Are we Asking Too Much of the Caterer?
With the capital investment sums required to secure a commercial catering contract creeping up and up we have been asking “Are we expecting too much of the catering companies?”
The need for ongoing and periodic investment into the development and refurbishment of catering facilities is a given. Without investment your catering facilities will date and visitor satisfaction and spend will diminish so reinvestment is essential to simply maintain status quo but who should pay? The client who owns the premises or the caterer who operates the contract?
Over the past ten years the answer has invariably been the latter but with the cost of fit outs rising with increasingly ambitious schemes can this be sustained? A fit out for even a low key café now costs upwards of £100K and investments into multi location venues often exceed £1 million.
In the old formula the client gained a smart new facility often entirely funded by the caterer but concession rents were adjusted downwards to take account of the capital depreciation. In reality, therefore, the client was paying for capital investment through a lower concession return.
But in this era of spending cuts clients are under pressure to deliver the same, if not better, concession returns with ever increasing capital requirements and this pressure is being passed on to the caterers. What used to be a win: win situation is beginning to look like a one sided gain for the client?
Or is it?
The sums of money now required to even be considered for a contract precludes many of the smaller operators from bidding. More stringent lending by banks combined with uncertainty over future interest rates means that those who need to borrow to fund investment into client premises are thinking twice. Those caterers that have ready access to funds through company reserves are considering more carefully about where to invest those funds. With more and more opportunities requiring capital only those in which the balance of risk and reward truly stack up are likely to attract interest.
Going forward therefore venues may find that tender interest is determined more by capital availability rather than genuine ability to deliver the best services for the venue which would be a backwards step in customer service and not entirely an all round win for the client.
Not only has the scale of capital increased, the allocation of capital has also altered. One such example of this is the increasingly common expectation that the caterer will not only fit out the kitchens and service areas but will fund building repairs and other infrastructure needs such as upgrading mechanical and electrical services. These have a far greater impact on the capital budget that the cost of upgrading interiors and equipment and are increasingly forming a significant proportion of the project cost.
In our view these costs should remain firmly within the client budget. Allocating these costs to the caterer can create an unrealistic rate of return on investment for the contract terms offered. Where contract terms are then extended to balance the ROI the client is merely storing a potential future problem. Catering facilities need to be upgraded every five years in the current market to keep abreast of changes in trends. When longer contracts are let there is a real danger that by year five of a ten year contract the state of the art facilities created at the outset of the contract are looking tired and dated unless the contract terms negotiated include a mid term investment.
Then there is the wider question of investment opportunity. Creating a café or restaurant on the high street requires capital investment and there is arguably increased risk of failure in a highly competitive environment (although some would argue that the limits imposed by venues on its caterers such as entrance charges, fixed operating hours, menu and tariff scrutiny create an uncompetitive environment of equal risk). But the lease arrangement provides longevity of tenure and an opportunity to build and sell a business which is not achievable within a third party contract arrangement where every five years or so the contract is re tendered. Caterers are starting to question the business sense of investing greater and greater sums of money into contracts which typically last an average of five years and which can be terminated with six month’s notice.
So what does the future hold?
Will caterers continue to inject the sums of money we have seen in the past?
I have been consulting to the museum and heritage market for over 20 years and I believe that private capital will continue to be available as there will always be some company willing to use capital investment as a sales tool. Capital investment is cyclical. Where a company adopts a growth strategy it has often used capital investment as a tool towards quick contract gain. This is usually followed by a period of consolidation where delivering a return on that investment becomes essential and the company policy takes a more inward focus at bottom line profit. These cycles of growth and consolidation have been going on for years and in my view are unlikely to change. The trick for the buying client is to recognise the point the company is in the cycle as being on the cost reduction/profit increase wave is not always that favourable to the client.
At the same time the caterers are delivering schemes designed to increase customer penetration and spend per head thus driving revenue. This is how most redevelopment schemes pay for themselves. We are seeing more innovation than ever before and the cafes and restaurants in client venues really are taking on the high street. But there does come a finite point where further growth is not achievable and many organisations are reaching that point due to space restrictions largely. It is impossible to drive more and more revenue from an operation which has reached its physical capacity.
The market is widening with catering companies venturing into the concession market from the more traditional contract catering sectors and corporate hospitality markets where growth has slowed in recent years. This increased competition will help to keep the market buoyant and the delivery of capital investment and good concession offers will be essential for those wishing to compete.
So a Rosy Future?
We believe the future does look good but venues must not become greedy. The concession model works because it provides a decent profit to the caterers in return for modest risk compared to the high street. Reduce the profit margins and increase the risk by demanding higher concessions and capital investment and the model could prove to be tipped too far in favour of the client.
Director, Boyd-Thorpe Associates