Surveying the Onsite Landscape 2005

John Lawn

Time for a business environment check:

But before starting that list, let's do a cross-check of the economy in general...

Economic conditions in the U.S. are better than they have been for several years, with the business cycle in a modest upswing. Consumer confidence, disposable personal income and housing starts are all improved from a year ago, signs that 2005 will be a good, if not necessarily a booming, period for onsite operators.

Looking back, the country's Gross Domestic Product increased 4.4% last year, the best showing since 1999 (Fig.2). Though growth slowed somewhat in the fourth quarter, economists say there is plenty of momentum to assure good business prospects for the year ahead. With well over two million jobs added to national payrolls (Fig.3), consumer spending was up a healthy 3.8%, and some of that money has found its way into onsite cash registers.

On the negative side of the ledger: inflation. Consumer prices bumped up 3.3% last year, the biggest increase since 2000. Food costs in particular were an unexpected challenge for many operators in 2004 (Fig.4). The government projections for a 2004 a wholesale food price increase of 1.8% at this time last year vastly underestimated what turned out to be a 5% bump. A 16% rise in energy prices was another contributor, although in real terms energy prices remain far from the "crisis" levels of the early 1980s. To keep inflation under control, it's considered a virtual certainty that the Federal Reserve will continue to raise interest rates in coming months.

For a look at the more specific prospects of the foodservice segments served by FM, we spoke to a sampling of industry experts and consultants to tap their best-guess scenarios for the year ahead.

Higher Education
College enrollments are still on an upswing (Fig.6) and foodservice sales in higher education overall should see a 4.5% increase, according to Technomic. NRA projects (Fig.1) an even higher growth rate— 5.4%—when self-operated and contract are averaged together.

Managing labor costs remains the biggest challenge for many college FSDs. Benchmarking studies performed by the National Association of College and University Food Services (NACUFS) show that this is most problematic in retail and c-store operations (Fig.7). On the other hand, an 18% increase in average college cstore transaction size, and a reduction in cost of goods sold suggests managers are finding operational strategies to offset these costs.

A more diverse operating environment. "The good news on many campuses is that as a result of retail conversions and offerings, much of past student discontent with foodservice has been greatly diminished," says Tom MacDermott, president of the Clarion Group in Kingston, NH.

"The bad news is that managing labor costs in this more diverse service environment has become much more difficult. Extended hours, with multiple operations open at the same time, give students the choice they want, but it is not the same operating environment as when you move thousands of resident students through one or two dining halls during clearly defined meal periods."

MacDermott also notes that the more diverse range of campus foodservice outlets has made accounting more complex. "C-stores have become enormously popular, especially on campuses with debit card systems. But you can't roll them in to the same financial statements with dining halls. Their cost structures are just too different."

Menus are becoming more 'sustainable.' "One thing you don't hear a lot about is that the student population on most campuses is now more than 50 percent women," says MacDermott. "They have a greater interest in more healthful choices, vegetarian food, produce that is sourced locally.

"Organic food is not something you see widely yet, but the idea of becoming 'sustainable' is catching on, with more schools looking to purchase product from local farmers. You see this more in the South and West, where the growing season overlaps the academic year more than in the Northeast. It is also more common at liberal arts colleges, where students tend to have a greater interest in these kinds of issues."

Mainstream vegetarian. Ray Petit, a principal with FoodStrategy, Inc. of Potomoc, MD, says more healthful campus life styles "are being seen as very important to the learning environment and will be a long-term requirement for operators.

"There is a real opportunity for these programs to have more mass market appeal. The historical stigma was that vegan and vegetarian focused on a narrow slice of people who were just very picky about what they ate. Today these kinds of menus can be developed as mainstream concepts."

Coexisting with residential kitchens. Petit also notes the increasing number of residential apartment complexes being built on many campuses that include modest kitchen facilities. "Directors in these situations need to find strategies that reach a better balance between mandatory resident meal plan participation and affording students the opportunity to prepare meals in their units," he says.

"Most students do not want to prepare meals seven days a week, but they like having the option. At the same time, it raises serious financial and campus-life questions: What are the implications for all-you-care-to-eat programs? Does it compromise learning or socialization opportunities for students? Will it cause administrations to favor debit card retail programs in lieu of traditional ones? Directors need to have well thought out positions to present to their administrations when discussing such issues."

Managing the dining experience. "A lot more attention is being paid to the physical college dining environment, with schools investing more to elevate the quality of the experience," says David Porter, CEO of Porter Consulting.

"A dining venue can shape the perceptions of visiting parents and students in a positive or negative way, and particularly for schools with large residential populations, dining facilities affect social opportunities, a sense of connection with the university, and retention rates.

"Do we want to be a fast food nation? Or do we want to be something else? People sometimes want the convenience of fast food, but more often than they sometimes acknowledge, they want the experiential value of what can be offered in a well-designed residential dining venue that emphasizes a comfortable social setting and a visually creative dining environment."

A new appreciation for all-you-care-to-eat plans. "Schools want to offer students flexibility, and the conventional wisdom has been that declining balance and a la carte programs provide the most flexibility," adds Porter, "but that is changing.

"Take any high quality casual dining operation. Ask yourself: if I had unlimited access, and all-you-care-to-eat privileges, or a declining balance, with each item priced individually, which would be the more flexible plan?

"Administrators often associate all-you-care-to-eat plans with oldfashioned venues and menus, but that link isn't necessary, it is only one created by association. If you disconnect the method of service, more resident students prefer all-you-care-to-eat. It is not about gluttony, but about flexibility and choice. The old 19-, 14- or 10-meala-week plans are dinosaurs, but all-you-care-to-eat is not a dinosaur."

Managing the slow drip to finance. One of the largest issues for many college FSDs is the need to cultivate opportunities and data to make their case to administrations, whether it is for renovation dollars, meal plan changes, c-store locations or other needs.

"Directors need to have the data collection tools to understand how each of their business units is performing, because each has a different metric," says Porter. "Once they have this data, it's also critical that they interpret it and communicate it to administrators who have an influence on decisions that affect the department. They need to break it down by business, by segment, by daypart and put that data on a slow drip to the vp of finance."

K-12 Schools
K-12 school enrollments are still rising, but at a slower rate than in recent years. Technomic forecasts that K-12 sales will increase 3% in 2005; NRA forecasts a 3.5% increase overall. There are stark differences regionally, however, with declines forecast for the Northeast and Midwest, and large increases occurring in the west (Fig11).

Meanwhile, school nutrition programs remain a convenient focus for a growing social awareness of the impact obesity is having on our adult and child populations. While studies show the increase in obesity in school age children only mirrors that of their parents (Fig 12), and that declining opportunities for physical education and activities in schools are just as pronounced (Fig. 13), foodservice is often where the social spotlight is pointed.

Wellness takes center stage. A new "Wellness Initiative" added to the recent USDA lunch program re-authorization bill will require significant attention from many school nutrition directors next year, according to Barry Sackin, a principal with B. Sackin & Associates. It will require school boards to establish policy that coordinates nutrition education, school foodservice and physical education programs in their districts.

"In many ways it was a 'sleeper' provision," says Sackin. "I don't think Congress understood the transforming effect it could have. While no specific actions are mandated, and there are no real enforcement provisions, the thinking was that if elected board members must stand up in public and defend their policies, it will encourage them to support ideas that improve the healthfulness of the school environment."

While these policies do not have to be in place until the first day of the 2006 school year (July, 2006, for most schools), the realities of school procurement mean that most schools will need to at least acknowledge the requirement by having some policy structure in place before the end of this year. And getting the parties responsible for school meals, nutrition education and physical education to coordinate their activities within that timetable could be a real challenge, especially in large districts.

"School foodservice directors are in a good position to be an advocate for these programs and to take the lead with boards to move them forward," Sackin believes. "The School Nutrition Association will be putting a lot of emphasis on providing them with the tools to do so."

Fine tuning local policies. Many of the same large districts are also being challenged to rationalize their existing nutrition policies. "The concern over obesity has shifted the focus somewhat," observes Paul Schmidt, a partner in the consulting firm Nutri-Tech, Inc.

"You'd assume efforts to promote school nutrition and to reduce obesity would be congruent, but that's not always the case. Serving 100% juice to children fits a sound nutrition policy, but may conflict with obesity policy because of the high level of natural sugar in juice. At the same time, flavored water may fit an obesity policy, but not contribute to nutrition. Both beverages are approved in some districts, but a beverage that combined them in a 50:50 ratio might not qualify. Such issues need to be sorted out if suppliers are to provide products that help schools meet their goals."

The changing role of a la carte. One effect of the concern over obesity has been a move on the part of directors to promote participation in school meal rather than a la carte programs, a shift in direction compared to past years. For many, this is good strategy both from a nutrition standpoint and a financial standpoint. Computer technology at point of sale is also contributing to this goal, by helping schools identify more qualifying meals based on their components.

Technology as an enabler in these and other areas, "even though it was a long time coming for many districts," says Tami Cline, RD, of Cline Consulting. "In addition to helping to track and qualify meals, there are many new applications being developed in K-12 as directors seek to reduce labor in operations and provide more convenience to parents."

An example of the former, she says, is the use of scanners to input free and reduced meal application data; one of the latter "is to allow parents to pre-pay for children's lunches online. We are increasingly being asked to provide recommendations for technology practices that enable data-driven decision-making," she adds.

Food manufacturers are watching such developments carefully, adds David Magill, another consultant active in the field. "Many are re-formulating their products to fit nutrition program requirements and to make a la carte choices more compatible with school meal component specs."

New product development will focus on two areas, Cline suggests: items that boost participation in reimbursable programs, "such as those that employ kid-friendly licensed characters," and "new kinds of extended-life and shelf-stable products. These will find use in emergency situations, before and after holidays and when refrigeration and freezer space may not be readily available."

Finally, the competitive foods issue is still lurking on the sidelines. Concerns remain about "competitive foods" sold in the school environment by vending and other means in competition with foodservice programs. More districts appear to be cancelling or rethinking their exclusive pouring rights contracts, partly as a result of community pressure. The challenge schools face is finding ways to replace the revenue those contracts represent.

A GAO report last August, "Commercial Activities in Schools," noted that legislatures in 25 states have considered one or more bills to regulate such activities. (Appendix II of that report makes interesting reading and illustrates the wide variety of ways different states are seeking to address this issue). And a new GAO investigation of the competitive foods issue is now underway, with a report due sometime in the next 12-18 months; that will likely spur even more policy discussion of the issue.

Business and Industry
Foodservice programs in business and industry have finally emerged from the long slump caused by the business recession.

Turning a corner. "There has been a noticeable change in the 2004 data we've seen, showing that those operations with an excess have turned a corner, and are now reporting increased participation," says Tom Newcomb, president of Corporate Dining, Inc. "The increased costs and reduced participation levels of the last four years have clearly leveled off."

Subsidies are under control. Newcomb also observes that B&I operations showing a deficit—those that need subsidy—have been able to address many of the underlying causes and bring the deficits back into a more typical range.

"By the middle of 2002, operations in this category were averaging deficits in the mid-30% of net revenue range, much higher than had been typical," he says. "These are now down to the more typical mid-20% range, showing that operators have been able to make the necessary operational adjustments." Various types of service cuts, including dinner and late night service, have likely been key to such improvements (Fig. 17).

Benchmarking data from annual Society for Foodservice Management surveys show this deficit decline clearly (Fig. 20); they also show that while participation rates have remained relatively steady, operators have been able to raise check averages in breakfast programs even as they've apprently held the line on labor costs per transaction (Figs. 15, 16, 20).

Challenging the conventional wisdom. One interesting finding of recent Foodmark data has been that participation levels in accounts without a subsidy have been higher than in those with one (Fig.19). "This challenges the conventional wisdom that subsidies will lead to greater employee participation," Newcomb says. "It is something we will be looking at closely in the future to see if the trend holds up over time."

The return of catering. Catering volumes in B&I have also begun to return, with many of the recession-induced moratoriums now relaxed. Still, Newcomb observes "it is not necessarily the same type of catering the industry had become accustomed to. The frequency of high-end events still seems to be constrained, with much of the resurgence occurring at the mid-range level." At the same time, this loosening of corporate purse strings bodes well for 2005 numbers.

Corporate cultures are also evolving, says Newcomb, moving from higher to mid-range levels as more companies look to to make services more cost effective and improve cycle time. "Companies are looking to reduce real estate costs," he adds. "In the future, they see more employee flex-time schedules, more use of home offices and more hoteling of employees. This will provide a different kind of customer base in the next five years."

Healthcare
Foodservice sales in the healthcare segment are looking up, especially for those in acute care, which has suffered for several years under stringent cost control pressures that tended to put a cap on program investments. There seems to be increasing recognition of the positive impact retail foodservice sales can have as a contributor to hospital finances in many facilities, and pressure to raise patient satisfaction scores is causing many hospitals to re-think their investments in patient programs.

Construction is booming. The acute care community is entering the largest construction boom in half a century as old facilities are replaced, new hospitals are planned and new beds are finally being added in many regions of the country. Modern Healthcare magazine recently cited a survey showing that about 70% of hospital executives said their facilities were very likely or extremely likely to undertake a major expansion-within the next three years.

Much of the new construction is due to the proliferation of "specialty hospitals," often financed by physicians, which seek to attract more profitable "niche" business away from teaching and community hospitals.

More creative financing. That doesn't mean financing is getting any easier to obtain for foodservice projects, however. "If anything, directors have to be even more creative in the way they approach requests for funding," says Paul Hysen, a principal with the Hysen Group. "We've observed that midrange projects—those costing between three and five million dollars—can be the hardest to fund.

"One strategy can be to break a project into smaller pieces or phases that represent more easily justified amounts. Another can be to approach other departments with similar-sized projects, say rolling three together into a general renovation propsal costing $10 million. This is large enough to be taken to the bond market and can be a more interesting sized package for a finance committee to deal with."

SNGL RM W VU. Another trend fueling the construction boom is move by many facilities to convert large numbers of double occupancy rooms to single occupancy. Two forces encouraging this transition are the new federal HIPPA (Health Insurance Patient Privacy Act) rules and the greater acuity of the average patient, says Hysen.

"Hospitals see efficiencies in that they won't have to be as concerned about gender considerations and cross-infection issues," he adds, noting that the move may represent a significant opportunity for foodservice departments. "One result will be higher occupany rates at hospitals. You 'll see many of the new rooms designed to provide temporary sleeping options for a visiting family member. That can mean more guest trays or more guest visits to the hospital cafè."

Labor vs. service. On the operations side, the pressure is still to reduce FTEs," says Ron Kooser, a principal at Cini?Little. "Many administrators are evaluated based on a hospital's FTE counts compared to other facilities, even though that's too simplistic a

measure. The classic answer is to outsource-—to put the FTEs on someone else's payroll.

Playing the percentiles. "At the same time, administrators are trying to achieve higher patient satisfaction scores, and that means improving the level of service," Kooser adds. "Sometimes, a small increase in raw scores can result in a fairly large relative increase in your percentile standing in benchmarking programs. Playing the percentiles in this way can be a significant strategy, particularly from the administration's point of view. You have to look at the cost of increasing that satisfaction score, how it can be accomplished, and also at how much of an increase is required to significantly change the percentile category you fall into."

Room service takes hold. That is almost certainly a major reason so many hospitals have begun looking to the room service and spoken menu models for patient feeding, as a recent survey of HFM members underscores. (Fig. 21, 22). Although room service models vary in complexity, and sometimes are offered selectively to patient populations, they have clearly become one of the dominant trends in acute care foodservice.

An eye on Washington. Finally, everyone in healthcare—whether involved in acute, extended or private physician care—has their eyes on Washington. There are ample signs that Congress and the Administration will continue looking for ways to more tightly control the growth of Medicare and Medicaid reimbursements.

One sure indicator: a new report from the Congressional Medicare Payment Advisory Commission recommends reducing planned inflation-adjustment increases to reimbursements Medicare makes to hospitals and a freeze on those for nursing homes. It also recommends that such programs be modified so they tend to reward healthcare providers that demonstrate the greatest efficiencies. More pressure for every department to be a low-cost provider in the future.

Resources:
For information on the NACUFS Benchmarking program, contact (517) 332-2494.
For information on obtaining a complete copy of the SFM Benchmarking Survey Results, contact SFM at (502) 583-3783.
For information on HFM, its benchmarking programs and surveys, contact HFM at (202) 546-7236.
For a copy of the GAO report on Nutrition Education, GAO-04-528, or on Commercial Activities in Schools, GAO-04-810, go to www.gao.gov