Panel Discussion: Feasibility, Profitability, & Private Industry Standards
Thursday, September 26, 2002, 9:00 to 10:15 am (Text Version)
Panel: Richard Daley, Concessions Management Specialist
General Services Administration, Southeast
Sunbelt Region, Atlanta, GA
James Devir, Supervisory Building Management
Specialist, General Services Administration
New England Region, Boston, MA
Patricia Clyburn, Building Management Specialist
General Services Administration, Northeast and Caribbean Region, New York, NY
RD: How do you make a food business profitable? This may seem like a strange question to be posed by GSA, one of Randolph-Sheppard's largest customers. Yet, in a business where profit equals success, GSA wants Randolph-Sheppard facilities to succeed. Success means the services desired by our building tenants will be there over the long term and that spells success to GSA. Profitability is a vast subject that we couldn't hope to fully explore in the 75 minutes allotted for our discussion. So, to narrow the focus of our discussion, I thought we might refer to a single, brief quotation: "Only marketing and innovation produce profits." - Vending & OCS, July/August 2001, "Budgeting Provides a Road Map," pp. 8, 10. Quotation attributed to business consultant Peter Drucker. Mr. Drucker's quotation-"only marketing and innovation produce profits" [that is, "selling" and "departing from the old"]--is the springboard for our chosen theme: "Feasibility, Profitability, and Private Industry Standards." Our theme will lead us to better appreciate the vital need for improving the Randolph-Sheppard Vending Program's customer focus and meeting customer expectations in order to compete successfully with the proliferation of food service venues outside the Randolph-Sheppard arena. To be profitable, a business first must be feasible. Pat Clyburn will discuss the simple tool GSA uses to measure feasibility when weighing employee wants against a potential market.
PC: GSA's tool to measure the feasibility of a proposed food service business opportunity is called a "feasibility study." The model or template for conducting such a study is found in GSA's Concessions
Management Desk Guide (August 2001) in Appendix A-1, pp. 1-12. In GSA's world, a feasibility study is the principal process that determines the appropriate level of concessions services on GSA-controlled property. The process supports GSA's policy to establish concessions services at sites where GSA and our client agencies deem services essential to our tenants. A feasibility study indicates the level of concessions services that an estimated or real building population may sustain in the face of competition from neighboring, commercial businesses. In the civilian sector of the Federal government, concessions services must be self-supporting and are not subsidized by direct cash payments to food service operators. The costs for services are not paid with appropriated funds. Therefore, determining the specific level or type of service is critical because the quality of any service is directly affected by its profitability.
RD: I think what I am learning from your comments is that some skills in market research and business analysis are needed by personnel from both GSA and the State licensing agencies. For example, Title 34.395.35(a)(3) describes articles that may be sold in Randolph-Sheppard facilities including "other articles or services as are determined by the State licensing agency, in consultation with the on-site official responsible for the Federal property, . . . to be suitable for a particular location." This regulation underscores the need for both personnel from the State licensing agencies and GSA property managers to know how to determine if particular menu items, products, and services are "suitable." That is a function of the feasibility study process, isn't it?
PC: Yes. GSA's Concessions Feasibility Study Template is a simple tool that determines appropriate service levels by weighing the population of a building in comparison with customer wants and neighborhood competition. Included in the template is a Service Level Chart that establishes the number of building occupants in the absence of competition needed to support seven levels of food service, as follows:
- Level 1 Vending Machines (100-399 Federal Employees)
- Level 2 Sundry Stand (100+ FEs)
- Level 3 Prepackaged Snack Bar (400-799 FEs)
- Level 4 Limited Onsite Snack Bar (800-1199 FEs)
- Level 5 Onsite Grill (1200-1599 FEs)
- Level 6 Café (1600-1999 F Es)
- Level 7 Cafeteria (2000+ FEs)
How can this chart assist in determining an appropriate service level? You must have an estimate or actual census of a building's population. If an agency interview discloses that they want a Cafeteria, but the number of Federal employees is 700, then the chart can assist in helping customers understand that the best service level for 700 is a Prepackaged Snack Bar. Moreover, if the survey of a building's immediate neighborhood discloses the presence of many, clean, attractive, moderately-priced, and convenient commercial facilities with 600 seats available for lunch, then the appropriate service level for the building might be canned drink and snack vending machines. The main point is: A prospective food business cannot be profitable if it is not feasible. Using GSA's Concessions Feasibility Study Template can help your agency avoid establishing a new facility in an inappropriate market environment.
RD: If anyone wants to see the entire feasibility study protocol, which also includes insight regarding how to make the correlation between appropriate services levels and the size of the space reserved, your SLA's GSA contact will be happy to make a copy of Appendix A-1 of the GSA Concessions Management Desk Guide available to you. Before, we leave the subject of feasibility and its impact on profitability, I want Pat Clyburn to briefly comment on the issue of anticipated patronage. If a Federal office accommodates 500 employees, would it be proper to project anticipated business as 500 customers per day?
PC: No. In 2000, GSA nationwide saw food services operate 251 days during the year for breakfast and lunch with daily patronage ranging from 60% to 80% of the building population and lunch patronage equaling less than 40%. So, using your example of a building with 500 Federal employees, one could expect daily patronage to range from 300-400 per day with lunch patronage at 175 per day. Also of interest: daily sales in manual or cafeteria operations on GSA-controlled property in 2000 equaled $1.40 per building occupant. Using the building population of 500, daily sales could be projected at $700 per day or $175,700 per year. That is the building population times the check or transaction average ($1.40 per building occupant) times 251 operating days per year. (GSA Concessions Management Desk Guide, August 20001, Appendix A-1, Concessions Feasibility Study Template, pp. 1-12)
RD: That's fairly low, somewhat below private-industry expectations where in 2000 lunch patronage dropped to 45% after a 6-year slide from 67%. (SFM's 2000 Industry Standards & Benchmark Comparison study) So, if an operation generating annual sales of $175,700 achieved a 10% profit margin, then that would yield only $17,570 per year, profitable but nothing to write home about. This example does point up an excellent lesson: The lower the customer volume the more effectively an operator needs to market high-profit items (like gourmet coffees and fountain drinks, for example). In addition, the numbers emphasize the need to match the level of service to the anticipated patronage level through a realistic feasibility study.
RD: Consideration of the value of a thorough feasibility study when determining appropriate service levels opens the door to the second topic in our theme, Profitability. Jim Devir is going to explain a vital concept that is the very underpinning of realizing profits.
JD: It has been said: "You can't improve what you don't measure." This is true in any business enterprise, no less so with food businesses established under Randolph-Sheppard. In this connection, how should profits be measured and how can profitability be improved? To measure profitability, it is necessary to project sales and costs and to measure actual sales versus actual costs in a meaningful way. Pat Clyburn showed us how to project annual sales by taking a building population, multiplying it by a valid check or transaction average, and multiplying that total by the number of days the Government is open for business (251 days). Many vendors are unaware of the size of their potential customer base. Many vendors do not know what percentage of the building patronizes them each day or by what the commercial food industry calls dayparts: breakfast, lunch, and break periods. That is because many vendors do not appreciate the importance of tracking sales by category, measuring patronage, calculating transaction averages, monitoring operating costs, or looking for trends. Again, you can't improve what you don't measure. It takes effort and persistence to gather and organize sales and cost data, and the effort can seem overwhelming, but it doesn't have to be that way. Again, as published in the GSA Concessions Management Desk Guide (August 2001), on page 18 of Appendix C-1, a simple checklist can help one get started in predicting anticipated business performance and in measuring actual performance. Essentially, the process compares annual or monthly sales against three categories of annual or monthly expenses to determine profitability. Gross sales are the annual or monthly aggregate of all food, beverage, and catering sales after the deduction of applicable sales taxes. The three categories of annual or monthly costs are (1) Product or food costs, (2) Labor costs [salaries and wages], and Miscellaneous expenses (including all costs of doing business, such as equipment repairs, telephone bills, laundry, postage, decorations, promotions, payroll taxes, employee benefits, accounting services, and so on.)
RD: I have seen this model followed by private-industry food service companies for years as both a planning tool and a tracking tool. At the start of each fiscal year, many companies create an annual budget plan (or Pro Forma) based on site-specific or industry-generic historical data of the previous year and then adjusted for inflation. As the year progresses, they compare the budgetary projections against actual sales and cost data. In this context, the model (or Pro Forma) becomes a business tool to alert a manager when sales decline or costs exceed the budgetary limits and to give such trends adequate review.
JD: That's right. At GSA cafeteria locations, an actual budgetary model has been used to evaluate contractor performance by reviewing profit and loss statements for each operating period. Generally, every dollar of sales after taxes breaks down as 40% product or food cost, 40% labor cost, 10% miscellaneous expense, and 10% administrative expense and profit.
RD: As a footnote to financial reporting, most private-industry food service companies report profits and losses monthly, but some, wanting all reporting periods to be uniform in length, break the year down into 13 periods of 4 weeks each. This does make it easier to spot real business trends unmasked by the variables of 31-day versus 28-day months.
JD: But the main point is this: Successful, profitable companies, both predict and track sales and costs so that if sales dip or costs increase, then appropriate actions can be taken. If sales dip, a solid promotion may be needed to recapture disloyal customers or capture new ones. If labor costs rise abnormally, perhaps there are overstaffing issues that need to be addressed, or perhaps unusual employee turnover is impacting labor costs. You may discover that employees are coming on board and leaving quickly because they discover they don't have the skills to perform their jobs at the level you and your customers expect. To stop spiraling recurring cycles of turnover, it may be necessary for you to invest in your employees by providing the training they need in their areas of weak performance in order to boost their morale and effectiveness. Perhaps they are clueless regarding the principles of food safety and customer service. Employees who have the skills to fully discharge their responsibilities are likely to take greater pride in their work and stay on. That alone could reduce escalating labor costs and add to an operation's bottom line accordingly. Of course, if costs are not tracked and compared to sales, then a manager will be blissfully unaware of the critical need to take appropriate action. You can't improve what you don't measure.
Private Industry Standards
RD: There are many business and operational standards applied throughout private-industry that Randolph-Sheppard entrepreneurs ought to copy in order to improve profitability. In the convenience store industry, by using electronic cash registers hooked up to computers, sophisticated tracking procedures are used to find profit centers among the hundreds of products that are sold in a convenience store. I am always amazed when a vendor can't tell me what daypart is the most profitable for his or her operation. In the private sector lunch patronage is in the neighborhood of a declining 45% whereas breakfast has held stable at around 24% of an available pool of customers. If a vendor tracks sales or customer counts and tracks sales by daypart and benchmarks with private-industry, think of how useful that data could be in determining menu offerings and hours of operation. If there is no early morning breakfast business, why open early? If business drops off at 3 pm, why stay open until 6? Convenience stores track sales by category. Few vendors do this. Few vendors have accumulated data on what brands are the most popular and streamlined inventories accordingly. Some vendors will not give new products a chance, preferring to stick with products they have always offered, whether such loyalty is warranted or not. Remember, "Only marketing and innovation [selling and departing from the old] produce profits". Tracking sales by category could help many vendors see the need to freshen their offerings and build relationships with emerging suppliers and markets.
JD: Before we wrap up our discussion, I have a footnote of my own that ties in with Peter Drucker's quotation-"Only marketing and innovation produce profits." Marketing is selling, as Richard Daley pointed out at the beginning of our panel discussion. Selling involves reaching out to customers, telling them what you have to satisfy their needs, building customer desire, and inviting them to patronize you. In my region, we have successfully employed electronic communications available throughout the Federal government to publicize available concessions. For example, at the O'Neill Federal Building in Boston, each morning we send out via email the "O'Neill Federal Building Daily News Bulletin." The daily newsletter includes information of interest to building tenants for that day, including the menu for today's cafeteria offerings and for tomorrow morning's breakfast special. We've noticed that since the "Daily News Bulletin" has been going out, it has helped our food service operator's business.
RD: That is an excellent, simple, and cheap solution to a common business weakness in independent food service operations, inadequate marketing and selling. And yet, in no one area do vendors exhibit less savvy than in setting prices that are attractive to their customer base. Perhaps vendors need help in using a simple mark-up formula:
- Multiplier - 1 divided by Desired Food Cost Percentage
- Example: If the Desired Food Cost Percentage is .40 or 40%, then the multiplier is 2.5.
- Best Selling Price = Ingredient Cost x Multiplier
- Example: $2.25= $0.90 x 2.5
Questions and Answers
RD: Does our audience have any questions for the panel?
RD: Remember, "Only marketing and innovation [selling and departing from the old] produce profits."
PC. A prospective food business cannot be profitable if it is not feasible.
JD. You can't improve what you don't measure.
RD: To be successful and remain competitive be aggressive in seeking out best practices that will improve Randolph-Sheppard operations. Benchmark your facilities against the best in the business.
Source: General Services Administration (Reproduced with permission.)