The Big Squeeze
There has been no relief on the rising prices front, and many agree it's going to get worse before it gets better. Are there any ideas operators haven't tried yet to save a buck? FoodService Director examines how operators in the four major markets are coping and what their strategies are for the coming year.
President-elect Barack Obama put it succinctly last month in outlining his economic plan: It’s going to get worse before it gets better. There will be bailouts, and more attempts at handouts, as several key industries struggle with their financial crises.
Noncommercial foodservice operators, however, aren’t looking for government help. Many of them accepted economic reality months ago (See Rising Prices, June 2008) and have responded in typical entrepreneurial fashion: They’ve continued to work to keep customers satisfied, attract new business wherever possible and control costs as best they can.
As we prepare to roll into 2009 and a new political era, FoodService Director examines each of our four major markets, gauging the mood of operators and finding out how they are surviving—and, in some cases, thriving—in this ever-tightening economy.
Captive Audiences Make Rising Prices More Manageable
While college and university directors are watching rising prices as close as any operators, many are finding that although it’s become more challenging to keep up with planned initiatives, increased enrollment has delivered a captive audience that seems to be here to stay.
At 44,000-student Pennsylvania State University in University Park, Lisa Wandel, director of residential dining, says her department’s sales are up 12% to 16%, and since the department planned ahead for rising prices, her food costs have only increased by 1.5% since last year.
“Sales and participation are up due to record enrollment at Penn State this year,” Wandel says. “However, last spring when we developed our menu for the fall, we knew that food prices were going up. Rather than running four different menus all over campus, we had everyone follow the same cycle menu. We also looked at our menu mix, and fortunately some of the cheaper food items—things like chicken and waffles or mac and cheese—are still popular with our students. We love the food costs on those, so there are still some cheap foods that you can balance out with more expensive items.”
However, Wandel says some changes are on the horizon.
“We’re going to be controlling portions more carefully,” Wandel says. “We’re going out and talking to our servers about it because they can really make or break us if they have a heavy hand. We’ve already begun controlling the entrée numbers and that has helped a lot. We’re thinking of going to smaller trays, but we’re not ready to try trayless yet. Since the department’s volume and sales have been much higher this year that seems to hide all sins for now.”
Staying on track: At 10,000-student Villanova University in suburban Philadelphia, Tim Dietzler, director of dining services, says he has continued to see upward pricing put pressure on food and other supplies.
We have evaluated our top 200 volume items in terms of finding equal quality at lower costs,” Dietzler says. “We are also assessing the higher-processed commodity items we purchase and comparing them to minimally-processed items. One example is chicken and turkey products. We have found several chicken products that have dramatically reduced our recipe costs. This switch produced a savings of approximately 40%. Our participation rate is higher than last year, indicating increased satisfaction, but it’s also putting additional pressure on our food expenses.”
Another challenge Dietzler has had to deal with is the fact that his entire program is now free of partially hydrogenated oils (PHO) and MSG.
“Offering a PHO-and MSG-free program is one our of hallmarks and very important to us,” Dietzler says. “When developing a market basket for products for bid comparison, it can get challenging when comparing items. Often we find that manufacturers have done an excellent job of complying with the FDA and reducing trans fats below the requirement. However, there remain food products that still contain MSG and PHOs. More often than not, these are the most cost-effective products.”
To combat the extra pressure, Dietzler says they’ve tried several other tactics.
“Similar to all college and university dining programs, during these difficult economic times, we need to be excellent stewards of the university resources,” Dietzler says. “We are currently speaking to an outside firm that is leading the industry in capturing rebate programs for operators. It is separate from a group purchasing organization, which will help get effective pricing; this organization focuses on rebate programs. The company tracks your purchases using a patented technology and, like a GPO, this company leverages group purchasing volume, but rather than negotiate price, they negotiate coupons. This company will identify products on which we are not currently receiving a coupon or perhaps get us a higher level coupon on some products.”
Dietzler has been lucky in some respects regarding the economic downturn. His department’s sales are running higher than last year, and he says the university’s spring study abroad program count is trending lower, which he hopes will translate into more students on campus and higher spring semester sales.
Battling larger increases: At 11,500-student University of Wyoming in Laramie, Eric Webb, director of dining services, says his department’s food costs have increased approximately 7% to 8% during the last six months. Compared to last year, he says costs have increased about 11%. Labor and utilities have increased as well but at closer to normal rates. To counter these increases, Webb says his department has made several changes to its business model.
“We recently signed a prime vendor agreement that will save us approximately 7% on our food costs this year,” Webb says. “We previously didn’t have a prime vendor at all; we pretty much just shopped on the street, which gave us flexibility but less buying power. We also put our linen and laundry business out to bid this year and we ended up consolidating from one vendor to two, which added up to us saving about 15%.”
In addition, Webb says his department made slightly larger increases in retail pricing than in past years.
“We increased retail prices by about 5% across the board,” Webb says. “However, our sales are up dramatically, which is partly due to increased enrollment. The university made a decision to freeze tuition, and other increases were relatively minor. The university is trying to position itself as a more cost-effective choice. For many students, it is cheaper to pay out-of-state tuition to us than to pay in-state tuition in their home state.”
Other ways Webb’s department has tried to cut costs is by being more selective in sourcing food products by looking for the ones that provide the best cost-value relationship.
“Instead of buying every type of cereal, we switched to strictly Malt-O-Meal,” Webb says. “That yielded us a dramatic savings of almost 25%. We opened with it in the fall, and the students didn’t say a thing because it was just what we serve now. If we had switched mid-semester it might’ve been a different story.”
Renovation rejuvenation: At 12,300-student Montana State University in Bozeman, Todd Jutila, director of university foodservices, says his department’s food costs have increased approximately 7% compared to last year, and labor costs have also increased more than 7%. But the increase in labor, he says, is due in part to increasing student wages by $1 to keep up with the private sector.
“We had a shortage of students and in order to compete with the restaurants downtown, we increased the wages,” Jutila says. “For the first time in several years, we have a waiting list of student employees. However, we are struggling with the 7.5% increase in labor costs.”
As for participation, Jutila says he has seen students eating more often in the dining halls and not missing as many meals, which his team assumes has to do with students not being able to afford to dine elsewhere. However, in MSU’s retail operations, Jutila says it’s hard to tell if the economy has impacted sales because this fall semester was the first that all retail operations were open due to a major renovation last year.
Currently retail sales are up 30% and a lot of that is due to the new facility,” Jutila says. “This increase in sales has stemmed any cuts for the time being. It has also allowed us to do some new marketing, enhance our local food buying program and expand our recycling/sustainability programs.”
For spring semester, Jutila says they are looking at scaling back some schedules to help reduce labor dollars. Jutlia says the department is also looking at going trayless as a way to cut down on costs.
“We have a student group helping us do a test run in one of dining halls next semester,” Jutila says. “Also during Christmas break, we will review our menu mix and make any changes necessary including price increases. In years past, we would set our prices for the entire school year, but now, we will make adjustments mid-year.”
Introspection and Innovation
Once it could be argued that, in an economic downturn, healthcare foodservice would be less affected than, say, corporate dining because there were always patients to feed, and that made up the bulk of business.
But as managed care has shifted more and more medical treatments from in-patient to out-patient, the percentage of revenue hospitals must derive from non-patient sources has grown. In many hospitals, more than 50% of foodservice business is conducted in cafeterias, coffee shops and catered affairs.
As a result, the current economic crisis has had as big an impact on healthcare as any noncommercial market sector, and hospital foodservice directors are having to find innovative ways of dealing with shortfalls.
“In 2008, we saw the biggest single-year increase in the cost of food since the early 1990s,” says Bruce Thomas, associate vice president of guest services for Geisinger Health System, Danville, Pa. “For my largest hospital, the increase in food beyond normal inflation cost the organization more than $300,000. My team is in the process of reducing menu offerings and decreasing the number of purchased SKUs by 15% to 20%. Additionally, they are trying to balance the use of fresh/scratch to pre-prepared items to maximize resources.”
Nationwide: Across the country, in Glendale, Ariz., Julie Spelman tells much the same story.
“Our food prices have risen quite a bit,” says Spelman, director of food and nutrition services for Banner Thunderbird Medical Center. “We estimate about 5% to 7% higher than last year. A number of suppliers were charging extra for deliveries, but we are demanding that be taken away since the price of gas has gone down recently. We are not seeing an immediate reduction in food costs, however.
“We are continually looking for cheaper center of the plate ideas,” Spelman adds. “Our salad bar has changed to ‘heavier’ items that are less costly, such as bean salads and Jell-O-based salads. We have reduced the sandwich proteins and are re-enforcing portions on all high-priced items.”
At St. Mary Medical Center in Hobart, Ind., director of food and nutrition services Len Ayres is taking several dramatic steps to control his budget, which has been hit by a 10% to 15% increase in food prices and a 5% to 10% hike in the cost of disposables.
“We have decreased our entrée portion size from 5.5 ounces to 4 or 3.5 ounces,” he explains. “We are eliminating our value meal combos and pricing everything à la carte. We are looking at discontinuing our salad bar and serving only prepackaged and weighed salads. We began charging for miscellaneous disposables, which must now be requested instead of being readily available. We discontinued portion-control condiments and went to using pump condiments. And we are in the process of implementing payroll deduction to try to increase revenue in the café.”
Increasing costs have begun to take their toll on health and sustainability initiatives in some hospitals, as operators reassess the cost versus the return on investment.
“So far we haven’t had to change our menu based on raw food costs,” says Denisa Cate, director of food and nutrition services at Henry County Medical Center, Paris, Tenn. “About the only thing we may change, or just eliminate, is fresh produce. For example, the price of fresh tomatoes went through the roof several months ago, so we chose to just not purchase them. It affected our sandwich and grill areas in the café, but most of our customers understood since the price was also very high in grocery stores.”
Being flexible: In the Veterans Administration hospitals in Portland, Ore. and neighboring Vancouver, Wash., Foodservice Administrator Deanne Carlisle is considering some staff adjustments to ease the burden of higher gas prices.
“We are looking at flex hours, to avoid traffic, working four 10-hour days to help with fuel economy and even letting some staff work from home,” says Carlisle. “We have only a limited number of people to whom this would pertain. But we are also thinking outside of the box on how we can cover shifts better, looking at tasks to see if they can be rearranged or altered to become more efficient.”
At St. Mary’s Health Care in Grand Rapids, Mich., Director of Nutrition Services Mary Jaskowski has challenged her staff to become more efficient and more productive, with some positive results.
“Because we are holding all staff accountable for our production hours, our employees are working across teams to help each other meet their goals, as well as identify new revenue enhancement ideas,” Jaskowski says. “[For example], each of our production staff has the opportunity to plan a special event for our cafeteria. They plan the event, decorations, menu and pricing themselves. It’s turned into a friendly competition to hit a new daily revenue high and it is a real morale booster for the entire department.”
Mary Gregoire, director of food and nutrition services at Rush University Medical Center in Chicago, says that in some respects the economic crisis has been a blessing in disguise.
“I would say that our positive outcomes have been a refocusing on the importance of the basics to help control costs: following recipes, accurate portion, monitoring waste, etc.,” says Gregoire. “Escalating food and supply costs are not a new challenge, as it seems we go through ups and downs about every 10 years. I think the next year or two will be challenging as we find ways to better control costs and be innovative in menu planning and presentation.”
Mixed Bag for Corporate Dining
Layoffs, higher operating costs, and reductions in internal catering are casting shadows over some B&I foodservice accounts this year, reflecting the nation’s economic turmoil and the loss of some 1.2 million jobs in the first 10 months of 2008.
But at the same time, some operators are reporting a boost in business as their customer bases turn more to in-house cafeterias that represent good quality and value.
Owen Moore, president of the Society for Foodservice Management and director of dining at New York University, observes that his association’s members are feeling the impact of reductions in labor, hiring freezes, consolidation of company divisions and the loss of middle management jobs. Between 80% and 90% of corporate foodservices are managed by outside contractors.
“Operators who counted on five to seven years of continued growth have incurred debt and now must renegotiate their contract terms to withstand the next six to eight months,” says Moore.
Employees and participation: After months of “crippling inflation,” many are exploring “creative menu planning,” to look for ways to control costs without impacting the quality of food. “We have to do more with less,” Moore declares, “and the first level is labor.” He anticipates “lower building populations and an increase in options for a mobile workforce.” Customers are spending less and many are choosing soup and a sandwich at lunch instead of a full meal, he adds.
High margin internal catering is seeing a “huge impact,” Moore says. “We expect a very soft holiday season with firms closing and reductions in the labor force.”
At Chrysler, which has seen several layoffs and closed down a shift at one of its facilities, the company expects a loss of 5,000 temporary and administrative jobs by year-end.
Caught between rising gas prices and the credit crunch, which is delivering a blow to automobile sales, Chrysler’s foodservice department, where Aramark is the contract provider, has seen a “significant” impact in the past six months, says company liaison Len Bonner.
He’s looking at closing some venues and reducing the number of vending machines because of population declines. Customers are cutting back, he notes, “maybe eating in the cafeteria three days a week and bringing sandwiches from home the other days. We have seen a drop in customer counts because of there being less people in the building.”
To build traffic, Chrysler is “trying to adjust to the economic realities we’re facing and offer more budget items such as a meal with a drink for $4.99. We expect we’ll still be in a downturn in 2009.”
Not all cafeterias are seeing a downturn in participation, however. Julie Stewart, food service manager at SAS Institute in Cary, N.C., is seeing more employees “stay on campus for lunch” as a result of the economic climate. She expects that trend will continue “until gas prices decrease. Our prices are better,” she adds, and “some employees tell me they eat out less often now.”
To give customers “good deals throughout the day,” to-go offerings have been increased. Stewart increased prices at the start of 2008 and may raise some items next winter to counter increased food costs.
Quality and value: Among the contract companies, some operators are not seeing a drop in business but continue to focus on offering value.
“We’ve seen no major downturns except at one bank,” says Nick Camody, vice president at Parkhurst Dining Services, Pittsburgh. “Our sales are going gangbusters and internal catering has seen a boost. Some accounts initially cancelled holiday parties but are deciding to do them on a reduced scale.”
Parkhurst is focusing on packaging meals such as a half sandwich and soup or soup and salad at a value price. “We also see people using lunch as their main meal,” says Camody. “Our hot line with fish entrées is one of the most popular stations. Quality has become more important than ever.”
Parkhurst’s Hemisflavors program, now two years old, is proving to be a way to offer value while providing healthier dining options.
The program offers 50 recipes, prepared fresh with raw ingredients indigenous to Latin America, Asia and the Mediterranean.
“In the ‘80s and ‘90s,” Camody says, “we took flavor out of foods to make it low-fat and now we’re putting it back with herbs, spices and oils. At our Highmark BCBS account, the menu mix is changing dramatically because of this program, which has lots of vegetables and plant-based foods that allow you to give a lot at value prices.”
Price increases and value meals: A series of educational seminars and reports for Parkhurst managers helps operators stay abreast of fluctuating food prices. Quarterly classes teach waste reduction, purchasing tips and ways to reduce costs while a weekly produce market report lets operators determine what products and local producers of food to promote on their menus and what products to use sparingly.
B&I accounts make up 35% of business at Unidine Corp., Newton, Mass., according to the segment’s vice president of operations, Eric Kunz. While the company has yet to feel the effects of the economic slowdown, “we are concerned at the unit level and looking at catering and retail sales,” he says. Unidine has seen “nearly double digit increases in food and paper prices and we don’t see them stopping any time soon.”
Unidine hasn’t seen dramatic changes in check averages but is undertaking “contingency planning.” The company’s emphasis on green and organic programs, which are more expensive, continues to be adopted by clients.
At Humana, in Lousiville, Ky., Patty Guist, director of associate programs and services, has seen a few cutbacks, with the average check down 20 or 30 cents at some sites. Humana promotes “bundled deals” such as a sandwich and beverage and 30% discounts for ‘healthy choices’ to drive traffic.
Whitsons Culinary Group, Islandia, N.Y., also is seeing some slight declines in per person checks but notes that many of its accounts remain stable or are growing. Whitsons is doing more bundling, ‘value-enhanced’ meals, says Vice President of Operations Kelly Friend. Whitsons has raised prices only where contractual agreements allow, and she expects that to continue in 2009 to keep pace with inflation.
Districts Cut Programs, Raise Prices to Combat Rising Costs
It’s been a particularly tough year for school districts. According to the School Nutrition Association’s Back to School Trends Report, 97.5% of directors surveyed said they expected an increase in food costs for the 2008-2009 school year.
The report came out in August, before many had started the new school year. Are things as bad as predicted? Joan Young, director of child nutrition in the 63,000-student Volusia School District in DeLand, Fla., expects the cost of milk to be $750,000 more this year than last. The department spent $2.9 million on milk last year, meaning the department is in for a 26% increase in the cost of milk.
Food costs are not the only increase. Ninety-four percent of those surveyed in the SNA report said they expected increases in transportation costs, including Dave Mensher, general manager of foodservices for Sodexo at the Rocky Hill and Portland (Conn.) school districts. Mensher’s main distributor charges a $7 fuel surcharge for each delivery, which he says will account for an almost 20% increase in delivery charges. Because his two districts are small—enrollment is 2,700 for Rocky Hill and 1,300 for Portland—that increase accounts for only a few hundred dollars, but it is no less of a hit.
Cost-cutting tactics: To cut costs, nutrition departments are cutting programs. At the Volusia School District, Young eliminated the universal free breakfast program this year. Young says the lack of revenue the department would have made if the students eating breakfast under the free program had paid would be $1 million. Last year, 15,000 breakfasts were served each day in the free program. This year, breakfast counts are down to 10,000, but Young says the revenue generated by students who are now paying to purchase the meal is helping to make up for cost increases in items like milk. Breakfast now costs $1.
Also new for this school year is a two-tier price system in the high schools. Meals such as orange chicken and barbeque pork, which cost more to produce, now cost $2.50. The lower-tier priced meals cost $2. Items on both meals are part of a reimbursable meal.
One program helping Mensher is the Healthy Food Certification program offered through Connecticut’s Department of Education. To become eligible, the district must serve meals that conform to strict nutritional standards. With the program, Mensher receives a 10-cent reimbursement from the state for every meal served.
Laura Roberts, foodservice director at 17,000-student Indian River County (Fla.) Schools, created mega meals in the secondary schools to help offset the cost of higher-priced items. Roberts says items, like chicken wings, cost more to produce, but they are also popular. Instead of having those options available only as an à la carte item, Roberts bundles them with milk and sides to make a reimbursable meal, which sells for $2.75 instead of $2.25, the regular meal price.
Raising prices: Many districts are increasing prices to help offset rising costs. According to SNA’s Cost Survey of Members, 73% said they increased prices for some facet of service, including meals, à la carte or vending. Between 50% to 60% increased meal prices.
But David Binkle, deputy director of foodservices for the 692,000-student Los Angeles Unified School District, says raising prices should be a last resort. “Everybody said, ‘We can’t afford things, so we need to raise prices,’” Binkle says. “We didn’t increase our prices. We drive our department based off the menu. A lot of people predicted things would be bad, but the fact of the matter is our prices have gone down.”
To control costs, Binkle took a long look at the menu. Now, there are standardized menus—one for elementary and one for secondary—and the number of daily entrées in secondary schools has decreased from 15 two years ago to five. “We want to focus on doing fewer items and doing them really well,” he says. Participation is up 18% from two years ago.
With fewer entrées, Binkle says he can control costs better. In fact, food costs for the 2007-2008 school year were the same as the 2003-2004 school year, and the district served 16 million more meals in 2007 than in 2003. One way Binkle has been able to control costs is by taking a hard stance with manufacturers. He brought more than 100 vendors together to discuss the district’s long-term plan. “I told the vendors that we would not honor any price increases in our current procurement bids and that what we would likely do is just take the item off the menu if we could not afford it,” he says. “That has gotten their attention.” Binkle admits the district’s size is an asset in negotiating prices, but he says smaller districts can do this as well.
One area in which Binkle saved money was milk. Binkle told the dairy presidents he was going to put shelf-stable milk on the bid as a way to decrease costs. When the manufacturers thought that the volume of milk LAUSD would order from them was going to decrease or disappear altogether, they were more willing to compromise on price increases. Due to this negotiation, Binkle will save $2 million on milk this year.
Free and reduced: Troubling economic times are affecting districts in another way. As families feel the money pinch, directors note an increase in the number of free and reduced applications being turned in. “We are still getting parents who are turning in applications every day,” Roberts from Indian River says. “Normally, at this point, we wouldn’t see any new applications.” Roberts says there is at least an 8% increase, to 50%, in students who qualify for free- and reduced-price meals this year. Participation is also up 8%, to 63%. “The increase is because parents see if they were to buy things to make lunch from the store, our meals are a much better deal.”
Roberts is not the only district to see an increase in applications for free- and reduced-price meals. Wayne Nagy, director of food and nutrition services at 80,000-student Lee County (Fla.), has seen a 5% increase, to 57%. Nagy says the increase benefits the department’s bottom line because he receives more money in federal reimbursements.
There is not a nationwide figure on the increase in students who qualify for the federal program, but Erik Peterson, SNA spokesman, says that historically, when the economy takes a dip and unemployment increases, the number of students qualifying for the program increases. Between 1990 and 1992, when unemployment increased from 5.6% to 7.5%, the number of students qualifying for free- and reduced- priced meals increased 14.2%.