By: Ted Farrand, FMP
President & COO
In the corporate dining centers at office buildings and other employee foodservice facilities, which are called “ON-SITE FOODSERVICE”, the factors that make them successful often depend on having the correct contract in place. If you work in an office setting and your company provides a dining facility, consider yourself lucky.
WHAT MAKES ON-SITE DINING DIFFERENT FROM OUTSIDE RESTAURANTS?
There are many behind-the-scenes costs required to provide even the most minimal foodservice for employee dining settings, so many corporations avoid providing on-site foodservice and employees must find their own source for meals, most often for lunch. The biggest difference between on-site dining facilities and outside dining options like restaurants and quick service outlets is that in the external market they have many more opportunities for capturing customers, unlike the on-site dining facility, which has a maximum number of potential customers—the number of employees at that location. Another significant difference is that outside restaurants can have a static menu, which has a higher profit margin. The on-site dining facility must provide a wide variety of menu items, often changing them daily to keep the program interesting for the available employee population. These all add up to higher costs of operation for the on-site dining facility.
HOW DO OWNERS/CLIENTS ARRANGE FOR ON-SITE DINING FACILITIES?
There are still companies that provide employee dining through an internal foodservice department—these are called “Self-Operated”. Many of these companies are emphatic in their belief that they can focus more on employee productivity, satisfaction and retention if they handle foodservice themselves. The vast majority, however, contract foodservice out to a third partyto avoid the hassles and focus on their core business.
HOW IS THE CONTRACT STRUCTURED FOR FOODSERVICE CONTRACTORS?
What motivates the contractor is the agreement that is in place. There are two basic types of management agreements or contracts—“management fee” or “profit and loss”, with many hybrids of these in place today.
Management fee contracts require the contractor to provide a foodservice program specified by the owner/client, and in return they are paid a management fee, typically as a percentage of revenues.
Profit and Loss contracts require the contractor to provide a foodservice program that they specify and control, and the contractor receives payment for this service in the form of profits that are generated by the foodservice operation.
The most basic management fee contract has the lowest risk to the contractor (of getting paid), and the highest risk to the owner/client (of a subsidy—where expenses exceed revenues). The operator is guaranteed a fee and unless that contractor performs extremely poorly, will continue to receive the fee for services. There are various limitations on these types of arrangements today, typically a budget adherence feature, where the contractor must maintain a budget of expenses to be below the total revenues, while also continuously working toward increasing revenues. Other hybrids include guaranteed break-even arrangements, where the contractor takes a risk of having to cover any losses (subsidy), either with a subsidy “cap” or splitting of any losses with the owner/client. This shifts more responsibility (risk) onto the contractor.
As we move farther up the scale of shifting risk from the owner/client to the contractor, we have the Profit & Loss contracts and its many versions. The pure profit and loss contract is very similar to a lease arrangement; however, the owner/client typically pays for all overhead (heat, light, space, maintenance and upkeep) and capital expenditures (equipment, furnishings). In this arrangement, the contractor takes most of the risks of losses and may take most or all of the profits, depending on whether a profit split or profit cap arrangement has been established.
Whichever arrangement is in place, the most successful programs are those that provide an opportunity for steady income to the contractor and strong control by the owner/client of the expenses necessary for this important benefit for its employees. What you see as the consumer is the operator’s skill in encouraging you to purchase meals from them, with creative menu items that are freshly prepared for you. If all the contract conditions are correct, it is a true win for the owner/client, the foodservice contractor, and most importantly, for you.