Part 3: Small Business Food Services Industry Growth & Capital Needs
In Part 3 of a 5-part series examining Small Business Growth Industries and Capital Needs in Texas we take a look at the Food Services Industry. Boosted by a stronger economy and high-levels of pent-up demand, the restaurant industry is expected to hit a record high in 2018. According to the National Restaurant Industry Forecast report, the food services and restaurant sales in 2017 were projected to hit $799 billion at the end of the year, up 4.3%. Table service will remain to be the biggest segment. Nonetheless, quick service sales are expected to show a steady growth rate in 2018. The improving economy will help the industry to increase sales in 2018, even as restaurant operators are faced with continued margin pressures, lingering consumer uncertainty, and a tightening labor market.
In Texas, there are approximately 77,652 small business food service firms, employing 622,945 people in 2018. The food service industry is expected to grow by 29.7 percent over the next 10 years while adding the most jobs of any Texas industry.
This growth has increased the demand for capital to fund expansion and operations. Traditional banks have fallen short, as a result, you have seen an increase in funding from the Alternative Finance providers; merchant cash advance, equipment financing and LOC providers to name a few.
With $54.1B in Sales, Texas only trails California as the largest consumer market in food services. In the Food Service Industry, sales at the state and local levels are closely tied to demographic and economic trends. Texas has one of the friendliest business environments and is seeing 1,000 people moving to Texas every day. This has resulted in positive sentiment across most industries including food service. A full 24 percent of surveyed merchants expect revenue growth and another 16% anticipate growth in employment.
In Texas and Nationally, much of the growth will come from limited-service options as consumers shift their spending to quicker, and more convenient eat-out locations. Quick-service restaurant sales are expected to increase by 2.5%. The projected growth will not be evenly distributed across the country. More growth will come from Western/Southwestern and Southeast states. This is not surprising since these locations are experiencing population growth.
A majority of the loan financing applications were for business expansion (57 percent), and 41 percent of the loan financing applications were meant for funding business operations. The food and beverage industry faces both secular and cyclical challenges but also vast opportunities for long-term growth. For mid-size companies CFO’s, this business environment demands creative thinking and a close working relationship with financiers who understand the industry and can help them in positioning the companies for growth. Some of the top financial issues in this industry are escalating labor costs, inventory levels and fulfillment rates, capital expenditures including repair and maintenance, and the collection of receivables.
Adam Van Doren, COO, Accord Business Funding stated it best, “We see significant food service funding request at Accord, specifically in Texas. As a restaurant owner, when something goes sideways, it immediately impacts your bottom line, every minute down is costing the owners money. That is where we see Alt-Fi solutions making a difference. You can have that replacement cooler or oven in hours/days, not weeks as you would with traditional banking. Time is money in this industry and we see the difference every day.”
2017 Industry Highlights
As previously stated, the National Restaurant Association projected 4.3% Growth in 2017 reaching $798.7billion in sales. When adjusted for inflation, the 2017’s industry sales figure represents a gain of 1.7 % over 2016. The figure is slightly up from the previous 1.5% that was registered in 2016. The growth of the industry was dampened by historical standards. Substantial variances among industry segments and geographic regions also affected the sales and the performance of the restaurants.
The projected sales of food and beverages for 2017 in table service-restaurant was $263 billion. This is 3.5% up from the 2016 figure. Fast-casual and Quick service sales were expected to reach a total of $233.7 billion in 2017, which is a 5.3% gain from the previous year sales volume. The Association estimated that the industry’s workforce would grow to 14.7 million in 2017. Restaurants remain the second largest private sector employer in the country, providing careers and jobs for one in 10 working Americans.
Key Trends That Shaped the Restaurant Industry in 2017
1. A Challenging Business Environment
Though restaurant operations usually are optimistic about the future outlook of their businesses, a range of challenges affected their enthusiasm in 2017. Rising costs of labor, and a sophisticated regulatory and legislative landscape on local, state, and federal levels added pressures on business performance and operations.
2. Recruitment Was A Top Challenge
Recruitment and retention of employees was a major challenge for restaurant operators in 2017. As the economy gradually improved, and employment levels increased, there was an increased competition for qualified employees to fill the vacant positions in the restaurants.
3. Increased Pent-Up Demand
Consumers’ pent-up demand for restaurant services remained elevated as compared to the previous years. As Americans remained relatively consciously on how they spent their money in 2017, restaurant operators used social media marketing and other innovative strategies to highlight the exceptional quality and value of the services that they offer to attract more consumers.
4. Technology Gained Ground
Technology adoption kept growing among restaurant owners in 2017. However, the process faced a few challenges. Cost in different forms was a significant barrier, and the acceptance of the more common kinds of restaurant technology, for instance, mobile payment, kiosks, and online ordering gained ground among consumers. Some of the consumers, however, are still undecided about the advanced technologies.
5. Food And Menu Trends Leaned Towards Concepts
As consumer’s food-decision matrix grew increasingly sophisticated, consumers became more discerning and engaged than ever before when dining out in 2017. Diners were more knowledgeable about food and came to expect menu options which fitted their dietary preferences no matter where or when they visit restaurants. This resulted in food trends becoming more concept-driven as opposed to ingredient-driven with a growing focus on food production, sourcing, and preparation among the consumers.
Economic and migration patterns are having a significant impact on the growth of the food service industry. Structural issues and trends at the state & local levels matter more so than other industries. Texas is a benefactor of these changes and many of the 77,652 merchants have demand for capital to support expansion and operations.
Given the immediate nature of some demand, traditional banking cannot support these merchants. Additionally, with 75% of all small business funding request below $250,000, traditional banks are less inclined to fund and to provide the total funding requested by small business owners. Fortunately for small business merchants in the food industry, the Alternative Finance, specifically, online lenders have stepped in to close the credit gap.
As Texas continues to see population growth, small businesses will follow the growth curve. The need for Alt-Fi funding will also scale with small business, presenting significant opportunity for ISO’s to step in and meet the demand. With 5 Decades of Funding Texas experience, Accord’s Founders are positioned to meet your merchant needs. We look forward to Funding Texas together. Next week we continue the series with Part 4 taking a look at the Retail Industry.
Co-Funder & Sales
Accord Business Funding