Keeping the Food Service Self-Sustaining

Everything started out well. The new food service contractor breathed fresh life into a tired employee dining operation at a corporate headquarters. They seemed to be on the way to a long-term successful relationship under a “P&L” (profit-and-loss) contract; the contractor takes the financial risk.

But, not long after this promising start, the company began reducing employment. Over six months, café sales slid 14% on a 13% decline in customers. Catering sales dropped by 44%. The contractor claimed it was losing money at a rate of 3.6% of sales and asked for a subsidy.

The company didn’t see a food service subsidy as part of its cost-cutting plan. We were asked to evaluate the situation and determine how the contractor could make a profit without a subsidy.

What We Found: The operation was generally good and prices were reasonable. While there were fewer customers, they were spending more than before the layoffs, indicating they were satisfied with the meals and service.

But we also found:

• Cash control was nearly non-existent. At least one cashier might have been diverting receipts to her own pocket.
• The executive chef spent his time making pizza, not managing the kitchen.
• There was no food safety program.
• Sanitation in the kitchen and support areas was deplorable.
• Most of the contractor’s reported loss was due to overcharges for its overhead costs.

But there was a sunny side. In its consolidation, the company closed an outlying building, bringing some 300 employees into the main building. The contractor could close a small, unprofitable kiosk and eliminate one position while gaining 300 new potential customers.

The food service had about $2 million in sales, plus $200,000 in vending sales. A reasonable pre-tax profit on the combined sales would be about 7%, or $154,000, excluding the overcharges on overhead items.

We advised our client that the contractor could make a profit without a subsidy. We discussed the issues candidly with the contractor’s senior management. They tightened cash controls, instituted a new sanitation program and inaugurated several new promotions.

Within six months, sales had increased and the operation had reached profitability without a subsidy.

Clarion’s Role: We showed our client and the contractor where the problems were and recommended workable solutions that ensure the contractor a reasonable profit at no subsidy cost to the company.