Sunday, December 1, 2013

Texas A&M Got Big Money for Outsourcing Dining Services. What's Their Risk?

Article revised December 2, 2013

Be careful what you ask for.  You might get it, and a lot more in the bargain.

 We're talking about the large investments major food service contractors are offering colleges for the opportunity to operate their campus food services. The dollars certainly are enticing, but not quite so attractive when you look at the long strings – really thick cords – attached to them.

The biggest recent example is Texas A&M University, College Station, TX, which outsourced its food service operations to the Chartwells Division of Compass Group last year.  A separate Compass division also was awarded landscaping and maintenance contracts.

 With an enrollment of 56,000 students including 8,000 campus residents, Texas A&M certainly isn’t a typical university, but the rewards the administration hopes to receive and the risks they're taking, scaled down, are the same for any college or university that accepts a contractor's "investments."

The financial commitments Chartwells made to the university to gain control of the campus food services are enormous, yet it has already caused problems, maybe more problems than it cured.

According to the local newspaper, The Eagle, the company paid the university a "signing bonus" of some $45 million upon being awarded a five-year contract, with an option for another five years. It paid another $6.5 million this year and spent some $5 million in dining facility renovations, with additional payments to come throughout the contract’s life.  The total cost to Chartwells over the 10 years -- if the contract runs that long -- is the $45 million signing bonus, plus a total of $25 .5 million in facilities improvements, a 5 percent commission on sales in the first year and a 10 percent commission on sales in the remaining years, about $2.5 million,  for a potential total of around $73 million.

The administration apparently sees that as a real bargain, since it reported losing $1 million a year running the food service on its own 

 That’s the good news.  But here’s the other side:  Meal plans for resident freshmen and sophomores have been made mandatory. By the 2016 academic year, all 8,000 resident students will be required to joint the meal plans at prices that currently range from $1,236 to $2,096 per semester and will increase by up to 3% a year. When all resident students are required to belong to a meal plan, Chartwells’ revenue from the plans will be about $27 million a year; potentially $270 million if the contract runs for the full ten years, not counting revenue from retail outlets, catering and other sources.

Of the total $270 million in potential meal plan revenue, the $73 million in payments and commissions equal some 27%.  Chartwells has to generate a profit on top of that big enough to justify the payments, probably 8 to 10 percent of sales, leaving about 65% or less of total revenue for food, labor and operating expenses.

But what if all doesn’t go well?  The Eagle reports a great deal of student unhappiness and agitation over the mandatory meals plans, price increases and new restrictions on meal plan options.  Already,  Chartwells has had to replace the campus general manager, a sure sign of trouble.

 A college or university has only one good option when its food services become unsatisfactory and the contractor cannot improve them.  It must replace the contractor. But wait, what about those dollars the contractor provided? The institution has to reimburse all the money the contractor provided, prorated by the number of years left in the contract. Not many institutions can afford that – the money has been spent – so it may have to go along with the unsatisfactory food service operation and hope the contractor can improve its performance.

 Of course, the money isn’t really an investment, it's an advance or loan.  Repayment comes from higher meal plan charges and other prices and maybe reduced services. The college never knows how much return the contractor is making on the loan. It’s buried in the cost structure of the financial reports it sends to the client. A college would do better to borrow the money at a known interest rate and let the contractor operate at a known rate of profit.  

 College and university administrators should carefully look the gift horse in the mouth and think about the possible long-term consequences to the campus food services and the institution of accepting immediate money in exchange for a long-term commitment to a single provider.

About Clarion Group   
Clarion Group is a consulting firm that advises colleges and universities, companies, professional firms and institutions in the management, operation and improvement of their in-house employee/student food services, catering, conference, lodging and related hospitality services throughout the U.S. and Canada.

For information, contact:
Tom Mac Dermott, FCSI, President
Clarion Group
PO Box 158, Kingston, NH 03848-0158
603/642-8011 or