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How to run a nil-subsidy contract

19 November 2010

How do you create a perfect recipe for running a successful nil subsidy catering operation? Caroline Fry explains

The drive towards changing the structure of catering contracts from cost-plus to low or nil subsidy continues to gain momentum, but it's not always possible to achieve.

There are key ingredients that impact on a contractor's ability to operate at nil subsidy. A crucial factor is having sufficiently large numbers on site to make it feasible.

A nil subsidy solution can have a lower percentage uptake of site population than a subsidised service because tariffs will be higher, so potential customer numbers need to be high enough to allow for this.

Then there's the relationship between tariff, sales volume, gross profit, operating expenses, labour costs and, finally, the caterer's income, to dictate whether there is any subsidy. Lower numbers on site will mean a smaller service or offer which will be less labour intensive.

To achieve nil subsidy a contractor would have to work to gross profits averaging about 55%, which may seem high, but that is before labour costs are taken into account.

To set up an operation to nil subsidy or, indeed, to move from a subsidy to nil, involves looking at each of the areas above and the key factors that influence the relationship between these costs.



FIVE INGREDIENTS TO CONSIDER FOR A NIL SUBSIDY OPERATION

1 Tariff/Sales volume How a tariff is established depends on what the market will bear, for example, what the customer is prepared to spend in-house. The lower the subsidy, typically the higher the tariff and the less reason for staff to use an in-house facility as opposed to competition. What are your customers' expectations? What is the external and internal competition? What is the disposable income of staff on site? Effective marketing and merchandising will help drive sales but unlike a retailer or commercial venue, the potential customer base is capped and all repeat. Similarly, discounting or special offers will only have a limited impact in driving volume.
2 Food cost and gross profit These are intrinsically linked. The cost of the product will be determined by the quality of the ingredient sourced and, to some extent, the quantity. The gross profit that can be made on menu items is different and, again, this is dictated to a great extent by what tariff the market will bear. The item that delivers the highest margin is hot beverages. A higher margin can also be made on hot meals compared to salads due to market perception. The overall gross profit that can be generated, therefore, will be determined by the full range of products sold and the sales mix.

3 Labour The spend on labour is determined by many factors such as the total opening hours, the range of food offered and the volume of on-site prep versus bought-in items. Labour represents, not only the biggest cost, but it is also important to note that it is a fixed cost because, regardless of volume, a core team is required at a minimum. Volume of trade needs to be there to support this fixed cost, hence the importance of site population and its reliability.

4 Operating expenses In order to stay within the right percentages to achieve the nil subsidy, only the direct cost of sales can be included. Costs to support the provision of the facility such as equipment purchase, rental and repair need to sit outside these expenses.

5 Management fee The management fee represents the skills and resources provided by the caterer to deliver to the client, not only the product or service they want, but also within an agreed price framework. The actual profit within a management fee is very low. The fee has to cover everything from health and safety expertise, HR management, payroll, marketing, food development and all of the procurement management including due diligence.

Caroline Fry
Managing director
Charlton House

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Jacobs Media Group is honoured to be the recipient of the 2020 Queen's Award for Enterprise.

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