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Eating into Costs

19 February 2010

Caterers are under pressure to reduce costs as their clients adjust to the economic downturn. The pressure is on from subsidies to sales for those managing food service operations to play their part, as Peter Pitham explains

BEFORE STRUCTURING YOUR STRATEGY for managing your food service operation in difficult financial times, you need to have a clear understanding of the internal mechanics that make up your catering subsidy.
Do you understand your subsidy. ‘Nil subsidy’ in effect means is that the catering operation is being provided without any financial input from the client company other than premises and utilities. However, the reality is often somewhat different because some client and food service management companies use the income from ‘hospitality sales’ to offset the overall subsidy This can be part of a commercial agreementbut more frequently the hospitality is being provided to client staff, and therefore, the client organisation is still ‘subsidising’ the catering operation. If a profit is made – this is known in the trade as ‘wooden dollars’ - it is the client company’s money being moved internally. As a result the cost doesn’t sit within the budget holder’s cost centre but is allocated to departmental cost centres. Be aware that it is not unusual for an inflated cost to be used for hospitality tariffs which ensures the food service management company achieves the ‘nil subsidy’ agreement. It is likely that most ‘nil subsidy’ contracts would not be viable without a hospitality service running alongside or for a significant number of staff on site.
Sales are clearly a very important element of any catering budget. Equally as important is the control of costs that produce the sales since any mistakes here go straight to the bottom line as a debit. There can be several income streams that make up the total sales figure, however, they will be offset by a number of cost elements eating into the profit generated by the ‘sales’ and this becomes the catering subsidy.
It is important to manage the sales and costs effectively. It is a mistake to think that having a small number of customers using the catering operation will result in a lower cost of catering.
The contribution to the cost of catering will be generated by the volume and spending power of the customers. Therefore, if the number of people available to use the service is low, there will be little or no profit produced to offset the operating costs. Operating costs are generated regardless of the number of people using the service although the scale will vary dependent on the nature of the service provided.
Competitive tariffs
In the main a competitive tariff to the high street will achieve a reasonable gross profit. It is essential that customers feel they are receiving good value for money. Ensuring that the price of a meal is slightly less than can be bought locally will help the caterer achieve high volumes of customers. The greater the usage of catering services by the client staff, the more opportunity the caterer has to generate profits to offset the operating costs. If the client organisation has a policy of providing low cost meals to their staff, then the tariff will be set at a low level – and therefore reduce the gross profit. This in turn can significantly increase the cost of the catering serivce.
It is vitally important that the caterer attracts high volume of customers to use the facilities by structuring a well thought out marketing campaign. Loyalty schemes, special offers, special theme days, ‘2 for 1’ offers can all help to encourage more custom. Staff training can also play a major role in increasing sales. Major high street chains invest heavily in the training of staff to ‘up’ by, for example, matching food with drinks by encouraging at the till additional purchase of a cookie or cake with the coffee, or to purchase a be purchase a large beverage in preference to a medium. Staff in high street stores are well trained to up for good reason, as sales can be increased by an average of 11 percent. A little creativity can go a long way in reducing costs whilst at the same time, increasing sales.
Purchasing
Food prices have a tendency to ‘creep’ and so attention here may well pay dividends. It is better to work with your suppliers in a friendly business like manner as they can assist when you do need help. I recommend that you have several suppliers in each commodity category - meat, fish, dairy, bakery etc – and review prices on a like for like basis regularly. Sometimes a well timed call to one of the suppliers can often make a difference especially if you point out that one of their competitors are a little more cost effective on certain goods.
Purchasing consortiums can also be worth investigating as you will be making use of their volumes which often run into many millions. You can take advantage of this leverage in exchange for paying them an agreed fee. Look at a shopping basket of goods with your own invoices and compare against what the consortium can purchase for. Also, ask them how long they are prepared to hold prices for and then monitor against. The difference between your purchasing power and a purchasing consortium could, make the difference between a zero subsidy operation and one that has a catering subsidy. If you do not feel comfortable with managing these elements yourself then an FCSI consultant will be able to look into these areas for you and structure a plan
for your team to work to.If you employ a food service management company, then your approach will be a little different although the disciplines will be similar. Work with your caterer’s management representative to establish an agreed business plan that reflects your own requirements. They will have their own dedicated nominated suppliers, however it will be a worthwhile exercise to benchmark prices. There are a number of FCSI consultants who can assist you with this.
While the day to day responsibility for managing the catering operation rests with the food management company, you should not abdicate total responsibility as the most successful catering operations are where food service provider and client work closely together.  A clear understanding of your requirements and providing support when requested will allow the contractor to be creative, producing high levels of service and an exciting food offer. Transparent financial agreements will ensure that you know exactly what you are paying for and that cost expectations are met.
Planned marketing campaigns can often produce the results required to encourage customers to use the catering services. Professional and well designed marketing materials can be supplied by the food service management company to promote new service initiatives such as food theatres or new products to achieve maximum impact.
Your food service management company will also be receptive to any proposals for profit share. Once the budget has been set you may wish to offer an incentive to your caterer for any savings achieved. If they are able to improve the gross profit, which in turn reduces the overall subsidy, then offer a profit share to them. However, you may also wish to structure an arrangement for them not achieving agreed targets by linking their fee to performance. In this way you are enforcing the importance of achieving the financial targets in a fair and equitable manner.
With a food service management company, it is vitally important that you have regular structured meetings to discuss past and future initiatives that will assist in contributing to an increased level of sales. A business plan needs to be agreed and structured so that all parties know what is expected of them. Performance measuring tools need to be in place and actively monitored, to identify good and poor performance. It is also worth taking the time to analyse the catering invoice as additional costs can often creep in.
To summarise it’s not easy to manage an effective catering operation but with a few simple steps and procedures, you will be able to ride out recession with a little more confidence. Food service consultants provide support for all of these areas and have assisted many organisations with operating efficient and cost effective catering services.
● Peter Pitham is an independent FCSI consultant and MD of Catering Consultant Bureau. www.fcsi.org.uk


RECESSION-BEATING MENU
Work hard to keep sales levels high: Customers need to be encouraged to use the services and spend their money. Reward them for their loyalty and maintain their interest.
Tightly control costs: Check that you are buying the right products at the right price and you only buy what you need. This applies not just to food costs but also labour and sundry costs.
Watch what is happening on the high street and adopt similar strategies: They are the competition but also have a great deal of expertise and resource so don’t be afraid to imitate.
Work with your caterer to achieve efficiencies: Use a ‘carrot and stick’ approach: reward when cost savings are achieved without reducing the level of service and ensure the pain is shared if costs are not being controlled.


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