2013 College Foodservice Market Outlook

John Lawn Editor-in-Chief

This article was significantly expanded and updated on February 24, 2013.

Dining programs in higher education are booming. The college foodservice market is projected to grow 5.1 percent in nominal terms in 2013, according to Technomic, the Chicago-based consulting organization, a nice followup to last year's 5 percent growth. Such prospects have made campus dining a standout segment in an industry that in other areas is struggling to grow.

"The college sector continues to do quite well as it continues to upscale its offerings," says Technomic's Vice President Joe Pawlak. "Today's students have been raised with greater exposure to interesting foods and a social consciouslness that is reflected in their meal choices. Colleges are catering to those changes."

At the same time, "We do not see a universal rise in college foodservice growth," observes Rob White, President of Envision Strategies. "Some schools have growth, others do not, reflecting among other things the situation in local economies.

"We are also seeing students put more value on the downtime around a meal," he adds. "That is part of the value offering they are seeking, and it is a trend being reflected in more master plans these days."

We will look more closely at these and related trends later in this report. But without a doubt, as college foodservice directors look to the future, two over-riding trends stand out for the long term. 

Two over-riding trends

Last year the Producer Price Index put crude prices for food up 12 percent between June and September.

The first is the changing demographics of the post-secondary student community. The second is the looming end of an era in which the cost of attending a four year college was able continuously rise faster than inflation, with relatively few constraints on tuition, fee, housing and board price increases.

Both changes will have significant implications for undergraduate dining operations in terms of their traditiional meal plan customers, their service delivery models, and the role dining services plays in the higher education environment.

Stepping back to look at the big picture, college enrolllment growth will continue. Forecasts from the National Center for Education Statistics (NCES) indicate total enrollment by 2021 will increase15 percent, to 24 million (see charts).

At the same time, that student population will increasingly include larger numbers of older and part-time students. By 2021, NCES predicts the percentage of college students who are 25-34 years old will increase 20 percent and that those who are 35 years old and over will increase 25 percent. Finding new ways to make traditional dining programs appeal to these kinds of students will be a major challenge for the future.

Women have made up a growing majority of the college student body for several years and that trend is also expected to continue. NCES notes that male enrollment in postsecondary, degree-granting institutions increased 42 percent between 1996 and 2010 and will increase another 10 percent by 2021.

In contrast, female enrollment increased 49 percent between 1996 and 2010 and is projected to increase 18 percent by 2021. The projected female to male ratio at that time will be about 55.5 percent to 44.5 percent.

Meanwhile, racial demographics are also changing rapidly, with overall declines in the percentage of college students who are White and increases among those who are Black, Hispanic and Asian. There is also a continuing decline in whose who report that English is their first language. (You can download a complete copy of the NCES report, just released in January, here.) 

Further, the exploding growth of community college enrollments in recent years is not only because of students looking for associate degrees. The College Board reports that 45 percent of four year degrees now go to students with previous enrollment in a two-year institution, a trend it says is more pronounced in the South and West.

"One-third of students enroll in a different institution within five years of their first enrollment term or by the time they earn a degree," the College Board says. "That's half of each institution's students (on average)."

This, too, has implications for campus dining, since so many schools rely heavily on first and second year students in their residential programs.

To paraphrase former U.S. House Speaker Tip O'Neil, "Most college enrollments are local." While the student mix for Tier 1 schools tends to be much broader, most four year institutions draw the majority of their enrollments from their own state and those on its immediate borders. Thus, regional trends in enrollment and demographics vary significantly by the part of the country in which the institution is located.

For example, much of the enrollment growth is regional, in the South and West, with future high school graduate populations in the East and Midwest looking flat by comparison. Also, while the percentage of Hispanic undergraduates is increasing everywhere, the impact is also much more pronounced in the South and West. Nationally, the percentage of public high school graduates (the base pool for college enrollments) who are Hispanic will grow from 10 percent in 1996 to 28 percent in 2022. But in the Southwest (defined here as Texas, New Mexico, Oklahoma and Arkansas) Hispanics will represent 45 percent of high school graduates by then.

The College Board describes these trends in detail in its October 2012 update to a long-running research series, "Landscape of Education." Anyone interested in this subject will find its charts, maps and previous reports to be highly informative.

"Hold the price increases but generate more revenue"

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Pressure on colleges to reduce cost increases is growing more intense, with net tuition revenue not keeping up with expenses at many schools. Look no further than California, where voters approved a tax increase for higher education last year after Democratic proponents said it would let public universities avoid tuition increases for seven years. Republicans subsequently came back with a proposal to freeze tuition charges for seven years (story here).

Or, look to the bond-rating agencies, which have been critical of higher ed's increasing debt loads (Moody's recently downgraded the debt of the whole sector). The skirmishing is just getting started.

It's a point not lost on top college administrators who have come to expect continued revenue growth alongside enrollment growth. Such expectations are increasingly unfounded (see related FM story: What's Behind the Cost Pressures in Higher Ed?"). And as the rumblings grow louder from Congress and the President about potential legislation to bring the cost of higher education under control, administrators are finding plenty of reasons to worry.

They had a taste of this with the Higher Education Opportunity Act of 2008 (HEOA), which requires those which participate in Title IV federal student aid programs to post a net price calculator on their websites. The calculators are supposed to provide estimated net price information to current and prospective students and their families based on a student’s individual circumstances. But the calculators have come under heavy criticism for their inconsistencies.

Meantime, the subject came up again in February's State of the Union address, where President Obama again urged colleges to do more to control their cost increases and unveiled a Federal "college sticker price" Scoreboard. For many administrators, it was an reminder of his comments the previous year, putting colleges "on notice" that they would have to do a better job controlling costs or risk losing additional Federal money.

In a different initiative, Senators Wyden (D. OR) and Rubio (F. FL) are pushing a separate bill, the "Student Right To Know Before You Go Act" that would call upon states to publish data showing the average salaries of college graduates from different majors and programs. 

As such moves put still more pressure on schools to hold down tuition and fee increases, administrations are leaning harder on auxiliaries to hold the line on price increases but still generate surplus revenue that can be returned as a contribution.

“While we are not seeing students or their parents spending less, there is definitely more focus on ‘What is the Nut,’ says Envision Strategies' White. “Household financial concerns are part of the reality of higher education. They're a key influence on the way meal plans are packaged, structured and priced and are why there's consistent interest in fixed price plans that offer a guaranteed level of dining.”

At the same time, schools are becoming more sophisticated about the negative impact of trying to pull too much money out of dining programs, says White. That would be a positive trend if it becomes widespread.

“We like the analogy of a plate: You take away a slice of food on the plate for overhead costs, but the bigger that slice is, the smaller the amount on the plate that students see they are actually paying for," he says.  

"If you take too much away, there’s a disconnect on the value perception. That puts the operator in a position where he or she has to create an illusory experience with smoke and mirrors. Where that happens, administrators at the highest level are seeing the problems that result from a dining program that is too highly leveraged."

Still, it's an operating environment where, “any new revenue is good revenue,” observes a West Coast director, and is a main reason campus cash operations continue to expand. Other common efforts to increase revenue include selling more meal plans to off-campus students, to expand catering programs and to introduce services like late-night, on-campus meal and pizza delivery. Retail programs that bring in additional cash beyond that of meal plans will remain key, even as meal plans themselves are being re-emphasized.

The search for more revenue from dining departments also has implications for those responsible for making outsourcing decisions. While multi-year outsource contracts can come with upfront cash investments from the provider, the contract terms involved can be difficult to evaluate.

“As cost management becomes crucial in higher education, administrations need to become more knowledgeable about auxiliary services,” says David Porter, CEO of Porter/Khouw Consulting. “If they want to outsource those services they need to become savvier about contract terms and have appropriate representation when those terms and conditions are negotiated."

Dealing with an Edifice Complex

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What some have called “the Edifice Complex...or Taj Mahal syndrome” (as it was described in a recent New York Times article, has also contributed to increasing levels of debt at the institutional level. Critics decry a “decade-long spending binge to build academic buildings, dormitories and recreational facilities—some of them inordinately lavish to attract students.”

College housing and dining departments are often the beneficiaries of such initiatives. And directors point out that many dining hall investments were long overdue based on the age of facilities, and that such improvements in foodservice facilities often generate additional revenues that offset associated costs over the longer term. 

There is also some evidence to back up the point of view that such investments have their intended effect when it comes to attracting the target student mix. A new research report from the National Bureau of Economic Research in January, "College as Country Club: Do Colleges Cater to Students' Preferences for Consumption," suggests that in the competitive environment most colleges face as they seek enrollments, some of these investments may turn out to have a significant return. 

Still, “I think we will see less of this in the future,” says Paul Hysen, president of The Hysen Group. “As colleges run up against debt ceilings, FSDs will have less capital investment and will have to rely more upon food presentation and quality to build their businesses. That is often true even if foodservice departments can generate internal funding to pay for upgrades—many times the schools will not let them spend it that way.”

As universities need new housing because old facilities are running down, Hysen says they are increasingly turning to partnerships with private developers. “This can represent an opportunity for directors,” he adds. “Students in those apartments are potential customers for modified meal plans, c-stores and branded concepts even if they technically are not campus residents.”

Hysen advises directors “to become more closely involved in the university’s long term planning and master plan development. You need to be friends with the campus architect, the facilities department or whatever group oversees campus development. If your projects are not in the five year plan, the money will be spent before you know about it.”

White offers similar advice. “We see student life departments partnering with the business side to apply resources the school already has in a more effective manner,” he says.

“So if a dining hall is already open until midnight, there might be interest in modifying the design to let students more effectively study there, even if it means adding some glass walls.  It is a more creative way of leveraging resources already in use, and perhaps reducing the need for other resources.

“The point is, some of these goals were sought simultaneously in separate campus silos before. What we see now is more collaboration to better leverage such efforts. It means bringing residential life into dining hall design discussions.”

Don't let 'em get away

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Another way forward is for schools to do a better job of retaining students and increasing graduation rates. That's among the reasons student retention initiatives are getting more emphasis from top administrators.

A new report released in January, “College Completion Must be Our Priority” by a commission of six leading higher education associations sets out the mission. It calls for various innovations that could include such things as “midnight classes” and alternative methods of course delivery. It also points to the poor “four year” graduation rate statistics, emphasizing that many students require six or more years to graduate and that there is a major mismatch between such realities and incoming student and family expectations. (You can download a pdf of the report here). 

The same report (and another recent one from higher education advocates—“The American Dream 2.0,”) also makes the major point that while graduation rates can be increased by more restrictive admission policies, such an approach does a disservice to higher education’s social and national missions. Instead, the report says, higher education must adjust its offerings, delivery system and culture to a more diverse student base.

Both are themes that college dining directors can play to in making the case for campus initiatives that help build community, provide foodservice to group study areas and make the college experience more welcoming to students from non-traditional groups.

“Schools are very dialed in to retention and graduation rates,” agrees Porter. "They know they need to work harder to retain students from freshmen and sophomore years Dining can play a fundamentally central role in bringing students together several times a day in a very socially rich experience.

"The future of higher ed is more than just the academic learning experience," he adds. "It is also about facilitating a social transition for those students as they prepare to enter society, the workforce and a social milieu far different than the one they experienced at home. They will form lifelong connections and relationships that make this not a purely academic thing."

Reaching out to new prospects

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To maintain four year enrollment growth, many schools are also looking beyond U.S. borders, seeking international students who pay "full freight" tuition. This also offers opportunities for those campus dining directors who find ways to make their programs more welcoming to studentsfrom other cultures. 

Another type of new tuition-paying student—those recruited for the growing list of online courses being offered in higher education—is also being sought as most schools expand their long-distance learning programs. Schools like the new revenue, but critics argue that online learning classes so far have a poor track record, especially among the low-performing and non-traditional students who are most likely to sign up for them. For example, community college students with who sign up for them in hopes of finishing a four year degree are much more likely to withdraw than those who take the in-person route.

Such results haven't discouraged those who offer or sign up for such courses. In 2011, close to seven million students took an online course. And the whole movement got a shot in the arm in 2012 with the expansion of so-called MOOCs (Massively Open Online Courses), which can involve many thousands of concurrent online students. These virtual classes are provided via joint initiatives  with online providers like Coursera and Udacity, and while business models are still evolving, such courses are now being offered with college credit (and a price tag) by some schools. 

At the moment, Coursera is riding high on $22 million in venture capital. Udacity boast of $15 million. Other startups are focused on helping individual professors to create their own online initiatives or to strike licensing deals with name brand universities.  Even as many believe a large percentage of such efforts are doomed to end in failure (see this article,) the trend seems unstoppable.

In college foodservice, some consultants see a threat to traditional dining programs. "MOOCs will especially affect schools with a high percentage of communter students," believes Tom MacDermott, president of Clarion Group. "The impact is imperceptible right now, but in an age driven by IT, things move very rapidly. It is not so much a matter of evolution, but of disruption."

In fact, some community college administrators in states like California are looking to online classes as a way to help address unprecedented admission demands and overcrowding. The response by top college administrators has been schizophremic: most see online learning as an important wave of the future, even as others are apprehensive that it will undercut traditional programs.

MacDermott notes that dining programs at commuter schools often aren't able to do much more than break even financially, so any decline in available on campus customers represent a threat. And data on the number of students enrolling in online courses since 2007 show consistent annual increases of between 9 and 21 percent.

Still, "I don't see MOOCs as having an impact on traditional college enrollments," says Porter. "Online programs will be more about extending access to people who wouldn't be able to get to a campus. Traditional students and their families are not going to decide that a student should skip the physical school experience to save $3-10,000 a year."

And a grab-bag of other factors...

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To be sure, there are a variety of other trends that are having significant impacts on the college dining scene. 

Sustainability and local sourcing initiatives continue to expand in the segment, sometimes with untoward consequences. For example, as procurement shifts to local sources, it can affect rebate income, especially for outsource providers, and is causing adjustments in some contract terms to reflect the difference. As locally procured volume increases, it can also affect negotiations with prime vendor distributors.

Legal experts speculate whether the availability of gluten-free and other allergen-free food offerings will likely become a much bigger issue at college dining halls in coming years following a Department of Justice settlement with Lesley University in December. It ruled that severe food allergies are covered under the Americans with Disabilities Act (ADA) in a lawsuit that charged the school with failing to adequately address students’ needs for allergen-free offerings in its meal plan or ensure them “an equivalent dining experience.” 

Regardless, more schools have already been requiring separate, allergen-free food storage and prep facilities, tighter cross-contamination prevention procedures and more extensive staff training and dining hall signage.

Renewed attention is being paid to an obscure IRS rule (Revenue Procedure 97-13) that restricts certain types of contracts nonprofits can enter into with outsource providers when an institution is financed with tax-exempt bonds. A key requirement of the rule is that services must not be paid for with a share of net profits from operations.

While exemptions exist for certain “incidental” service contracts, these do not include patient or resident nutrition, laundry, call center, purchasing and other services. It can also affect how contract termination clauses are structured, how investments are amortized and similar issues.  There are reports 97-13 rules have been cited in some contract termination discussions and to push back against certain kinds of P&L contract terms. Legal groups and the American Hospital Association have asked the IRS to change and/or clarify some of these restrictions. How significant an issue is it? The jury is still out.

On the facility design front, as more schools expand allergen-free dining, prep work is moving to front–of-the-house, with dedicated stations featuring secure access for customers and staff, says Mona Milius, a senior principal at BakerGroup. More schools are putting demonstration kitchen facilities into the dining areas for nutrition education, staff training and “eatertainment” value, she adds.

"We are also seeing quite a bit more interest in demonstration kitchens in the dining environment that can do double duty, serving as educational staff training areas and as locations where students can be taught how to prepare more nutritional meals for themselves," adds Milius. 

"Long term operating costs for new and renovated facilities are being discussed in advance in much more detail these days," she says. "There is an expectation that they will reduce operating costs over time, especially in terms of energy use. You have to be certain investments will pay for themselves over time and that facilities will be flexible enough to change over time without entailing unnecessary additional costs."

What’s Trending: Colleges & Universities

✓ Enrollment growth continues, but student populations will be increasingly diverse by race, gender and age, with more students attending part-time. Dining will be looked to to help bring groups together.
✓ Retail foodservice concepts and offerings will expand as dining departments seek to serve and tap these new student populations.
✓ Town & Gown issues heat up as efforts to keep more cash on campus conflict with goals of local FS operators. Whose customer is it?
✓ Meal plans will continue to evolve as FSDs seek to increase their flexibility and appeal to off-campus/non traditional students.
✓ Gluten-free and allergen-free menu offerings and prep areas will become more sophisticated following a court ruling that such allergies are disabilities protected by the ADA.
✓ Foodservice facility construction and renovation programs are getting more scrutiny in terms of financial paybacks, long-term flexibility and their ability to do double-duty in terms of other campus programs.
✓ MOOCs (Massively Open Online Courses) extend the reach of online classes but could eventually undermine on-campus dining, especially at commuter schools.
✓ Student retention and graduation initiatives are become a focus of administrations, a theme  dining directors can play to in program proposals.
✓ Increasing cost management pressures in higher administration will put more pressure on dining programs to both control board plan price increases and to generate increasing amounts of additional revenue contribution. Expanded retail programs and secondary services like catering and summer conference programs will be the beneficiary.