Strategies for Subsidy Reduction

Tracy Lawler

Participation
Participation is the first and one of the most critical factors to understand and analyze. Participation rates for lunch in a corporate environment can vary dramatically. Factors that effect participation include menu variety and breadth, food quality, food pricing, availability of competitive outlets, corporate culture, travel distance to competitive outlets, ease of exit and re-entry, and time allotted for lunch. In major metropolitan markets with a large variety of outlets within a several block radius, lunch participation typically hovers in the low to mid forties while in a more rural location with few competitive outlets and low prices it is not uncommon to see lunch participation reach 80%.

To effectively analyze and understand participation it must be tracked over time. Gather rates by meal period for the last two years at a minimum. Expect to see some seasonal fluctuations. If participation is on a downward slope, absent major changes in the program, it signifies a problem. Review program changes including hours of operation, offerings, and price changes with your on-site manager to understand how past changes affected participation. Determine what changes occurred during periods of either increased or decreased participation.

If declines in participation are identified, challenge your food service provider to develop a comprehensive plan to increase participation to a mutually agreed upon goal.At a minimum, your provider's plans should address menu items, specials, promotions to the customer base and customer service.

Consider developing a survey to query your population about their preferences. If at all possible, conduct the survey independently to gather the most impartial information.

Speak to colleagues at other sites internally or at firms with similar employee populations and operating characteristics. Learn what their participation rate is and tour their cafeterias. Compare their environment and location to yours to determine if the variation in participation rates makes sense.

Pricing
Price is a critical factor in both participation and profitability. Your food service operator should have a clear understanding of cafeteria prices in relation to street prices. The onsite manager should be able to provide a comparison of price and portion at your facility versus those in the immediate vicinity. This analysis will provide the percentage to street factor. Typically, operators find that a discount of 10% - 15% from street will optimize sales. This discount level is generally enough to strengthen participation rates without negatively impacting the financial results. Discounts deeper than 15% will undoubtedly start to increase the subsidy.

Outlets offering discounts of 20% or more from street should, however, demonstrate a much higher participation rate. Discounts north of 20% should result in participation rates of 60 - 65% at a minimum. If participation rates do not achieve that level it indicates the population is dissatisfied with the quality, selection, wait, or some other factor.

Outlets
If your food service operation has more than one outlet you should review sales both by outlet and daypart. A coffee bar that is open for 8 hours but transacts 80% of its sales from 2pm - 4pm should be reviewed. Similarly, outlets with either very similar offerings or located quite close to each other should be closely examined. Typically, the additional labor generated by two outlets with similar offerings and close locations do not cover incremental sales. While employees may grouse about inconvenience if an outlet is closed they will usually self police and transfer their business to the other outlet.

Hours of Operation
This is critical if your operation is open for more than a standard eight hour workday, has more than one outlet, or runs a second shift or weekends. Analyze sales by location and day part. If sales at a second location are minimal during the last two hours of the day consider closing earlier. Sales will likely move to the primary location but labor expenses will be reduced. If you operate a second shift or on weekends analyze sales and profitability by shift. You may find that a large percentage of the subsidy is created by the second shift. It is important to know the cost of serving less populated day parts even if no action is taken. Creative solutions might include paring back on the offerings and staff for less populated dayparts or enhancing vending options.

Population
Review population levels over time. Increases in the employee base are always positive for a food service operation assuming capacity and space is adequate. If significant population decreases are looming discuss them now with your food service provider. Planning for such decreases can help mitigate the financial impact to some extent.

If your company is located in a multi tenant building consider allowing outside tenants without a cafeteria to utilize your cafeteria if space permits. Increased population will translate to increased participation and a lower subsidy. Any discounts offered to employees need not be offered to other tenant users.

Staffing
Ask to review staffing levels with the on site manager for the past two years. Observe the cafeteria operation. Are there workers who appear underutilized? Smaller accounts can frequently utilize a chef/manager instead of hiring an FTE for both. Challenge the staffing levels to determine if the levels are appropriate. Ask your onsite manager if operational demands of the account are forcing labor to a higher than usual cost. If the answer is yes, understand the incremental cost of any operational demands and determine if operating requirements can be adjusted.

Corporate Overhead and Allocations
Evaluate your reports and invoices on a regular basis. Plan to spend several hours at minimum analyzing them each month. Understand what expenses are being allocated from corporate and determine whether they are contractually allowed. Line items that food service companies tend to allocate include training, management, credit card processing, insurance, and benefits.

A recent audit we conducted for a client uncovered a contract company charging an allocated rate for several categories of expenses that were a number of points higher than actual expenses. Understand if your contractor is obligated to pass on volume discounts. Utilize your audit right to determine if they are indeed passing them on. Understand any corporate initiative that might be charged to the unit level. One national operator, for example, has adopted a policy at some accounts of charging $25 per paycheck for any employee not on direct deposit. Three non compliant employees at a unit with weekly payroll could cost the client almost $12,000 annually.

Question any expense category that is either consistently the same month to month (i.e. 1% of sales on the nose signifies an allocation not an actual expense) as well as any category that experiences a significant change either year to year or month to month. You will learn a tremendous amount about your food service operations during this process and likely uncover potential savings as well.

Familiarize yourself with the contract
Read the contract between your company and the food service contractor regularly. Be familiar with the provisions, including which party bears responsibility for repairs, maintenance, waste removal, utilities, pest control, and other operating expenses. Understand how expenses are to be charged and what is allowed. Compare the contractual language with the actual operating statement.

Catering Volume
Catering is inherently more profitable for food service operators. Review catering activity over the past few years. If it has increased significantly over the last several years the food service operator has likely improved their margins quite a bit as well. Consider a mid contract renegotiation if you expect increased catering activity to continue. Consider mandating that all catered functions on site utilize the food service operator. This will guarantee a level of business and improve the bottom line of the contract. Encourage the food service operator to offer catering services to other tenants in the building if the production facilities are adequate. Greater catering volume will reduce the subsidy.

Consider a cap
Most contract operators are loath to lose an account. Even if your contract does not include a cap on losses consider approaching your operator. An account with a cap needs to be managed carefully because quality and customer service can suffer but it often provides some reassurance to those responsible for the budget.

Understand the cost of "extras"
The executive dining room and office coffee service function are frequently quite costly. Many of my clients tend to evaluate all services together. I advocate separating the services to understand what each individual component is costing. A corporate cafeteria serving 2,000 patrons may well have the ability to operate on a P&L basis; however when a staffed EDR and coffee pantries on 20 floors are included the account is no longer profitable. It is critical to know how much each distinct segment costs.

Free Coffee
Many clients offer free coffee to their employees through an office coffee service (often managed by the food service contractor) or less formally in pantries manned by staff. Giving away free coffee impairs the operator's ability to sell coffee and in many cases it is costly to offer. Ask the onsite manager to estimate incremental sales if free coffee is not offered. Five hundred employees purchasing two coffees twice a week at $1.50 per cup translates to an additional $78,000 in top line revenue.

Treat your On Site Manager as an Employee
I frequently counsel my clients that an operation is only as good as the manager. The on site manager is really an extension of and representative of your company. Provide him or her with the information required to do a stellar job. Open and maintain a regular dialog with the manager. Don't wait until problems crop up. Have regular meetings to understand their challenges, issues and initiatives to solve the problems. Treat them as you would a valuable department head.

Reducing a subsidy is not possible for every account but a large majority can gain some relief by reviewing some of the areas I have listed above. Maintain open communication with your food service contractor, do your homework, study all data, and ask questions. This formula will ultimately benefit both your company and likely the food service contractor as well.