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Cream, but No Gravy

15 April 2007

Caterers play a key role in the ethos and aspiration of an organisation. Good food retains as
well as sustains its staff. Subsidies and employees’ cash are just part of how caterers make
a profit, but there is other income you don't see. Caterer, Nick Parker tells all.

I MIGHT HAVE HAD THE PRIVILEGE of speaking to you before, perhaps at one of my presentations. You will know that Bite champions transparency, provocation (with positive intent, of course) and partnership. This article is no different.

Starting with the end in mind I considered what you, the FM, would value learning about, (assuming that you wish to be recognized by your work colleagues as administering a great catering service). As managing director of a contract catering company, there are some perspectives I could give you.

How much money do caterers need to make and how do they make their money out of you? Those of you with a subsidised contract will be paying this money currently, whether you believe it or not.

Some cynical types will be questioning why I would tell you the secrets of my trade. The simple truth is that it makes good business sense: adversarial buyer versus supplier thinking is old school. It’s OK for your transactional buying projects such as buying new office furniture where you may never need to deal with the company again. However, catering is about relationships. As a client you have got to work with your caterer every day for years. Relationships are built on trust. Trust does not happen if both parties are into ripping each other off.

So, how much money does a caterer need to make? Using a smaller contract as an example (there will be more of you dealing with this size than with larger contracts):
1. The caterer can only be in business if they make a profit out of your budget. If you are not happy with this concept keep your catering inhouse.
2. It costs a caterer £20,000 per year to run a bare bones, small contract (£200,000 pa say) of 3 years duration. Major cost elements for the caterer include:
● the cost of winning the contract. With conversation rates of 25 per cent, you will be carrying the cost of three failed sales attempts to win business by your caterer.
● the cost of 1/10th of an area manager’s time and a part of their bosses time too
● processing invoices, payroll and other administration
3. As the caterer is typically operating at 70 per cent of head office capacity and needs to make a profit they look to earn £30-35,000 from your business. A no frills, 3-year £200,000 contract therefore should cost you around 15-17.5 per cent of turnover. You should expect that it could cost you the upper end of this band where you have asked the caterer to take on more risk such as guaranteeing fixed costs for the year ahead.

Those with a fixed management fee might be thinking that the above does not apply because you have negotiated hard and achieved a £10-15,000 fee (5 -7.5 per cent of turnover). But think about it, what company would get out of bed for £10-15,000 gross earnings a year, before paying for processing all those invoices, chasing suppliers, running training programmes, etc?

Unless you can confirm it otherwise, your caterer is finding another way to make another £20,000 out of you. On their supplies, the caterer could be taking a retrospective discount on the ingredients going into your contract. A cucumber costing 50p might be supplied into your unit for 55p. All those 5ps are collected by the supplier and paid as a cheque at the end of the quarter to the caterer.

Additionally, they could be taking a listing fee - a lump sum payment for the right to supply a caterer. Ultimately this too creates inflated prices into unit because the supplier has to recover his listing fee somehow.

For cost plus contracts (your monthly subsidy varies in line with varying costs) the chances are that your budgets are being exceeded because of these inflated ingredient prices. If it is not obvious in the food budget lines they could be shuffled into other budget lines.

If you have a fixed price contract, the caterer could be buying cheaper food for the same money and keeping the difference. You might be thinking that because it’s a fixed cost you don’t pay any more money, but as the food quality goes down fewer staff eat the food. Consequently the subsidy per employee goes up. Then your company should be asking whether the service is still the economic benefit to staff that it set out to be.

However, you do need to accept that the caterer needs to make somemoney out of your budget and you need to accept that if you ask him to do additional work, outside the terms of the contract, such as specify, source and purchase additional equipment, it will cost him time and money to do so. It is therefore reasonable for him to charge you a margin. Is the caterer choosing to be explicit, covert or just ignorant about this?

Whatever the answer, it is in your interests to find out. But there are some transparent reasons for a catering company charging less. These might be because:
● they are growing their business or are getting established in the marketplace
● because they are ignorant of the true costs of doing business - this should be a danger signal
● because you can save them money by not asking them to do things that cost money such as not going through a long tender process (one with 6-12 other companies can cost caterers £15,000 each time), or having a contract for less than 3 years -the longer the contract the more you should save through saving the caterers sales costs.

The point here is that you need to find out why he is charging you less – in total not just the management fee that you can see. It’s all those other hidden things mentioned above. A challenge for client facilities manager is that it is difficult to get a straight answer from most caterers. It’s not the fault of the sales and operations people - they are just doing what their leaders are asking them to do in order to get paid their salaries. When you deal with old, established caterers (and individuals who have split off these companies to go it alone) what happens is this:
● You speak to a salesman. They are unaware of the cost of operating a contract and are simply tasked with winning turnover (and bonused this way). They sell you a contract with a low management fee and you think you are on a winner. The salesman has got his bonus but you never see him again.
● You now deal with the operations person. They are tasked to earn the 15 per cent I identified above working with a low management fee, an operations budget that is not operationally deliverable and a company system geared to making the £20,000 through retrospective discounts and other hidden earnings.

Your contract is set up to fail before you even start. How can you create an agreement that delivers great food? Firstly, make sure that the agreement allows the caterer to earn 15 per cent of turnover (or more for overachieving or taking on more risk) without having to resort to hidden earnings. Of course, make the earnings performance linked.

Cost plus and fixed price contracts don’t work in the long run. Neither delivers a win-win for both parties. You might think you win with a fixed price contract, but the caterer will be forced into reducing the food quality. With the resulting declining sales you are forced to find a new caterer and so both parties are in a ‘loselose’ situation.

The only route for success is either a commercial contract - there has to be sufficient numbers of high income people on site. However, less that 1 per cent of all contract environments are suitable for this. Or, via a contract that has a performance element in it - the caterer earns a percentage of sales. A capped subsidy with share of savings is Bite’s favourite arrangement because it has the best elements of fixed price and commercial.

Find a catering company where the operations and sales functions are inextricably linked. Make sure there is joined up thinking in the company. Ask those challenging questions and make sure you meet (and trust) the senior people in the company before you enter contract discussions.

I borrow my last words - they are as true today as when they were scripted in the eighteen hundreds by the English philosopher John Ruskin: “There is hardly anything in the world that some man can not make a little worse, cannot make a little cheaper and the people who consider price only are this man’s lawful prey.”

● Nick Parker is managing director at Bite Catering

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