"Surprisingly resilient." That's how U.S. Chamber of Commerce Chief Economist Martin Regalia described the U.S. economy in his 2006 economic forecast in December, and it seems an apt read of the country's—and the foodservice industry's—overall business conditions.

Despite dramatic increases in the cost of oil and natural gas, dislocations caused by hurricanes Katrina and Wilma and the dampening effect of 13 interest rate increases over 18 months, 2005 gave the country—and the foodservice industry—a solid year of expansion for the fifth straight year.

The economy grew at a healthy 3.6 percent clip (Fig. 3) and forecasters expect it to continue at that pace, with hiring likely to accelerate (Fig. 4). The core rate of inflation is modest and consumer prices should increase under two percent in 2006.

"Noncommercial segments are picking up the pace and ... are growing faster than they have for a number of years." – Joe Pawlak, Technomic

Foodservice passes a milestone. Foodservice this year will exceed a half trillion dollars in sales for the first time. And, in a significant contrast to a few years ago, noncommercial segments have staged a significant comeback in terms of growth prospects (Figs. 1 & 2).

"From the manufacturer's standpoint, these segments are picking up the pace and in aggregate are growing faster than they have for a number of years," says Joe Pawlak, vice president of Technomic.

He notes in particular "a real turnaround" in higher education and hospital foodservice due to "upscaling" and adds, "suppliers that have tended to take their eye off these market segments in recent years should revisit them in terms of future planning."

Rising energy prices are having an impact. Despite the inflation forecast, operators who pay utility overhead are finding it hard to cover increases caused by the spike in oil and natural gas prices. While wholesale food and commodity prices should remain flat or trend downward in 2006 (Figs. 5 & 6), rising transportation costs are affecting delivered food prices, either as distributor price increases or as fuel surcharges.

Technology is playing a bigger role. Slowly but surely, technology is finding its way into front of the house productivity solutions. Cashless debit systems are growing more sophisticated; non-contact, RF payment systems are appearing in B&I and healthcare; POS technology is helping operators manage product movement and fine-tune meal bundles. And, as many FSDs expand retail operations, an increasing number of them are experimenting with self-applied bar codes on prepared foods.

Operators are also carefully watching the public's acceptance of touch screen kiosk ordering stations. If these catch on as a form of self service in quickservice restaurants, look for them to be adopted by high volume lunchrooms in B&I, healthcare and higher education.

Nutrition, nutrition, nutrition. Food and foodservice found their way to the front pages of American newspapers in the last year in a way they have seldom done before. In many cases, the reason was growing public concern about nutrition, especially among children. A spate of cautionary studies and reports from the government, organizations like the National Institute of Medicine and in publications like the American Journal of Public Health fueled the fire.

Both operators and manufacturers are looking to respond to public-concern by improving the nutritional profiles of their offerings. But longer term, the fear is that such efforts alone will not be enough to fend off greater regulation.

In K-12 schools this is already happening—by the middle of last year, 28 states had proposed legislation going beyond existing federal guidelines to regulate the availability of "competitive foods" in schools (Fig. 13). Such regulations go beyond bans on such items as candy and pop and affect many other products and menu offerings.

The labor pool is growing tighter—and more expensive. From the healthcare industry to the education community, administrators report it is becoming more difficult to maintain quality staffing. A wave of baby boom retirements and a decline in high school graduate populations will complicate this trend over the next five years. Employee benefit cost increases remain a real problem and are pushing total compensation budget lines higher than wage increases alone suggest.

The good news: as workplaces put more emphasis on attracting and retaining talent, foodservice as a benefit tends to rise in importance. Now, let's take a quick look at some of the trends affecting individual segments within the onsite market.

HIGHER EDUCATION
The surge in higher education enrollments that has been ongoing for almost two decades continues, with a record 17 million students entering college this year. At the same time, college administrators have their eyes on the period five years from now when the number of graduating high school seniors will begin to decline.

A demographic sea change. Speaking at The College Board Forum last fall, Penn State President Graham Spanier warned that over the next decade, the Northeast, Midwest and Great Plains states will likely see a significant decline in their traditional pool of prospective students. By 2012, thirty states will be experiencing a decline or no growth in their annual number of high school graduates.

Complicating the situation: 65 percent of the population growth over the next 15 years will be among ethnic minority groups, which historically have been less likely to enter and graduate college, and three-fifths of that increase "will take place in just three states... Florida, California and Texas," Spanier said. Other shifts include the increasing majority of women students. "By 2020, 156 women will earn degrees for every 100 men who do."

Looking for bigger contributions. As federal and state support for higher education has declined, colleges have turned to increased tuition and other charges to make up the gap.

"Dining departments are one of a limited number of income generators for institutions, and administrators are knocking on their doors," says Ray Petit, a principal with FoodStrategy, Inc. of Potomac, MD.

"That knocking is going to continue," he adds, citing a survey of college FSDs that shows 69 percent of respondents expect their revenue " contributions" to the general fund to increase over the next two years (Fig. 7).

Better margin management. "In general, dining department revenue increases are outpacing their cost increases," agrees Mona Milius, associate director of residence/dining at the University of Northern Iowa and a member of the NACUFS benchmarking committee. "The challenge for many directors is accomodating the pressure from the campus to keep retail prices low" (Fig. 8).