Today’s profit and loss foodservice contracts demonstrate the unique set of challenges facing many market sectors as the foodservice industry grapples with re-inventing itself post-pandemic. With COVID-19 in the proverbial rear-view mirror, owners, contractors, and foodservice customers in the corporate, higher education, and recreation/tourism industries must take this opportunity to modify the profit and loss foodservice contract for fiscally sound success. The question is, how does that happen and what should you look for?
A Little History
With nationwide pandemic closures, many contractors were put in a previously unknown position of having to shut down operations, furlough employees, and mitigate their damages in this new environment. Additionally, there were material changes in operations, many beyond the control of the foodservice contractor. For example, some educational institutions chose to conduct classes online, substantially halting the need for foodservices for most on-campus student residents. Office managers determined that work from home was a new long-term option for their employees. Lastly, some departments of health changed regulations, including those regarding methods of services, effectively eliminating customer self-serve options.
As a result, many foodservice contractors with profit and loss contracts could not sustain this financial agreement, resulting in their approaching clients to negotiate and amend their contracts to a management fee or cost-plus subsidized contract. Essentially, the basis for their profit and loss arrangement, primarily those being known operating hours, days, and client population, was fundamentally changed. Clients agreed to these amendments to prevent losing their contractors. In summary, the Covid era brought in a new paradigm to contracted foodservice, the modified foodservice contract.
Now post-pandemic in 2023, these contract changes still present a challenge. Permanent alterations to workplace population, changes in points of service (served vs. self-serve options), and updated foodservice health codes are the primary drivers for this new normal in foodservice contracts. These drivers result in a challenge and opportunity for those site owners and contractors with subsidized contracts that originated as profit and loss arrangements. Many contracts do not have the minimal customer population and/or minimum revenue available to support a profit and loss contract, directly conflicting with Ownership’s financial and corporate culture restrictions on subsidizing foodservice.
Owners must critically think about their corporate financial, cultural, and Human Resources goals and how these pertain to their foodservice contract. Owners who must maintain a profit and loss foodservice contract have the challenge of finding the means of meeting the requirements of the foodservice contract to make a profit. This will entail changes in the foodservice program, both small and large. These may include changes in foodservice mode of service— self-service or served, menu type, menu pricing, hours of operation, kitchen usage; onsite or offsite production— ghost, commissary; methods of order placement; and staffing. Owners must take all possibilities into account, allowing for the critical customer and revenue base to be served to support a profitable bottom line while meeting the cultural, financial, and HR goals of their company.
Once these changes are identified, Owners must negotiate these new terms into their foodservice contract. A cost and time-efficient mode of doing this is for the Owner to issue an Invitation to Negotiate (ITN). This is a means of renegotiating an existing contract with the Contractor rather than going through the time and cost of a full Request for Proposal (RFP) process. The investment in effort necessary for the changes in program and contract re-negotiation will allow for a win-win-win outcome for all stakeholder parties, the Owner, Contractor, and foodservice customers.
By: Tim O’Mara | Project Manager, Management Advisory Services