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 TWM@clariongp.com
Website: www.clariongp.com
Showing posts with label Colleges. Show all posts
Showing posts with label Colleges. Show all posts
Sunday, December 1, 2013
Tuesday, October 15, 2013
Should a College Operate Its Own Food Services?
Should a college or university operate its campus food services on its own, or turn the role over to a food service contractor? That’s a question with an ambiguous answer, according to Tom Mac Dermott, FCSI, president of the food service consultant firm Clarion Group.
It depends on a number of factors primarily, how important food services is considered to be to the institution’s core mission and how competently the service is being managed.
Some 90 percent of all colleges and universities (from community colleges through graduate schools) now outsource their food services to a contractor; the exceptions being the largest campuses of state universities and a small number of state and independent colleges.
The big state universities’ dining services with budgets of $20 million or more are larger than many regional food service companies and have the resources to employ professional staffs and operate successfully.
Among smaller institutions, the decision to remain self-managed is based on the value the college sees in its dining services and a desire to keep it as an integral part of the campus community. Over the past 30 or so years, colleges have increasingly outsourced food service operations almost invariably for economic reasons. The decision usually was made when the food service operation was losing money or a competent manager retired and the successor was not competent.
In recent years, colleges have converted to contractor management because the contractor offered a substantial financial investment to upgrade – or even build – the food service’s facilities. Some of these investments have been in the millions of dollars, even for relatively small institutions. Of course, the investments do not come without strings in the form of a long-term contract, sometimes for more than ten years.
Some medium-sized and smaller colleges have a long history of self-management and have been successful. Davidson College in North Carolina, Saint Anselm College in New Hampshire, Bowden and Bates Colleges in Maine and Middlebury College in Vermont are examples. Many of these regularly appear on the Princeton Review’s annual "Best Campus Food" list, indicating the importance food service plays in their campus' lives.
At one time, colleges would outsource their food services because the contractor claimed its buying power would enable it to reduce the operation’s food costs, but that’s no longer the case (if it ever was true). Food service companies now retain all the advantages gained by their purchasing volume and promise no more than to match local market prices – the same prices a competent independent operator could get on his or her own.
"Competent" is the key word. The self-managed food service operation is only as good as its manager, and purchasing food economically is only a part of the picture. The manager’s skills in creating imaginative menus that reflect the tastes and preferences of the campus community; adaptability in meeting the needs of the college and students, and leading a well-motivated, well-trained staff are more important.
The college or university that is considering outsourcing its self-managed food services should be aware that, while it’s comparatively easy to convert to contractor management, its far more difficult to do the reverse, revert back to self-management. The infrastructure to support the operation has to be reassembled and a competent manager found and hired.
Only one Clarion client in 18 years, New York Institute of Technology, Westbury NY, made the switch and has been successfully self-managing its multi-unit campus food service operations for the past five years.
About Clarion Group
We are a consulting firm that advises companies, professional firms, colleges and universities, independent schools 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 TWM@clariongp.com
Website: www.clariongp.com
It depends on a number of factors primarily, how important food services is considered to be to the institution’s core mission and how competently the service is being managed.
Some 90 percent of all colleges and universities (from community colleges through graduate schools) now outsource their food services to a contractor; the exceptions being the largest campuses of state universities and a small number of state and independent colleges.
The big state universities’ dining services with budgets of $20 million or more are larger than many regional food service companies and have the resources to employ professional staffs and operate successfully.
Among smaller institutions, the decision to remain self-managed is based on the value the college sees in its dining services and a desire to keep it as an integral part of the campus community. Over the past 30 or so years, colleges have increasingly outsourced food service operations almost invariably for economic reasons. The decision usually was made when the food service operation was losing money or a competent manager retired and the successor was not competent.
In recent years, colleges have converted to contractor management because the contractor offered a substantial financial investment to upgrade – or even build – the food service’s facilities. Some of these investments have been in the millions of dollars, even for relatively small institutions. Of course, the investments do not come without strings in the form of a long-term contract, sometimes for more than ten years.
Some medium-sized and smaller colleges have a long history of self-management and have been successful. Davidson College in North Carolina, Saint Anselm College in New Hampshire, Bowden and Bates Colleges in Maine and Middlebury College in Vermont are examples. Many of these regularly appear on the Princeton Review’s annual "Best Campus Food" list, indicating the importance food service plays in their campus' lives.
At one time, colleges would outsource their food services because the contractor claimed its buying power would enable it to reduce the operation’s food costs, but that’s no longer the case (if it ever was true). Food service companies now retain all the advantages gained by their purchasing volume and promise no more than to match local market prices – the same prices a competent independent operator could get on his or her own.
"Competent" is the key word. The self-managed food service operation is only as good as its manager, and purchasing food economically is only a part of the picture. The manager’s skills in creating imaginative menus that reflect the tastes and preferences of the campus community; adaptability in meeting the needs of the college and students, and leading a well-motivated, well-trained staff are more important.
The college or university that is considering outsourcing its self-managed food services should be aware that, while it’s comparatively easy to convert to contractor management, its far more difficult to do the reverse, revert back to self-management. The infrastructure to support the operation has to be reassembled and a competent manager found and hired.
Only one Clarion client in 18 years, New York Institute of Technology, Westbury NY, made the switch and has been successfully self-managing its multi-unit campus food service operations for the past five years.
About Clarion Group
We are a consulting firm that advises companies, professional firms, colleges and universities, independent schools 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 TWM@clariongp.com
Website: www.clariongp.com
Thursday, September 12, 2013
Contractor Investments: Look the Gift Horse in the Mouth
With low interest rates and the Federal Reserve’s easy money policy, the major food service contractors have been more generous in offering financial investments to potential college and university clients.
In Clarion Group college food service projects, we've seen recent seven-figure investment offers to college clients where the apparent profitability to the contractor doesn’t merit such large sums. Clearly, the contractors are seeing a return on investment (ROI) that’s not apparent to the client.
A food service contractor needs a 20% ROI – total annual profit – to justify a large investment. That means for a $1 million investment, its annual profit must be at least $200,000 a year for five years.
A minimal profit for the contractor is about 8% – 5% to cover its general and administrative expenses and 3% net, pre-tax profit. It would take $2.5 million in annual sales to generate an 8% rate of profitability to cover a $1 million investment.
Some contractors have offered investments that on the surface don’t come close to yielding a 20% ROI. Their actual profit is far above 8% or whatever profit margin they show to their clients on their budgets and financial statements.
Recent Clarion Group reviews of college food service financial statements indicate where the additional profit comes from. There are at least three principal areas:
Vendor rebates: Contractors no longer deny that they receive rebates and discounts from their vendors. An audit by the New York State Attorney General found contractors were withholding rebates equal to 14% of purchases from state university and public school clients. Other documents we've reviewed indicate the rebates may be as high as 18% of purchases.
A $2.5 million dining service might have a 35% food cost and 4% paper/disposables cost, about $975,000. At 14% of these purchases, the contractor's rebates are $136,500.
Wage-related taxes, benefits and insurance: Contractors typically charge between 30% and 40% of direct payroll (salaries, wages, overtime and paid time off) on their operating statements. A college administrator may not question this cost because the college’s own payroll tax and benefits package may run as high as 40% to 50% of payroll.
The food service contractor’s actual cost is about 25% to 27% of payroll, sometimes less. The contractor retains the difference as part of its profit. Low-wage food service employees often can’t afford their share of the cost of the contractor’s health insurance; young employees don’t think they need insurance, and some have a spouse with better coverage. Typically, half or fewer of full-time hourly employees – and none of the student or other part-time employees – accept the company’s benefits package.
A $2.5 million sales, dining service's direct salaries and wages cost may be about $850,000. If the contractor charges 30% of payroll, but has an actual cost of 25%, its indirect profit is about $42,500.
Liability insurance: Contractors typically charge between 1% and 1.8% of total sales for liability insurance, although their actual cost is about 0.5% of sales; up to 0.8% for small contractors, Clarion financial reviews have found. What that's worth to the contractor? At 1.5% of $2.5 million in sales, the insurance charge is $37,500. A large contractor's actual cost at 0.5% of sales is $12,500, leaving $25,000 in the contractor's pocket, an undisclosed 1% of sales.
Altogether, the contractor in this example has generated about $204,000 in profits not visible to the client -- some 8% of sales -- in addition to the profit shown on the operating statement.
The trap: Contractors typically ask for five- to ten-year contracts when they make an investment, and sometimes longer, if the investment is large. This may seem like a minor consideration when the college is seeking the investment dollars, but it can prove to be disadvantageous. The operating contract will require the college to refund the undepreciated balance of the investment if the contract is terminated by either party for any reason before the contract term has expired.
If a college that accepted a $1 million investment, depreciated over a 10-year contract and by the fifth year, the college is dissatisfied with the operation of the campus food services, it must pay back $500,000 to terminate the contract. The college may not have the resources to make such a repayment.
Colleges should be cautious about asking for or accepting large investments from food service contractors. Their services may not live up to the promises they made to secure the contract. Measuring the value of food service contractors by the size of their investment offers shuts out the smaller, but often more capable, regional and local food service companies from consideration.
Clarion Group works with colleges and universities, corporations and institutions to improve the quality and cost-effectiveness of their food service and hospitality services and in the competitive selection of food service providers. For information about Clarion and the value we can bring to your organizations, contact Tom Mac Dermott, FCSI, president, 603/642-8011 or Angela Phelan, senior vice president, 609/619-3925 or e-mail us at info@clariongp.com. We look forward to hearing from you.
In Clarion Group college food service projects, we've seen recent seven-figure investment offers to college clients where the apparent profitability to the contractor doesn’t merit such large sums. Clearly, the contractors are seeing a return on investment (ROI) that’s not apparent to the client.
A food service contractor needs a 20% ROI – total annual profit – to justify a large investment. That means for a $1 million investment, its annual profit must be at least $200,000 a year for five years.
A minimal profit for the contractor is about 8% – 5% to cover its general and administrative expenses and 3% net, pre-tax profit. It would take $2.5 million in annual sales to generate an 8% rate of profitability to cover a $1 million investment.
Some contractors have offered investments that on the surface don’t come close to yielding a 20% ROI. Their actual profit is far above 8% or whatever profit margin they show to their clients on their budgets and financial statements.
Recent Clarion Group reviews of college food service financial statements indicate where the additional profit comes from. There are at least three principal areas:
Vendor rebates: Contractors no longer deny that they receive rebates and discounts from their vendors. An audit by the New York State Attorney General found contractors were withholding rebates equal to 14% of purchases from state university and public school clients. Other documents we've reviewed indicate the rebates may be as high as 18% of purchases.
A $2.5 million dining service might have a 35% food cost and 4% paper/disposables cost, about $975,000. At 14% of these purchases, the contractor's rebates are $136,500.
Wage-related taxes, benefits and insurance: Contractors typically charge between 30% and 40% of direct payroll (salaries, wages, overtime and paid time off) on their operating statements. A college administrator may not question this cost because the college’s own payroll tax and benefits package may run as high as 40% to 50% of payroll.
The food service contractor’s actual cost is about 25% to 27% of payroll, sometimes less. The contractor retains the difference as part of its profit. Low-wage food service employees often can’t afford their share of the cost of the contractor’s health insurance; young employees don’t think they need insurance, and some have a spouse with better coverage. Typically, half or fewer of full-time hourly employees – and none of the student or other part-time employees – accept the company’s benefits package.
A $2.5 million sales, dining service's direct salaries and wages cost may be about $850,000. If the contractor charges 30% of payroll, but has an actual cost of 25%, its indirect profit is about $42,500.
Liability insurance: Contractors typically charge between 1% and 1.8% of total sales for liability insurance, although their actual cost is about 0.5% of sales; up to 0.8% for small contractors, Clarion financial reviews have found. What that's worth to the contractor? At 1.5% of $2.5 million in sales, the insurance charge is $37,500. A large contractor's actual cost at 0.5% of sales is $12,500, leaving $25,000 in the contractor's pocket, an undisclosed 1% of sales.
Altogether, the contractor in this example has generated about $204,000 in profits not visible to the client -- some 8% of sales -- in addition to the profit shown on the operating statement.
The trap: Contractors typically ask for five- to ten-year contracts when they make an investment, and sometimes longer, if the investment is large. This may seem like a minor consideration when the college is seeking the investment dollars, but it can prove to be disadvantageous. The operating contract will require the college to refund the undepreciated balance of the investment if the contract is terminated by either party for any reason before the contract term has expired.
If a college that accepted a $1 million investment, depreciated over a 10-year contract and by the fifth year, the college is dissatisfied with the operation of the campus food services, it must pay back $500,000 to terminate the contract. The college may not have the resources to make such a repayment.
Colleges should be cautious about asking for or accepting large investments from food service contractors. Their services may not live up to the promises they made to secure the contract. Measuring the value of food service contractors by the size of their investment offers shuts out the smaller, but often more capable, regional and local food service companies from consideration.
Clarion Group works with colleges and universities, corporations and institutions to improve the quality and cost-effectiveness of their food service and hospitality services and in the competitive selection of food service providers. For information about Clarion and the value we can bring to your organizations, contact Tom Mac Dermott, FCSI, president, 603/642-8011 or Angela Phelan, senior vice president, 609/619-3925 or e-mail us at info@clariongp.com. We look forward to hearing from you.
Tuesday, July 9, 2013
College Food Services Face New Challenge
By Clarion Group Food Service Consultants
www.clariongp.com
College food service operators are finding a new competitor for their voluntary meal plans. In addition to the usual off-campus restaurants, fast food, pizza and deli outlets, there now are a growing number of off-campus student residences, some of which have an in-house dining operation.
"Student housing development has remained robust [and] continues to boom, and analysts predict growth in the coming years," The New York Timers reported recently. The growth in off-campus housing has appeared in such diverse place as Columbia, MO, home to the University of Missouri, and Manchester, NH.
In Columbia, private developers have opened student residences with more than 3,800 beds since 2011 with more under construction, the Times reports. In Manchester, NH, a developer is building a residence for students of the local campuses of the University of New Hampshire, Southern New Hampshire University, Saint Anselm College and Hesser College.
The dining service operator at one large eastern university faces a special dilemma – a developer is building a new residence and dining hall on campus and plans to use a separate food service contractor. The new dining center is likely to lure some student meal plan members from the main campus food service, Mac Dermott notes.
At a college that is struggling to keep its on-campus residence halls full, the off-campus competitor, such as the ones in Columbia and Manchester, can be a challenge.
The University of Missouri in Columbia, with an enrollment of 35,000, probably doesn’t need to worry too much about off-campus competition. But the option of living near but off campus may lure some students away from the dorms and meal plans of the nearby, much smaller Columbia and Stevens Colleges.
The colleges in and near Manchester may feel a pinch when the new private residence hall opens there next year.
College food service operators have a few weapons to meet the new competition. The off-campus food service facility isn’t convenient when the student on campus. The food service can actively promote its commuter meal plan or a low-cost "block-meal" plan – a plan proving a fixed number of meals per semester – to capture some of the optional dollars.
The college food service also can extend its meal plan to incorporate some local restaurants, a popular option at some campuses. While this type of plan does drain some revenue from the on-campus food services, it has proven valuable in attracting participants to a meal plan.
A good example is Iona College in New Rochelle, NY. The all-declining balance meal plan includes an allowance for spending at local restaurants in addition to the four on-campus food service locations, but the service is still profitable for the operator and the college.
But the most important element in competing with the off-campus residence operator and it food services is having a really good, imaginative and responsive operation that will attract students on its merits.
Clarion Group can help your campus dining service meet its long-standing and new challenges. For information, contact Tom Mac Dermott, president, 603/642-8011, or Angela Phelan, senior vice president, 201/305-8653, or Ernie Wilder, 703/282-4040, or e-mail us at info@clariongp.com.
Visit our website, www.clariongp.com
www.clariongp.com
College food service operators are finding a new competitor for their voluntary meal plans. In addition to the usual off-campus restaurants, fast food, pizza and deli outlets, there now are a growing number of off-campus student residences, some of which have an in-house dining operation.
"Student housing development has remained robust [and] continues to boom, and analysts predict growth in the coming years," The New York Timers reported recently. The growth in off-campus housing has appeared in such diverse place as Columbia, MO, home to the University of Missouri, and Manchester, NH.
In Columbia, private developers have opened student residences with more than 3,800 beds since 2011 with more under construction, the Times reports. In Manchester, NH, a developer is building a residence for students of the local campuses of the University of New Hampshire, Southern New Hampshire University, Saint Anselm College and Hesser College.
The dining service operator at one large eastern university faces a special dilemma – a developer is building a new residence and dining hall on campus and plans to use a separate food service contractor. The new dining center is likely to lure some student meal plan members from the main campus food service, Mac Dermott notes.
At a college that is struggling to keep its on-campus residence halls full, the off-campus competitor, such as the ones in Columbia and Manchester, can be a challenge.
The University of Missouri in Columbia, with an enrollment of 35,000, probably doesn’t need to worry too much about off-campus competition. But the option of living near but off campus may lure some students away from the dorms and meal plans of the nearby, much smaller Columbia and Stevens Colleges.
The colleges in and near Manchester may feel a pinch when the new private residence hall opens there next year.
College food service operators have a few weapons to meet the new competition. The off-campus food service facility isn’t convenient when the student on campus. The food service can actively promote its commuter meal plan or a low-cost "block-meal" plan – a plan proving a fixed number of meals per semester – to capture some of the optional dollars.
The college food service also can extend its meal plan to incorporate some local restaurants, a popular option at some campuses. While this type of plan does drain some revenue from the on-campus food services, it has proven valuable in attracting participants to a meal plan.
A good example is Iona College in New Rochelle, NY. The all-declining balance meal plan includes an allowance for spending at local restaurants in addition to the four on-campus food service locations, but the service is still profitable for the operator and the college.
But the most important element in competing with the off-campus residence operator and it food services is having a really good, imaginative and responsive operation that will attract students on its merits.
Clarion Group can help your campus dining service meet its long-standing and new challenges. For information, contact Tom Mac Dermott, president, 603/642-8011, or Angela Phelan, senior vice president, 201/305-8653, or Ernie Wilder, 703/282-4040, or e-mail us at info@clariongp.com.
Visit our website, www.clariongp.com
Sunday, May 3, 2009
Sustainability and Food Service
Sustainability in all its many iterations has been embraced enthusiastically by nearly all, if not all, university, college and school communities. It's been less obviously adopted in the corporate world, if only because companies don't have students eager to promote the concept and practice.
In addition to its ecological benefits, sustainability has the potential to reduce costs for those who adopt its procedures. Energy-conserving equipment, utility-usage reduction, more efficient work practices and waste control are all good business, no matter what business you're in.
We're exploring the expanding and evolving world of sustainability and introduced our new "Fresh & Natural" approach to green, healthy dining in the Spring issue of Dining Insights. There also are articles about attracting and retaining customers and other topics involving the world of employee and student dining.
If you don't receive Dining Insights, you can join the 3,000-plus managers, administrators and executives who learn about the workings of on-site food service, outsourcing or "insourcing" their food services, dealing with food service contractors and more.
Just e-mail your name, title and mailing address to info@clariongp.com. We'll be glad to hear from you.
Tom Mac Dermott, FCSI
Clarion Group
www.clariongp.com
In addition to its ecological benefits, sustainability has the potential to reduce costs for those who adopt its procedures. Energy-conserving equipment, utility-usage reduction, more efficient work practices and waste control are all good business, no matter what business you're in.
We're exploring the expanding and evolving world of sustainability and introduced our new "Fresh & Natural" approach to green, healthy dining in the Spring issue of Dining Insights. There also are articles about attracting and retaining customers and other topics involving the world of employee and student dining.
If you don't receive Dining Insights, you can join the 3,000-plus managers, administrators and executives who learn about the workings of on-site food service, outsourcing or "insourcing" their food services, dealing with food service contractors and more.
Just e-mail your name, title and mailing address to info@clariongp.com. We'll be glad to hear from you.
Tom Mac Dermott, FCSI
Clarion Group
www.clariongp.com
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