Foodservice 411

By Scott Gardner and Lisa Paul

In 2007 the foodservice industry will take in $53.5 billion in sales, making up almost four per cent of the country’s gross domestic product, and provide direct employment for more than one million Canadians. Those are big numbers — so big that dining out is looking more and more like the new national pastime.
But averages and equations don’t always tell the whole story. Foodservice is a complex business and, not surprisingly, when you dig below the surface, there’s a deeper truth to be told. So from profit margins to iced frappés, here’s our take on the last 12 months of snacking, lunching, sipping and brunching in Canadian foodservice.

?The national view
Did you know you’re doing OK? It’s been no 2006, and there are a few caveats, such as where you do business, what exactly you’re selling and who you’re selling it to, but overall the Canadian foodservice industry is seeing moderate growth, says Jill Holroyd, vice-president of Research and Communications at the Toronto-based Canadian Restaurant and Foodservices Association (CRFA).
In the first half of the year, sales increased by 3.2 per cent in nominal terms, compared to five per cent for 2006. Additionally, menu inflation — which the all-seeing number crunchers at Statistics Canada actually measure — is running at 2.4 per cent. “This gives a net growth of 0.8 per cent for January to June 2007, and we’re forecasting a fairly similar pattern to the end of the year,” Holroyd says.

“According to StatsCan, the average pre-tax profit margin for a foodservice operator was 3.8 per cent in 2005 (the latest figures available), and there’s no significant shift over 2004, when it was 3.7 per cent,” Holroyd says. But while average margins are still prosciutto-thin, there are a few bright spots.

In 2006, the CRFA says industry sales topped $50 billion and, despite hefty competition, foodservice actually gained market share from retail. In other good news, the number of commercial foodservice bankruptcies reported by Industry Canada fell from 777 in 2005 to 705 in 2006, and the overall bankruptcy rate in the restaurant business slipped to 1.1 per cent, its lowest level in more than 20 years. But who’s really making dough (other than bakers)? Restaurant chains. The top 50 companies account for 36 per cent of all foodservice units, and 54 per cent of industry sales, with the top five alone generating more than one-quarter of total sales.

The economy
When telling this year’s economic story, Pedro Antunes, director of National and Provincial Forecasting for Ottawa’s Conference Board of Canada, says it’s necessary to start south of the border.

“The big picture is that despite the credit crunch in the U.S., most of the short-and long-term indicators show a fairly positive picture for Canada. The underlying story is not that different this year than [the past four] — we are benefiting from the income effect resulting from the rise in commodity process,” he says. And while some observers worry about the negative effects of Canada becoming a resource economy, Antunes says we are producing the same amount of resource goods — gas, oil, minerals — as ever, we’re just getting paid more for them.

“So commodity prices have helped our income and we’ve become an economy that’s flush with cash. And we’ve seen that play out domestically in consumer spending, in government spending and in investment. Those are the real factors that have been affecting the domestic economy.” The Conference Board is also forecasting 350,000 new jobs for this year, which is a two per cent jump over 2006’s numbers. While that may not seem stellar, Antunes notes the labour force is growing slower than in the past, making two per cent growth statistically significant.

Wealth of the nation
In recent years the unemployment rate has fallen steadily and the labour force participation rate has increased. Now Antunes says those measures have peaked and there’s no more unused labour in the economy (no surprise to short-handed operators, as discussed later). “What that has done is turn around real wages which, up until 2004, had been eroding. Post-2004 we’ve seen wages increase about one per cent above inflation,” he says.

As well as strong increases in labour income, the number of workers in high-income categories has grown, plus federal and provincial governments have offered generous tax breaks. Also adding to household income were unexpected windfalls, such as B.C.’s billion-dollar settlement with public workers, a provincial sales tax cut in Saskatch-ewan, plus some very large pay-equity settlements in Quebec, all of which go back into household income. “In 2006 we saw almost five per cent real disposable income growth — which is a huge amount — and in 2007 [the above] stimuli resulted in another 3.5 per cent gain,” Atnunes says.

The regional picture
In last year’s Market Report, Holroyd characterized the outlook as “a tale of three regions,” and the 2007 numbers once again bear that out. “Growth in the industry is driven very much by the West. We’ve got Alberta leading the pack at 9.2 per cent growth,” Holroyd says. In fact, she says that number would be even higher but for “the labour shortage and the difficulties of meeting consumer demand in that kind of red-hot economy.” Neighbouring Saskatchewan comes in next at 7.3 per cent growth, with B.C. third at 3.7 per cent, making a substantial gap from the first to the third.

Holroyd says Central Canada is “fairly lacklustre,” with heavyweights Ontario and Quebec underperforming at 2.8 per cent and 0.5 per cent respectively. And on the East Coast, they’re still crying in their Alexander Keith’s. P.E.I. and N.S. both grew less than 0.5 per cent, and N.B. was actually down 4.9 per cent. Only Newfoundland, buoyed by oil revenues and remote foodservice, is growing. But its 1.1 per cent sales increase is almost totally due to petrodollars, masking a still-weak provincial economy.

Economist Antunes offers additional and surprising shadings that suggest the fiscal picture in Central Canada is even worse than the CRFA’s sales numbers show. Raw GDP data tracks sales fairly closely, but he says a more meaningful picture emerges only when GDP is adjusted for population growth. Ontario’s GDP has grown by about three per cent, but as a hub for international migration its population has grown much faster. On a per capita basis, Ontario actually ranks dead last in GDP, largely due to the hard-hit manufacturing sector. Another surprise, when adjusted for population, Saskatchewan has the country’s strongest economy, followed by Alberta.

Segment trends
Among the major foodservice segments, Holroyd says sales are led by contract catering, due primarily to remote foodservice for the still-expanding oil and gas industry in the West. Caterers have grown 8.5 per cent — down slightly from last year, but still an impressive gain. Full-service and limited-service restaurants are holding their own, growing at 2.8 per cent 3.5 per cent, respectively. “I think both (restaurant) sectors have been adept at meeting changing consumer demands, capitalizing on increasing demand for convenience, using fresh quality ingredients in a variety of menu options, and delivering all this at a competitive price,” she says.

With lower-than-average food and labour costs, the limited-service segment posted the highest pre-tax profit margin in 2005, at 4.9 per cent, with full-service following at 3.1 per cent. “People still want convenience, accessibility, and to a slightly lesser extent affordability, but they want better quality,” agrees Jay Gould, Toronto-based founder and president of New York Fries and the South St. Burger Co.

Bars, however, continue to struggle. Sales are down three per cent so far in 2007, on top of a 3.1 per cent decline last year. But despite smoking bans and an aging population, someone’s making money in the bar biz, since average profits are 3.3 per cent. The bottom line, says Holroyd, is that “Margins certainly aren’t getting any larger in this industry.”

Storm clouds
There’s no question the labour shortage is far and away the No. 1 issue for operators,” says Holroyd. The CRFA says Alberta alone is short 11,000 foodservice workers, and over the next nine years the industry as a whole will require an additional 180,000 warm bodies. And it’s not just the West’s problem. Between July 2005 and July 2006, 13,000 workers left Atlantic Canada for Alberta, and operators like Michael Whittaker are feeling the pain. Whittaker is president of Truro, N.S.-based Grinner’s Food Systems Ltd., which franchises about 150 Greco Pizza and 30 Captain Sub restos in the Maritimes, and he says, “It’s extremely difficult to find people, and it uses up a lot of our franchisees’ time and resources.” Instead of advertising specials on their reader boards, Whittaker says many stores have posted “Help Wanted” on them, and Grinner’s has even put job applications on menu flyers.

Holroyd says the CRFA’s government lobbying has made some headway, with recent promises to streamline temporary and foreign workers programs, and to remove some of the disincentives for older workers to put in a few hours. Nevertheless, she says rising labour, energy and other operational expenses continue to challenge every operator. “And with more competition from grocery and convenience stores, it’s very difficult to pass those costs along to consumers.”

To Your Health
The way Jane Graham, general manager in Foodservice of the NPD Group Inc., describes it, healthy eating is a “Mega trend unto itself, but a slow-moving machine.” According to NPD’s research, more consumers are choosing healthy foods, and they’re doing it more often, though at a rate growing just one per cent annually. But she says most customers perceive they’re making healthier choices more often than they actually are.

And to cater to those perceptions, QSRs and casual-dining spots are continually rejigging the sprinkling of healthy items on their menus. The past year was no exception. For example, Subway introduced Dannon all-natural yogurt to its list of healthy side options, and added five more grams of fibre to its honey oat bread and four more to its wheat bread. Tim Hortons shaved 10 grams of fat off its highly successful year-old breakfast sandwich by offering the item on a bagel. Burger King recently announced that beginning in December 2008 it will limit advertising aimed at children under 12 in the U.S. to foods that meet strict nutritional guidelines. It’s also developing a healthier meal package for children that will include flame-broiled chicken tenders, organic applesauce and low-fat milk.

Mosaic Menus
Providing consumers with more choice was one of the year’s biggest trends — particularly in flavour profiles. Darren Tristano, executive vice-president of Technomic Inc., the Chicago-based International Foodservice Manufacturers Association and foodservice consultants, says many menus boasted new spices and hotter flavours, noting some U.S. wing houses now offer up to 25 different sauces. It’s an easy way to broaden the appeal of a dish to many different tastes, without having to change core items, he says.

A recent report by the CRFA stated that nearly 60 per cent of Canadian immigrants are born in Asia, which means foodservice operators must continue to cater to the different taste preferences and dining habits of this growing consumer group. NPD’s Graham lists Asian, Mediterranean, Caribbean and Latino as hot flavours for 2007. Just by looking at pizza chains alone, it’s evident that foodservice operators are consciously trying to address diversity. Boston Pizza added Szechuan and tandoori pizzas, 241 Pizza introduced the “Taj Mahal of pizzas,” as well as the Greek tycoon and a Mexican pizza, and Pizza Pizza now offers a mango chicken pizza, in addition to adding green chilies and fresh ginger to its list of available toppings, and it launched a Tikka Masala dipping sauce. Family casual chain St. Louis Bar and Grill added Cajun dust and sweet Asian BBQ wing sauces to its lineup, as well as several new exotic salads, including taste of Thai, Mandarin chicken and spicy Chicago chicken.

Consumers have more choices than ever in the beverage world as well. To keep up with Starbucks’ expansive menu and rotating seasonal favourites, Tim Hortons introduced flavour syrups to perk up its iced cappuccinos. At Wendy’s, spokesman Bob Bertini acknowledges, “People want different tastes and textures; they want [more] choices.” So after 30 years of offering only a chocolate frosty, Wendy’s added a frosty float, a vanilla frosty and a choice of M&Ms, Oreo cookies or Butterfinger, which can be blended into either a chocolate or vanilla base.

The smoothie segment is also growing. Alberta-based Jugo Juice now has more than 70 locations across Canada and the U.S., with an additional 25 set to open in the next year. It revamped its menu this past summer, offering 16 different smoothie combinations with 50 per cent more fruit. Booster Juice is expanding at an even faster rate, aiming to open one location a week in both Canada and the U.S. for the rest of 2007. Started in Alberta in 1999, it also expanded to the Middle East.  

Finer Dining
Consumers aren’t just craving more choices, they also want higher-quality choices at all levels of dining. “We’re starting to see a lot of upscaling,” Tristano says, noting that even traditional items like hamburgers are going gourmet. Buns have gone from the passé sesame to ciabatta, meat quality has improved (McDonald’s just launched an Angus burger in test markets in the U.S.), and the quality of toppings and cheese are now better. “We’re seeing upscaling, which has more to do with check average,” says NPD’s Graham, adding that more consumers are trading up to higher quality or more expensive items. “Across the board we’re seeing increased checks.” According to NPD, average checks have increased five per cent over last year to $6.71 (averaged over the total market, all segments).

The trend is also apparent in the new language QSRs are using, which was once typically reserved for high-end restaurants. For example, the Wendy’s breakfast menu now features “premium Folgers gourmet coffee.”

Demand for quality is also driving notable decor changes. McDonald’s Canada plans to redo 100 locations by the end of this year. The new design emphasizes the “customer experience,” and features fireplaces and materials such as natural and cultured stone. Country Style is also re-branding with a fancier menu and new stylish store design — including fireplaces and wireless Internet — to compete with the increasing number of upscale coffee chains.

What You Want, When You Want It
As far as trends go, “Convenience drives everything,” says Graham. Technomic’s Tristano agrees, stating, “Monday through Friday people care only about convenience and speed of service. If you can get it quickly on the way to work, and it’s portable, that’s all that matters.” For example, Tim Hortons repackaged its chicken and egg salad sandwiches ($3.99) into wraps this year. “It’s an easier way to eat the sandwich, and it’s more convenient,” says Rachel Douglas, Tim’s director of Public Affairs.

Another trend that validates the importance of convenience is the sheer number of restaurants that now serve breakfast, lunch, dinner and everything in between. In fact, the snacking occasion has surpassed lunch in terms of the percentage share of occasions. NPD reports that snacks (morning, afternoon and evening combined) now represent nearly 25 per cent of total meal occasions. “It’s almost as if Canadians are back to grazing and moving away from three square meals a day,” says Graham. According to Ron Christianson, spokesperson for McDonald’s Canada, this year’s launch of the snack wrap came “in response to the afternoon snacking occasion that’s become a $1.5 billion business for our industry in Canada.” At QSRs everywhere, hours of operation are also expanding. “Canadians are up later and earlier,” Christianson says. Some McDonald’s now close at 2 a.m., open as early as 5 a.m., and boast 24-hour drive-thrus. Similarly, the 600 Wendy’s stores that started serving breakfast this year did so to enhance consumer convenience. The frescuit, Wendy’s signature breakfast sandwich that sells for $2.49, “holds together and doesn’t crumble readily,” says Bertini. “It’s very portable.”

Year of the Pig
You can’t do your report this year without talking about Iberico pork, and all the heirloom varieties chefs are getting excited about,” says Dana McCauley, chef
and president of consulting company Dana McCauley & Associates Ltd. in Richmond Hill, Ont. “It’s gone beyond being another white meat.” In high-end dining, chefs are eating the trend up, and not just standard cuts like tenderloin.
At Aurora Bistro in Vancouver, chef/owner Jeff Van Geest buys whole sides of pig. Instead of featuring pork on the menu by cut, which changes as he works his way through the side, he simply lists the farm it’s from. “People are really embracing it,” he says. Van Geest adds that pigs have long been known as one of the best animals for nose-to-tail cookery, with charcuterie being a significant element. Van Geest and many other top chefs across the country are now preparing charcuterie in-house, and places that glorify the French art — Vancouver’s Salt Tasting Room, which opened last summer, Montreal’s Au Pied de Couchon, which McCauley credits as sparking the trend, and Cava in Toronto, which serves Spanish tapas-style charcuterie, including the pricey, imported Iberico pork — are bustling.

Canadian heritage-breed pork is also buzz-worthy. Dave Lewis, product manager at Toronto-based MacGregors Meat and Seafood Ltd., says its volume of pork orders has increased in the past year, with more chefs requesting breeds such as Berkshire. “It’s not only different as far as flavour and moisture level, but it allows [chefs] to tell a bit of the story,” Lewis says. Heritage breeds are still raised on small farms, and the chef often has the chance to get to know the producer. Tara Longo, co-owner of the Healthy Butcher in Toronto, says pork sales spiked over the past year, with Berkshire being the most popular. “Everyone’s looking for it,” she says.

Home on the Range
When in Rome, eat what the Romans eat. But if you’re in B.C. try Polderside Farm’s duck breast. Or if you’re in Ontario, sample some artisan cheese from Monteforte Dairy. Indeed, sustainability and sourcing local product are hot topics this year, says NPD’s Graham. There have been a few pioneers pushing local menus for more than a decade now (think Jamie Kennedy and Normand Laprise), but fine-dining chefs from coast to coast are now joining the movement. They’re listing where their product comes from on their menus and websites, leaning less on large-scale suppliers and supporting independent farms and artisan producers whenever they can.

Not only does the product taste better, says Michael Potter, chef at Harvest in Ontario’s Prince Edward County, but you’re supporting the local economy and typically, sustainable production practices. Potter, along with Blue Harland of Beaujena’s in Winnipeg, and Andrea Carlson, formerly of Raincity Grill in Vancouver (now at Bishop), showed their dedication by offering diners a 100-mile menu this year. Other chefs simply procure as much local product as possible and highlight its origins. Treadwell’s in Port Dalhousie, Ont., Dayboat in P.E.I., Aurora Bistro in Vancouver, Araxi in Whistler Village, Toqué! in Montreal, Jamie Kennedy Wine Bar and Cowbell in Toronto, are but a few places you can taste the best of what local producers are offering. This summer Il Fornello in Toronto also launched an all-Ontario menu, and the Fairmont Hotel chain recently announced its restaurants will use local, sustainable and organic food whenever possible.

But will QSRs ever jump on the going-local bandwagon? Oregon-based Burgerville (with 39 units) has been successfully sourcing and serving local food items for a few years, so you never know. And though Aurora’s Van Geest admits local and sustainable are catch-phrases right now, he hopes they’re here to stay. “Restaurants can be at the forefront of creating a sustainable food supply.”