To the degree that a rising tide lifts all boats, U.S. economic indicators for 2004 promise a classic election year boomlet, with positive implications for virtually every onsite foodservice segment (Fig. 1).
The country is enjoying a rebound in manufacturing, consumer confidence is rising and the GDP is on an upswing (Figs. 2 & 3). On the cost side, increases in wholesale food prices are expected to moderate (Figs. 4 & 5).
Throughout 2004, monetary policy will likely remain loose and inflation will be modest. Federal tax cuts will continue to bolster consumer spending. And the average taxpayer (who is also our readers' average customer) will typically find his or her tax refund larger than it was last year. So what's not to like?
Well—no economic picture is perfect. In particular, the slow pickup in employment (and the continuing trend toward global outsourcing) worries B&I operators, since it suggests white and pink collar places of employment may not return to peak, earlier population levels.
In higher education, state budget shortfalls have resulted in funding cuts and put more pressure on institutions to raise board rates and increase expected "contribution" levels from dining departments.
At the K-12 level, similar forces (and constrained Federal reimbursements for NSLA meals) have put increased demands on foodservice departments to generate income from a la carte sales.
Finally, a fifth straight year of double-digit healthcare cost increases, and the upward pressure they are putting on employee benefit costs, is affecting everyone. While the difficulty of finding em-ployees is easier than it was a few years ago, the cost of putting them on the payroll is becoming more problematic.
Where part-time employees receive healthcare benefits, these positions are becoming less viable; where they do not, the rationale for replacing some full time positions with part-timers is becoming stronger. Unions are making this a bargaining issue and workers are becoming more aggressive in seeking wage increases to compensate for the impact rising out-of-pocket healthcare costs are having on after-tax incomes.
So while issues like these temper any sense of unbridled optimism, the year ahead still promises to be a good one compared to the recent past. Also, savvy observers will always look beyond the short-term to the bigger picture. A few significant longer-term trends:
The remainder of this article looks at operational trends that are affecting FM readers in particular segments. For a broader perspective, review them along with those mentioned in our forecasts from the February 2001, 2002 and 2003 issues.
The swelling ranks of college and university enrollments will increase 1.3 percent this year, with similar increases moving through the pipeline over the next decade (Fig. 7). Industry consultant Technomic forecasts a 2.5% nominal growth in foodservice sales for college foodservice next year. Aggregate sales in the segment exceed $13 billion, according to NRA estimates.
A dominant trend in campus dining is a continuing decline in board plan participation and the financial implications that has for campus foodservice economies as they shift instead toward retail, c-store and hybrid foodservice models. Some of these are illustrated in Fig. 8, which shows several financial ratios for college and university operations as measured by benchmarking studies performed by the National Association of College and University Foodservices (NACUFS).
Some key trends to watch:
The upshot: keeping the books balanced for a campus foodservice department is tougher today than ever before. Here's how directors are responding:
Tighter financial controls. FSDs are seeking to increase the sophistication of their financial controls as a tool for achieving their goals of revenue growth, margin management and customer satisfaction. Food and service innovations remain important, but when it comes to meeting administration expectations, "it's the numbers, stupid."
Protecting board plan bedrock. As retail operations and c-stores have become a bigger part of overall campus foodservice volume, the traditional board revenue stream has become less predictable and less able to cross-subsidize other foodservice and campus programs. Directors are fighting hard to protect the core board programs and mandatory participation requirements that remain.
"There's an old adage that you make your money in board operations and you make your reputation in catering," says Art Korandanis, director of auxiliary services at College of the Holy Cross, Worcester, Mass. "Today you'd modify that to say ‘in catering and retail operations,' but the board revenue remains a critical part of most programs."
A long-time member of the NACUFS benchmarking committee, Korandanis knows what he is talking about. But despite that essential truth, a recent study by Cini-Little International shows just how fast the word "mandatory" has disappeared from resident student plans in the past few years. (Fig. 10).
As the unbalancing effects of this shift become more apparent to administrations, at least some observers are predicting that more colleges will seek to restructure undergraduate programs to give the pendulum a push back the other way in coming years. Stay tuned.
The curse of cash equivalency. Like it or not, demands from students for the right to use meal plan credit in retail and other operations means that meal equivalencies are here to stay. Some believe equivalencies may be the final nail in the coffin for the once-reliable "missed meal factor" revenue that so many departments relied upon in the past.
"Students have grown more sophisticated about using meal plans as a form of ‘cash tender,'" says Jim Bingham, director of foodservice at Rochester Institute of Technology, Rochester, N.Y., and another NACUFS benchmarking committee member. "They see ‘missed meals' as ‘lost money,' and look for ways to spend that currency any way they can."
Money spent that way generates lower margins.To cope with that, more schools have replaced traditional cafeterias with "marketplace" concepts that tend to reduce the need for equivalencies. It's clear that unprofitable retail operations will be under increased pressure to run stronger P&Ls and manage operations more tightly. A key need will be to ensure that they are permitted to occupy prime campus locations and are operated to fully capitalize on campus traffic patterns.
C-stores and hybrid operations. Campus c-stores have helped many schools more cost-effectively satisfy retail and 24-hour service demands, but they also come with a downside: lower margins because of the high cost of goods sold as a percentage of revenue when compared to traditional foodservice operations. As c-store sales have become a larger factor in campus budgets, this discrepancy has become more troubling when it's time to balance the books.
Higher markups are not a solution. Streetwise customers have grown sensitive to price comparisons and the perception that on-campus operations are trying to "make money" at their expense.
One strategy has been to convert c-stores into "hybrid" operations, offering value-added items in addition to pre-packaged products. That lowers food costs as a percent of revenue but tends to increase labor, making this "a delicate balance to achieve," says Dave McConnell, business manager at Washington and Lee University, Lexington, Va.
"Just as in managing the calculus of retail and board plan operations, it's a matter of how hybrid operations are structured in terms of operating costs and what they have to recover," McConnell adds. Look for lots of experimentation as college operators test concepts that seek the best of both worlds.
Coping with contributions. Finally, while it's no secret to the public that most colleges are struggling today with budgetary shortfalls, it's not typically communicated that they often look to campus dining programs for extra "contributions" that can help pick up the slack.
Sometimes that contribution appears as its own line item on the department P&L, but it just as often will show up as indirect cost allocations laid against foodservice for administrative overhead, facility square footage, larger shares of utility bills and so on.
These demands are growing, especially among public institutions that have seen significant cutbacks in state funding. It‘s probably one reason board rates are increasing faster at public institutions than at their privately-operated counterparts (Fig. 9).
As one of the few revenue-generating businesses on campus, dining departments should be able to capitalize on this supporting role with their administrations. But the truth today is that excess cash has become harder to generate, even as funding for renovations and other departmental needs is getting harder to sequester. Finding effective ways to communicate the implications of such operational complexities to administrators will be one of the larger challenges facing college FSDs in coming years.
"It's one of several reasons it's so important to benchmark your numbers," says Korandanis. "When it's time to make a case to your administration, you need to be able to show where, when and how your customers are spending their money, and how your numbers stack up to comparable schools. "
If you had to sum up the key issues that will face school foodservice in 2004 with a single sentence, you can be sure it would include the words "obesity," "a la carte," "reimbursements" and "frustration."
Just like their college brethren, K-12 schools are under pressure to generate more contribution revenue for their districts, and this often pits budget and business interests against school meal and nutrition goals. Overall school budgets are tighter than ever, even as cash-strapped districts are facing additional costs in trying to meet the requirements of the 2002 No Child Left Behind (NCLB) legislation.
Overall foodservice sales in K-12 are still growing—Technomic forecasts a 1.5% increase for 2004—but the rising tide of enrollments seen in recent years is peaking and will begin a slow decline after 2006 (Fig. 14). That trend has already begun in the lower grades. Here are some of the other dynamics at work:
Closing funding gaps. A widening gap between the cost of operating school meal programs and the revenues that support them (Fig. 13) is a major concern and at the heart of the conflicts many districts have over a la carte programs. Much of this gap is due to the declining portion of expenses covered by federal meal reimbursements, and most schools make up the shortfall by expanding a la carte sales, which do not have to meet federal nutritional guidelines.
Obesity and the battle over a la carte. One of the most cited data tables of 2003—statistics from a survey on childhood obesity conducted by the Centers for Disease Control and Prevention—has become a standard illustration for news reports that would point a finger of blame for childhood obesity at U.S. public schools (Fig. 12).
"Remember, there is an important distinction between the school nutrition programs that our members run and the school foodservice businesses that they are asked to run," cautions Barry Sackin, staff vice president for public policy for the American School Foodservice Association.
"The public has difficulty differentiating between school meal programs and the food available generally in the school environment," he adds. "If this distinction is not made, the result is the schizophrenic picture of school foodservice that is so often portrayed. The tension between the nutrition business and the foodservice business is played out on the a la carte field."
Regulation of competitive foods. Food sold outside of school meal programs—a la carte offerings as well as food sold in vending machines, fund raising and other programs—can all be considered "competitive foods" to school meals (Fig. 12). Yet foodservice participation rates—critical to the financial health of the programs as a whole—often depend on some availability of competitive foods, especially when campuses are "open" and students can go elsewhere if they want.
Today, such conflicts play out over and over again in the locally funded school environment. In 2003 alone, over 20 states floated bills seeking to regulate the sales of competitive foods in schools in one way or another. Clearly, there will be more efforts along these lines in the future. Similar efforts by some cities—such as recent moves in Philadelphia and New York City to ban sales of soda and snacks in public schools—ensure the segment's "food schizophrenia" will remain a chronic condition for the foreseeable future.
Cross subsidization. Like colleges, school nutrition departments have seen their financial dynamics grow more complicated. To cope, they are managing an increasing variety of meal occasion activities (Fig. 11) and looking to become outsource suppliers to other organizations as a way of making greater use of production capacity and driving additional revenue to their programs.
More sophisticated leveraging of commodity allocations. The days when schools struggled to find creative menu applications for USDA commodity allocations have declined as more districts have banded into commodity co-ops and sought to process commodities more effectively into value-added products. (See related story on p. 42.)
More fresh fruits and vegetables. Finally, many schools are looking for ways to fund more purchases of fruits and vegetables for their programs, especially items that are more "acceptable" to young customers. Although this typically raises food costs, the success of USDA's Fruit and Vegetable Pilot Program and efficiencies schools have gained from participating in the Department of Defense's cooperative produce purchasing program suggest efforts along these lines will continue. Look for a lot of experimentation in terms of new "delivery strategies"— kiosks, hallway carts, in-classroom snacks, innovative packaging, etc.— and promotional efforts in support of this activity.
B&I / Corporate Dining
Onsite dining in business and industry has long been the segment most dependent on the health of the U.S. economy as a whole. As such, it is now coming out of a cyclical downturn, with operators seeking to reclaim ground lost over the past several recessionary years.
NRA forecasts a significant uptick (3.7%) in overall B&I sales this year, and B&I will benefit from rising consumer confidence, greater discretionary income levels and higher employment levels in 2004.
At the same time, key performance indicators from benchmarking surveys fielded by the Society for Foodservice Management (SFM) suggest that while sales volume is returning, dining operations are again facing what might be termed the "new/old realities" of the marketplace:
P&L vs. subsidy. For a variety of reasons, including rapid downsizing during the recession, the percentage of B&I accounts operating with a subsidy has significantly increased. About 65% of contracted B&I locations now fit that description, according to SFM data.
Corporate population shrink is part of the reason, but as client organizations evaluate this trend, "higher-end culinary programs will be scrutinized," believes Tom Newcomb, president of Corporate Dining, Inc., the consulting organization that managed the SFM survey.
Many of these programs tend to have higher labor costs and while they add excitement and entertainment value to cafés, they likely reduce the overall performance of some B&I operations, Newcomb believes.
Data also show a wide gap between the results of the best-performing operations (the top 25 percent) and that of median and average operations. Top performers have significantly higher check averages and productivity, a lower cost of goods and labor per transaction, and better participation (Fig. 19).
A return to blocking and tackling. Getting subsidized operations "not to best in class, but to zero subsidy" could represent over $700 million a year, Newcomb calculates, and will become a major focus of clients in 2004 and beyond. "Some of these operations are small and will remain subsidized, but the overall picture should serve as a wake-up call for the segment," he adds.
That return to basic mealtime "blocking and tackling" can also be seen in the declining number of locations offering "add on" services of various kinds, a popular diversification in the 1990s.
At the the same time, B&I labor cost per transaction declined 9 percent, total operating costs per transaction declined 20 percent and cost of product per transaction remained almost flat between 2000 and 2002, according to SFM data. "That suggests management companies have done a pretty good job of managing their costs," says Newcomb. Another possible factor: the increasingly fierce competition among contractors for key B&I accounts, with ever-tighter margins the inevitable result.
Breakfast and grab & go snacks are growing. A notable bright spot in B&I is the increased participation reported for breakfast programs (Fig. 15). The availability and variety of grab-and-go and convenience retailing items, available in cafés and campus c-stores, is also growing, along with other self-service operations models. These allow operators to capture add-on sales during employee "grazing" breaks with only a modest increase in labor costs.
Looking for new models. With the average employee population size at B&I accounts on the decline, clients and management companies are seeking to more closely match service options to individual locations (see a typical analysis in Fig. 18). This is one factor driving vending, office coffee service and other retailing options, a service category NRA predicts will grow 4 percent next year.
Healthcare remains a segment under constant pressure. As spending on healthcare continues to grow faster than the country's GDP, there have been declines in reimbursement rates from states, local governments, Medicare and Medicaid. Although "managed care" was only temporarily effective in slowing that growth, "managed costs" and cost containment efforts still dominate hospital management strategy.
The good news: foodservice sales in healthcare should rise 3.5 percent, to almost $21 billion in 2004, according to NRA.
Rising patient counts (and resident counts, in extended care facilities) are one reason. Licensed bed counts began increasing in 2001 for the first time since the mid-1980s.
In coming years, this trend could well give the segment more growth than it has seen since the mid 90s. Already, ER departments around the country are operating beyond capacity, with many hospitals putting new admissions "on diversion" more and more frequently.
Growing cash revenue. That said, hospital foodservice revenue remains dominated by cash income from staff and visitors (Fig. 23). Benchmarking figures from HFM (National Society for Healthcare Foodservice Management) show that cash revenue at the typical single-site hospital has grown over 45% since 1998.
Funny money? Foodservice departments are often expected to provide services like catering, floor stock and "employee discounts" without full-cost chargebacks. Fig. 20 shows how such "foregone revenues" can add up for the foodservice department in a typical hospital.
"Regular credits" (inter-facility departmental transfers) only pay part of the costs of services (e.g. catering billed at food costs only). Other costs are real, but only show up as general expenses for the department. When "foregone revenue" equal to making these services break-even is calculated, it can add several dollars to a hospital's per patient day costs.
"Foregone revenues can badly muddy foodservice cost accounting in hospitals," says Mike Giuffrida, executive director of HFM.
"Educating healthcare executives to understand the hidden costs of these services, and to appreciate the real value of cash revenue a foodservice department can generate, is a major challenge for directors seeking to better manage their departments, expecially given the cost-containment atmosphere of today's healthcare environment," he adds.
Following the B&I model. One upshot of the boom in non-patient foodservice is that hospital cafés are becoming more "B&I-like" in terms of their offerings and in how their operations are managed. Trends like marketplace serveries, maximized revenue from OCS , vending and vending contracts, self-service, grab-and-go, and P&L venue management are just as significant as they are in B&I.
The boomers are coming. Looming on the horizon: an aging boomer generation that will cause an expected doubling of the senior population over the next three decades. They'll be responsible for an increasing share of hospital admissions (Fig. 22) and will bring their by now well-known foodservice preferences and expectations with them.
Infrastructures are aging. Many of today's acute care facilities were built in the healthcare construction boom days of the 1960s and 70s and are showing their age. Experts are predicting that over the next few years many facilities (including foodservice departments ) will finally get approval for long-delayed capital improvements and renovations.
Staying "inspection ready." With "surprise inspections" by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) set to begin in 2006, hospitals will be expecting all departments to implement strategies that keep them inspection-ready. For FSDs, that will mean stricter Hazard Analysis of Critical Control Points (HACCP) programs, better documentation and more training to ensure that employees are prepared for surprise inspection visits.