Proposed OT Regulations Will Upset Management Structures

Proposed OT Regulations Will Upset Management Structures

April 14, 2014

Food service operators who are worrying about a possible increase in the minimum wage are looking in the wrong direction.

The federal government’s proposal to tighten regulations on exemptions from overtime pay has received little attention, but if implemented, will have a far greater and more immediate impact on corporate and campus food service operations that an increase in the minimum wage.

Operators will have to rethink and restructure their on-site food service management teams.

In March, President Obama directed the Department of Labor to revise the regulations covering the minimum salary level that exempts an employee with some supervisory responsibility from receiving time-and-a-half pay for work performed over 40 hours in a week. Currently, the minimum is $455 a week or $23,660 a year. Proposals for the new minimum are as high as $984 a week or $51,168 a year.

In contrast, the impact of a raise in the federal minimum wage from the current $7.25 to a proposed $10.10 an hour – when it happens – will be minimal. The minimum wage increase will be phased in over two or three years, cushioning its impact. Many states have already raised their minimum wages and federal contractors must pay at least $10.10 an hour. Few food service employees are paid less than $8.00 an hour now.

Federal law permits an employer to pay employees who have some supervisory responsibilities, such as overseeing two or three other employees and exercising some independent judgment in the performance of their duties, on a salaried basis. They aren’t compensated for hours worked beyond 40 in a week.

In a food service operation, these would be chef-managers, chefs who oversee other food preparation workers, assistant managers and many supervisor positions, such as shift leaders. Many of these positions don’t pay much more than the $23,660 minimum to qualify. When that minimum is raised, even to $35,000 or $40,000 a year, persons in those positions will no longer be exempt from time-and-a-half pay. Operators will have to raise salaries, redefine salaried positions or begin paying for overtime work on an hourly basis.

What ever course operators choose, their labor cost will rise, much more than it will when the minimum wage is increased.

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 TWM@clariongp.com
Website: www.clariongp.com

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.    

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

The Dining Center as an Oasis

By Angela Phelan
Senior Vice President
Clarion Group

The business of hospitality, running a food service operation, rests on its core mandate: To offer good, healthy food to customers, whether they are students in a large university or the staff of a high-powered law or financial firm -- or to the very youngest customers trying to get through their day in fifth grade.

But hospitality connotes food and rest.

This central goal of providing good, healthy food costs time, money and above all, the good will of the team designated to run it. But note that I suggest food and rest. This is a novel concept. I rarely hear anyone talking about rest when discussing what food service has to offer its customers.

Interestingly, the only client I ever had that considered the rest that its dining service could offer to its customers was one of the Swiss banks who, from their main headquarters abroad carefully guided the U.S. designers in the art and science of caring for its employees. They insisted on a separate area for dessert and coffee, a few yards away from the main servery and seating area. Chairs are softer, lower, set around coffee tables (literally). The floors in that area are carpeted, the lighting lower.

The Swiss concept was that the downtime offered by dessert and coffee was a better way to transition back to work at a desk, telephone and any number of competing computer screens. This novel concept -- at least for the hard-charging Americans -- seemed almost quaint. To consider the psychological as well as the basic nutritional needs of employees (or students) was partically off the scale.

Restaurateurs, of course, are well aware that the time devoted to dessert and coffee can add many dollars to their bottom line. To be sure, one must make a choice between "turning the table" and the benefits of adding dollars to the check by selling the customer another hour's worth of food and drink. The downtime tends to enhance the customer's mood; tips are more generous.

Now we should consider the news reported in The New York Times recently. There is new data being assembled in some school districts in Texas and other states. Educators have discovered that simply by reversing the order of lunch with recess, the students were more relaxed, ate their meals more slowly, drank more milk or water and were generally in a better frame of mind to resume their classes and focus more readilly on their work.


This uptick in productivity, arrived at by such a simple and "old fashioned" notion of allowing students to take a full half-hour for lunch after their recess period was enormously revealing. All those time-and-motion studies designed to increase productivity have been turned on their heads by this simple, timeless notion. Let them rest before taking up the balance of their workday.

This could be an important way to give the employee a quiet time to "reset and recharge."

For those of us who design dining facilities for our clients, this is a very interesting and satisfying study. Americans traveling to Italy and France return with newfound respect for the leisurely meal, noting that the temperment of the diners appears to be more relaxed.

This is an extraordinarily difficult time in the world. Stress is the word on the lips of just about everyone over the age of seven: Too much homework, too much overtime, too much and too little of everything.

Serving the needs of one's employees, stressed as they are, requires some thought. Perhaps we should think about providing not only excellent food, but offering a quarter-hour of restful time before returning to work. Suppose we consider carpeting a quarter of the seating space, taking out the lunch tables and arranging some comfortable chairs and coffee tables. Sounds a little familiar? A little like your neighborhood Starbucks?

This could clear the dining area for others and subtly move them to the coffee and conversation area fo a little rest and recharge. A lawyer at one of our client firms, where we were in the throes of redesigning the cafe made this suggestion. Clearly, his travels abroad or a good deal of time in a Starbucks influenced his thinking.

So the firm created an "Oasis" for their associates, complete with foosball tables, a big coffee bar and some comfortable armchairs. It's actually on another floor from the cafe and it's a great success.

We would like to see the good will that could come from giving employees a restful, healthy break at lunch, encourage the R&R concept by moving some tables out and bringing in some comfortable chairs.

Do you have some room in your cafe or in an adjacent space? If you would like some help in putting it together, give us a call. Clarion can make it work.

After all, an Oasis shouldn't be a mirage.

Contact Angela Phelan at 973/544-6223 or e-mail us at info@clariongp.com.

PS: Do you have an arrangement like this that works for you? Write and let us know, either by leaving a comment or by e-mail to info@clariongp.com.