The New Cost of Doing Business

By Lindsey Ramsey, Contributing Editor

Rising prices across the board force directors to think outside the cost box.

Rising food costStatistics alone almost don’t do justice to the current crisis in noncommercial foodservice. Food prices rose 4% last year, according to the U.S. Department of Agriculture. From April 2007 to April 2008, food prices rose 5.1%, according to the Bureau of Labor Statistics’ Consumer Price Index. Prices for items such as milk, cheese, pasta and bread rose between 12% and 17% in 2007, according to USDA Economic Research Service data.

While these statistics are alarming, they’re not altogether unfamiliar. Bill Lapp, principal for Advanced Economic Solutions, a consulting firm that studies food prices, compares the current food price climate to one the country experienced in the 1970s.

“Back then, we had strong economic growth, the Soviet Union had emerged as a superpower, the dollar had declined and we had an energy crisis,” Lapp says. “All this contributed to the strongest period of food inflation we had seen in the past 50 years. Between 1972 and 1981, food inflation in the U.S. averaged more than 8% per year. Today, we have the emergence of China as a global superpower, a sharp decline of the dollar and we’re in the middle of a strong decade of global economic growth; all those factors have culminated since 2002, which is making for an environment where commodities are following the lead of energy and rising in value.”

How bad is it in noncommercial foodservice? Here are a few horror stories.

—Mary Hill, director of foodservice at 31,000-student Jackson (MS) Public Schools, says food prices have pushed her cost per meal to between $2.95 and $3.10, far outspending the $2.47 the district receives from the federal government for each reimbursable meal. Eighty-four percent of district students receive free or reduced price meals.

—At 80,000-student Lee County Schools in Fort Myers, FL, Wayne Nagy, director of foodservice, says it will cost an extra $1 million to offer the district’s current menu next year, an 11% increase in the nearly $11 million food budget. The rise in the price of milk alone cost the district an additional $595,000 this year.

—Renown Regional Medical Center, a 808-bed hospital in Reno, NV, has seen sales decline about 25%, says Joe Eidem, director of food and nutrition, while his beef and milk prices have risen between 25% and 40%. “It’s kind of scary right now,” Eidem says. “People just aren’t spending money like they used to.”

To counter these problems, directors are reducing labor, increasing prices, limiting menu choices and more, all to contain costs to manageable levels.

FoodService Director - Rising food costManaging Menus: Menus are often the first things to change when costs rise. At the SAS Institute in Cary, NC, Foodservice Manager Julie Stewart says her department is seeing a steady 10% increase in food costs. After increasing prices at the beginning of this year—by about 8% to 10% on most items—Stewart says she hasn’t heard many complaints because she thinks her customers realize what is going on. In most cases, Stewart says she has been able to fight rising costs by substituting or removing higher-cost items from the menu.

“Earlier in the spring, asparagus really spiked so we just took it off the menu for a while and substituted for it with vegetables like broccoli and cauliflower,” Stewart says. “We’re also working on a customer survey where we’re going to ask customers how important things like organic produce and local items are to them and if they’d be willing to pay more for it. That should give us a better idea.”

Joe Eidem has also been busy cutting costs by switching to cheaper versions of certain food items, but his biggest challenge has been dealing with his hospital’s spoken menu. In the past, patients were given two options for each meal. If they didn’t like either choice, they could ask for whatever they wanted, within reason. In light of inflation, however, Eidem says he is considering going to a fixed menu and not offering the patients so many options.

“We will still interview the patient, but they will have [two choices] such as meatloaf or a chicken salad sandwich and if they don’t like it, we’re not going to be offering an endless choice of stuff,” he says. “It will help reduce the amount of food we have to order. Unfortunately, we’re going to have to reduce the cost by reducing selections.”

Other menu simplifications include using iceberg lettuce, switching to a thinner crust pizza, limiting topping choices and putting plans for an organic salad bar on hold.

“I’d rather simplify than raise prices. We have to be a little more creative and cook more from scratch,” Eidem says. “One example is we do a ciabatta egg sandwich. We were using two eggs, two slices of cheese and two sausages for one sandwich; it was huge. So we went down to one egg, one slice of cheese and one sausage. It saved me money and no one complained.”

At the Egg Harbor (NJ) Township School District, School Foodservice Director Thomas Beck says his district has been relying heavily on the federal commodity program, especially for center-of-the-plate items such as beef, chicken, turkey and pork. To increase profit margin, Beck says he eliminated all bagged snacks such as baked chips, popcorn and pretzels to encourage students to buy more complete meals—as well as finish those they do buy—rather than buying à la carte items.

“Canned fruit and vegetables have gotten so expensive because of transportation and processing costs. Those items’ prices have gone up about 25% to 30%,” Beck says. “We’ve pretty much eliminated anything canned or with special packaging so we don’t have to pay those extra costs and pass them on to the kids.” The ban has had modest success. Meal purchases have gone up about 3% to 5% since eliminating the bagged snacks. Beck says eliminating the snacks also reduced costs by at least 3%. Also helping Beck offset costs is local sourcing. “We’re relying more on fresh fruit and vegetables, which is actually a great ‘problem’ to have,” Beck says. He adds that purchasing locally has actually helped with costs because of the district’s proximity to local farms, thereby reducing transportation costs.

Tim Parsons, cafeteria manager at Wrigley Manufacturing Company in Lowery Branch, GA, says he’s had to adjust his menu as well. Parsons has been using a lot more pork because pork prices haven’t risen as much as some other proteins.

“We’re menuing pork at least once a week but we’re doing different things with it, like sweet and sour pork and grilled tenderloins,” Parsons says. “We’re keeping it simple.” He adds that he’s been trying to encourage customers to eat items, like pork, that have a higher profit margin than the salad bar, which is priced by weight. Parsons says he’s had to raise prices about 20% in the past six months because the department has become almost 50% more expensive to run than a year ago. FoodService Director - Rising food cost

“The customers still realize it’s a good deal,” Parsons says. “We haven’t had too many complaints about the price increases, but they do miss their favorite menu items like ribs and steak.”

Looking at Labor: Wayne Nagy is looking at ways he can make his operation as efficient as possible by changing the work hours for many of his employees next year from six hours to four hours per day.

“We’re going to overlap our labor and have people come in the morning and work through the mealtime,” Nagy says. “Then we’ll have the second shift come in to work through the mealtime and through the afternoon. We’ll have the maximum number of hands during the serving time but still be able to cut back on costs.”

These cuts will affect the approximately 100 employees who have worked for the district less than two years. In addition, 17 vacant assistant manager positions won’t be filled. All of these actions will allow the department to reduce labor costs by 6%.

Joe Eidem says his department has been looking at different ways they can operate smarter and that, for him, it’s become a choice between cutting expensive food items or cutting labor. While he is not ready to cut labor permanently yet, he is making adjustments by seeking out employees who are willing to take a day off without pay.

“In the morning, I look at our patient count and then I look at how many employees are on,” Eidem says. “We have seven nutrition reps that deliver trays to patients. If the patient count is below 300, we go down to five nutrition reps. If it’s between 300 and 350, we use six reps. So when the patient count is down, I have to ask who wants to go home. So far, I haven’t had to ask people to go home because someone always wants a day off. Before, if our productivity was only 94%, I wouldn’t worry about it. Now we’re having to ask who wants to go home on a daily basis.”

In Urbana, IL, at 305-bed Carle Foundation Hospital, Director of Food Operations Michael Watz says they’ve seen an overall food price increase of 4%. His cost-cutting efforts have centered on labor because he feels it is one area he can control.

“I have our managers make labor forecasts for their departments on a weekly basis that project the number of bodies and the number of hours per week, per day and per shift. We are able to go back and, based on our forecasts, we can project where we should be as far as labor percentages.” This allows Watz to make adjustments based on projected sales, such as cutting positions during slower periods. However, his forecasts also allow him to see what departments could benefit from increasing revenue, which has been his main concern as he has battled rising prices.

“I’ve tried to increase transactions at each of our revenue centers and other places that we can control, like our catering business—mostly by analyzing what new opportunities there are and trying to take advantage of them by offering what banquet customers are looking for,” Watz says. “We can bring in more revenue and then we can support more bodies. I try to take a contrarian’s view versus ‘let’s just restrict.’” Watz says offering more contemporary foods, more variety and conducting customer surveys has helped him increase revenue by 25%.

Small changes, big results: Changing purchasing practices is often an effective way to combat rising costs. Nagy says to keep costs in line, he is taking full advantage of his district’s participation in a 36-district power buying program, which helps reduce costs by buying in bulk. In general, Nagy says he’s been able to save about 6% by buying with the program.

Paul Melchior, director of dining services at 36,000-student San Diego State University says his price on flour has gone up 400%, but so far he refuses to consider passing those costs on to customers.

“We’re doing a lot of different things to counter the price increases,” Melchior says. “Those items are going up, and I can’t control that. What I can do is practice assertive purchasing. We’re looking for price reductions on anything we can find.”

His assertive purchasing strategy found him a new disposable glove company that is saving his department $25,000 from the $50,000 worth of disposable gloves the department uses annually. Another example is trashcan liners.

“We saved about 35% on our liners by switching companies,” Melchior says. “We tested them first and it turned out they were just as good in quality.” Melchior is striving for between $50,000 and $75,000 in savings frFoodService Director - Rising food costom assertive purchasing to offset rising food costs next year. However, the biggest impact has come from eliminating trays in the university’s all-you-can-eat location, which began in 2007.

“It’s been hugely successful,” Melchior says. “It’s saving us more than 4.2% in our cost of goods, which translates to close to $50,000. We were able to take those funds and actually upgrade our menu. So we’re not really saving $50,000, but it’s allowed us to add items like fresh fish twice a week and an organic salad bar, but we’re still saving a net cost of goods.”

Reducing the number of deliveries made per week, especially in light of rising fuel prices, has been effective.

“We were getting six produce deliveries per week; now, we get three,” Watz says. “We don’t have people spending time putting product away. We’re consolidating so we can focus our energy on other things.” Having larger loads come in allows the companies to maximize space on trucks, Watz adds.  “It only takes us about an hour longer to put the larger loads away,” he says. “I also get the benefit—because of the increased loads—of drop ship premiums because the more on the truck, the better it is for us.”

Some operators are able to react to rising prices quicker than others. Bob Volpi, director of dining at Williams College in Williamstown, MA, says his department was able to anticipate some of the increases, so they immediately began to prioritize their vendors to save money. Volpi says when he started doing business with a local dairy to provide all the college’s milk; the department’s purchasing volume was going to allow the farm to get wider exposure to their products as well as give the farm access to other area vendors who could start purchasing from them. Volpi wanted to give the farm more volume so he encouraged the dairy to be the college’s vendor for value-added items like Stonyfield Yogurt. But once there was a projected 20% increase in dairy costs, Volpi needed to make some changes.

“We didn’t want to drop our purchasing effort from the dairy completely,” Volpi says. “So we hashed it over to figure out if it made still sense to continue buying those value-added items from the dairy, because we knew we could get them from another vendor for cheaper. The farm agreed to let us stop purchasing the value-added items, and it was a complete wash. The money we saved switching the vendor for those value-added items balanced out the rise in dairy costs overall.”

More cost-saving tips from foodservice pros 

—At Nikon’s 75-seat Shutterbug Café, Kevin Lessing, director of business development for Lessing’s Managed Services—which manages the café at the 400-employee corporate office in Melville, NY—says the café’s most successful cost-reducing step has been to bid out all purchases to three different companies. “We send out our top 500 items and we let three companies bid on them and the best one wins,” Lessing says. “We used to use only one vendor but by using three we find that we can save ourselves 5% to 20%. By bidding weekly, we’ve pretty much eliminated the rise in food costs.”

—Williams College has tried to cut costs by holding a weeklong collection drive to recover missing serviceware. Chris Abayasinghe, assistant director of student dining, says dining services stationed collection pods at each residence dining hall, which encouraged students to return serviceware. “We collected 400 plates total, a boatload of utensils and close to 300 glasses,” Abayasinghe says. “We had made a $6,000 investment in replacement serviceware, and I would guess we made back betweenFoodService Director - Rising food cost $1,500 and $2,000.”

—At 14,600-student Auburn (WA) School District, Eric Boutin, director of child nutrition services, has turned to a student-run garden to decrease food costs. Boutin says his department planted 45 fruit trees—apple, pear and plum. Each tree will be able to produce up to two cases of fruit. Along with the orchard, the garden has tomatoes, beans and lettuces, which he plans to use on the elementary school’s salad bar. “As the orchard starts growing, we should get quite a bit of fruit, but it will most likely just break even for us,” Boutin says.

—At the 175,000-student Orange County (FL) School District, Patrick McCarty, senior manager of procurement, says they’ve been using cooperative carts to serve more students but still reduce labor. The department sells snacks to student groups, such as ROTC, and then allows the groups to mark up the prices slightly. The student groups staff the carts themselves and keep any profit they make from the price mark-up. “They’re not necessarily competing with us because of the mark-up,” McCarty says. Senior Manager Kern Halls adds: “The carts help us out because we are feeding more students, but we don’t have to worry about the labor.”

—At SAS Institute, Julie Stewart is trying to cut costs by reducing the amount of disposable paper items her café uses. On Earth Day, Stewart launched a major push to get customers to use reusable serviceware. “We built pyramids with the boxes from all the disposables we use daily and we placed them throughout campus. Everyone was shocked by the amount,” Stewart says.  All disposables are being moved to one central location, Stewart adds, so that customers have to make a concentrated effort to use them. This year, Stewart hopes to reduce the amount of disposables the department uses by 30%.