BusinessWeek: January 10, 2000

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 Industry Outlook 2000 -- Distribution

Food

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Food

CHART: Food: Prognosis 2000

TABLE: Positives and Negatives


Americans still spend just 15% of their disposable income on food-the same percentage as 20 years ago. But as the number of dual-income households rises, and more Americans log longer hours in the office, spending patterns are changing. In 2000 these changes will have a significant impact on the packaged food, restaurant, and supermarket sectors.

In a nutshell, people are cooking less food at home, which spells sluggish growth for ingredients people stock in their kitchens. In 1999, only 8 cents of the 15 cents spent on food in every consumer dollar was for home preparation of food, and that number is headed south. At the same time, the portion spent on restaurants is growing. Take-out and delivery services, in particular, are becoming primary drivers of restaurant industry traffic, according to Hudson Riehle, National Restaurant Assn. (NRA) vice-president for research.

GOLDEN AGE. Macroeconomics bears heavily on this shift. With continued low unemployment in the U.S., 4% growth in gross domestic product, and an increasing number of working women, the eat-out and take-out markets can only get richer. "We may be in the golden age of restaurant retailing," says Alan F. Hickok, restaurant analyst with U.S. Bancorp Piper Jaffray. All told, the restaurant sector pulled in an estimated $350 billion in revenues in 1999. That number should grow about 5% this year, according to the NRA.

This migration out of the home kitchen spells trouble for packaged-food vendors. Supermarket sales are expected to rise only 2% in 2000, to $449 billion. And in 1999, for the first time, stores selling food and drugs dedicated more space--56%--to nonfood products than to food products, according to the Food Marketing Institute in Washington.

Food manufacturers and supermarkets are fighting back with new products and high-tech amenities. Across America in 1999, there was an explosion of fancy in-store delis selling freshly made dinners and restaurant-licensed food. National store chains such as A&P installed self-scanners to speed up the checkout lines. Shops began stacking more vitamin-enriched cereals and juices in the aisles. And stores started planning "health oases" where special-interest customers such as diabetics can find all of their food, vitamin supplements, and medical goods in one place.

Now, get ready for "cell food"--a new class of consumables aimed at hungry Americans on the move and on the phone. Entrees you can eat with one hand while talking or driving include ready-made peanut butter and jelly sandwiches and microwaveable scrambled eggs that are squeezed from a tube.

This year will also see a continuation of 1999's great Supermarket Sweep, in which large retailers such as Safeway and Kroger scooped up smaller chains to extend their reach and offer lower prices. Consolidation will spill into the packaged-food area, too, predicts John M. McMillin, a Prudential Securities analyst. He lists Quaker, Bestfoods, Heinz, Ralston, and Nabisco as likely participants in mergers.

Vendor consolidation will affect what you see on the supermarket shelf, whether ketchup or cans of soup. "There's concern that we have too much variety in the aisles," says Michael Sansolo, senior vice-president at the Food Marketing Institute. It's difficult to keep all these products stocked, and customers get frustrated when they can't find what they want. That's one reason Unilever is reducing its 1,600 food and consumer products to just 500.

Both distributors and producers will find a few things to be thankful for in 2000. Despite blaring hype, Internet grocers such as Peapod and Webvan pose little threat to regular grocers: They'll account for less than l% of total grocery sales in 2000, according to FMI. Commodity prices should also be stable, pleasing producers. After rising 12% in 1999, prices for beef loins and ribs should increase only 2% to 3% this year, predicts David Weaber, research director at Cattle-fax, a beef marketing monitor. In short, the food fights will continue in 2000--and nobody will run out of ammunition.

By Ann Therese Palmer in Chicago

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TABLE

Positives and Negatives

POSITIVES

-- Vendors of frozen and fresh-prepared foods in supermarkets do a brisk business catering to time-strapped consumers.

-- Food suppliers like Heinz, Campbell, and Bestfoods may consolidate to create stronger players.

NEGATIVES

-- With less home cooking, retail demand for ingred-ients could weaken.

-- Consolidation may spell fewer brands and less consumer choice.

-- Food safety scares are considered inevitable and could hurt whole product categories.

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