their business requirements. The success of distributors, manufacturers, and brokers in meeting this new demand and capturing their share of growth in the industry will depend on their ability to:

Develop strategies that address foodservice opportunities, segments, and customers. Foodservice represents the growth opportunity in the food industry. Strategies must therefore focus on capturing these opportunities in different foodservice segments and with individual customers. Plans must reflect the relative value of customers—including order potential over time, unique product and service requirements, price sensitivity, and costs to serve. Some fresh thinking will be needed, and experimentation will be crucial.

Reduce end-to-end system costs to provide greater value to consumers. Reducing costs in the foodservice chain is critical. Distributors, manufacturers, and brokers will have to provide more ready prepared goods, pursue network efficiencies (perhaps by seeking a minimum share of purchase agreements in exchange for service guarantees), and track item movement to improve forecasting. Various initiatives aimed at removing waste and creating a seamless, low-cost supply chain are already under way in the industry (such as the Efficient Foodservice Response).

Add value by assisting customers to respond to consumer demand for healthy, convenient prepared meals and snacks. Foodservice industry participants must focus on adding real value for the consumer. To a large extent, this will involve assisting foodservice operators provide consumers with healthier, easy-to-assemble, prepared meals (without excess costs). Suppliers need to determine ways to support individual operators in various foodservice segments. Initiatives could include item rotation, recipes, and sharing of core skills (such as promotion management, branding, and trend spotting) across foodservice operator segments.

Recast organizational resources, skills, and measurements. Some companies—especially manufacturers—have historically treated foodservice as a secondary business, despite its impact on almost every grocery category. Others may have a sound foodservice focus, but are pursuing the business in a traditional way, aligned with conventional opportunities rather than the new opportunities for prepared food. Still others are focusing on gaining share among commercial operators and the smaller, independent stores rather than in the growth segments and new types of outlets. As foodservice approaches 50 percent of all food sales and 100 percent of industry growth, it clearly merits first-class resources and investment in new skills aimed at specific growth segments.

Price to reflect cost and value of services. All players in the industry must price their foodservice businesses according to true cost and real value added to enable operators to meet their consumers’ demands at an acceptable price. In general, this suggests the unbundling of pricing to distinguish cost-plus pricing (based on the real drivers of cost for basic services) and charges for additional support. We are already beginning to see this response on the retail side as manufacturers move towards pay for performance on promotions, and some wholesalers migrate toward cost-to-serve based pricing. Similar responses are likely in foodservice.

How individual distributors, manufacturers, and brokers should react

These broad lessons translate into specific actions for each constituent. For broadline foodservice distributors, EFR and system cost reduction is a key tactical thrust. But the strategic challenges can be daunting. An ever increasing number of stronger chains will, to some degree, turn to low-cost system distributors and possibly even direct to manufacturers for their supplies. New channels, including supermarkets that sell prepared foods, may be difficult to penetrate. Determining the best customer focus will be imperative. Grocery wholesalers must also eliminate costs and offer extras only when they add real value to customers. Their biggest challenge is to ensure that the customers themselves—independent grocers and smaller chains—are positioned for growth. Independent grocers must find their niche and make sizable capital investments. Many of them will need to do much more trade in prepared foods, and the wholesalers who help them to do so profitably will be positioned to win.

Trends in food consumption pose the greatest challenge for manufacturers. Though there are some exceptions, too many manufacturers remain retail focused, and even those with a strong foodservice business tend to concentrate on conventional opportunities involving branded packaged foods. Strategic changes, new organizational structures, new skills, and new levels of resource commitment will all be critical.

Brokers will face many of the same challenges as manufacturers, as they too are over dependent on packaged foods. However, the breadth of a broker’s customer base is much the same as a distributor’s, which means having to find ways to add real value for customers.

Foodservice operators, distributors, manufacturers, and brokers have an enormous opportunity to capitalize on emerging consumer trends—a $100 billion per year opportunity. Yet they also face tremendous challenges as major change will be required. Those who recast their organizations in order to meet emerging consumer expectations will reap the rewards. Those who do not will resign themselves to slow growth, or even stagnation.