After graduating in 1989 from the Culinary Arts program at George Brown College in Toronto, you (Paulo) worked in various restaurants across Canada to gain culinary experience and sharpen your entrepreneurial skills. After attaining your designation as a Red Seal Chef in 1996, you decided to open Third Cup, a mid-sized restaurant in the financial district of Vancouver. For the first few years, you worked tirelessly to establish the restaurant, clocking an average of 72 hours a week. It was evident that competition was fierce within the volatile foodservice industry, especially in the heart of Vancouver where there were similar restaurants on every corner competing for the same target market.

Hard work paid off and in 1999 Third Cup expanded into contract food services with local financial district firms. In order to expand, you purchased a small catering company and a commissary kitchen. After success in Vancouver, the next step was acquiring a number of small and mid-sized catering companies throughout Canada, which became Third Cup's contract food-service division. By the end of the year, Third Cup had a very reputable account list with clients in Vancouver, Calgary, Toronto, Ottawa, and Montreal.

The specific activities needed to manage a contract food-service location included the following:

• planning and evaluating daily operations;

• determining the types of food and services to offer;

• recruiting, hiring, and training staff;

• creating staff work schedules, monitoring staff performance, and conducting performance reviews;

• implementing operational procedures;

• negotiating arrangements with suppliers for food and other supplies;

• controlling inventory;

• constantly satisfying the demands of customers and clients;

• enforcing liquor regulations;

• monitoring revenues and modifying procedures, menu items, and prices;

• ensuring adherence to health and safety regulations;

• implementing and analyzing budgets; and

• preparing operating statements and related accounting forms.

Although not easy, these activities were essential for delivering a quality foodservice program. The proper execution of these activities made privately owned, Vancouver-based Third Cup a leader within the Canadian market for contracted food services.

INDUSTRY DESCRIPTION

In order to focus on core competencies, many companies outsource their on-site restaurants,

cafe´ s, catering, office coffee, and vending services to food-service professionals. These

food-service companies are responsible for all aspects of the food and beverage needs at a

client's location. On-site food services are viewed as an employee benefit because it allows

the employee to purchase a meal quickly and conveniently. Google Inc., as an example,

has outsourced its cafe´ to a professional food-service company. Such companies often

offer additional employee perks such as fitness centers, day cares, and dry cleaning, which

are ways of enhancing employee satisfaction and supporting a positive corporate culture.

There are various benefits associated with outsourcing on-site food services, for

example, high-quality food, healthy selections, and reasonable prices. Keeping employees

on site during their lunch hour is not only convenient for the employee, it also increases

employee productivity. It takes less time to walk to the on-site cafe´ than to travel to an offsite

restaurant. Moreover, the interaction of employees at lunch leads to conversations and

the discovery of common interests, improved morale, and more effective teamwork.

Major competitors in the contract food-service industry include the full range of

restaurants from fine dining, to casual dining, to quick-service restaurants and food courts.

The current-year forecast for contract food services is about $3.6 billion, which is a 6

percent increase over the previous year. The industry is large, competitive, and fragmented.

AN OPPORTUNITY

You (Paulo) were working on a proposal for Morgan & Co., a large multinational

consulting firm with an on-site cafe´ . There were three additional food-service companies

bidding on this contract. Two competitors were large international food-service companies,

while the third was a small local catering company. You were cognizant that this was a

price-competitive bid and that the process was being driven by Mr. Robert Fung, Vice

President of Administration at the consulting firm.

Robert explained the decision to outsource at the meeting with the bidders who were

preparing proposals:

Morgan currently operates the cafe´ itself (in-house). However, Morgan senior

managers want to outsource the food services, as they know this is not a core competency

and a professional food-service company will likely do a better job. Senior managers

appreciate that, when contemplating a change from a self-operated service to a managed

contract food service, some opportunities need consideration.

Morgan provided all the bidders with the following information to help develop the

best financial offer:

• Demographics: Average age 31; 60 percent male, 40 percent female; 80 percent

single-person households

• Average income: $85,000 per year

• Current population: 1,155 employees

THIRD CUP 239

• Current cafe´ customer participation: 59 percent (average daily customers divided by

total employees)

• Current hours of operation at the cafe´ : 8:30 A.M. - 5:00 P.M.

• Average breakfast customer count: 193

• Average lunch customer count: 490

• Average check: $4.00

• Current cafe´ revenue: $638,000

• Product costs: 37.2 percent food, 3.5 percent paper

You went to the Morgan cafe´ to observe the customer flow during several breakfast

and lunch periods. You noticed a very slow breakfast period, with customers mainly

purchasing coffee and baked goods, while lunch had more participation with the majority

of customers purchasing the daily meal special at $7.99. According to the cash register,

there were nearly no customers after 3:30 P.M. You considered the customer participation

and counts from Morgan to possibly be exaggerations and when creating the proposal you

decided to anticipate a lower participation number to be more consistent with your

observations. You also noticed long line-ups at the cash register, a lack of menu variety,

and health and safety issues in the kitchen.

With the information provided by Morgan and that which you gleaned from your

observations at the cafe´ , you prepared the Third Cup proposal shown below.

PROPOSAL

Third Cup specializes in providing nutritious, delicious, and exciting food programs with

industry professionals, who are well-trained and can address any challenges facing an

organization with on-site food-service capabilities. Proposed operational changes include:

• Improve menu quality and variety - additional ethnic options to add variety to the

menu, and better quality products, such as organic, locally grown vegetables.

• Implement health and safety program with food-service staff training - ensure that

staff understand quality assurance and health and safety procedures related to food

services.

• Improve marketing of healthy food options - the trend toward healthier eating and

balanced choices encourages customers to make informed decisions based on

healthier food choices.

• Improve customer service - provide customer service training to all foodservice staff

to ensure a positive experience for all cafe´ customers.

• Improve client satisfaction - ensure open communication and develop a positive

relationship with key client representatives, essential to exceeding client expectations.

This will be done with quarterly business reviews, detailed billing, customer feedback

analysis, and performance measurement programs.

Third Cup has considered the current facility layout, preparation and cooking

capabilities, and population. Experience in comparable facilities was used to determine our

proposed financial plan. Third Cup has based the financial projections on the following

significant first-year assumptions:

• Revenue $630,455, which represents:

o $472,840 cafe´ revenue

o $157,615 catering revenue

• Product cost $253,944, which represents:

o $233,204 food costs

o $20,740 paper costs

• Labor costs $214,324

• Participation rate 55 percent

• Total direct expenses (marketing, promotions, health and safety, etc.) $92,875

• Population base 1,155 employees

• 45-minute lunch break and two 15-minute coffee breaks

• Existing market-based pricing will be maintained upon commencement of service

• The scope of service includes the cafe´ and catering services

• Net income (revenues less all costs) accrues to Third Cup

Some of the more specific details include:

• Third Cup will operate the cafe´ for Morgan under a profit or loss agreement. Third

Cup will be responsible for all revenue and costs of operation without financial risk

to Morgan.

• The agreement shall be for a term of five years.

• Third Cup shall have the exclusive right to provide all food services at Morgan.

• Morgan will supply all equipment necessary to operate the food services, including,

but not limited to, small wares, pots and pans, office furnishings, china, and cutlery

for catering and cafe´ service as required.

• Morgan is responsible for all utilities, as well as for maintenance and replacement of

equipment.

THIRD CUP 241

• The proposed $28,300 capital investment by Third Cup will be depreciated over five

years and includes two cash registers ($5,000 each), a pizza oven ($8,300), computer

equipment ($5,000), coffee bistro equipment ($3,000), and signage ($2,000).

• Labor costs:

o One full-time executive chef at $750 per week; 40 hours per week.

o Nine food-service staff at $9.14 per hour; average of 29 hours worked per week; of

the nine food-service staff, four are full time.

• Hours of operation: 8:30 A.M. - 3:30 P.M.

• Assume market-based pricing: salad $4.50-$6.00, deli meats and cheese on specialty

bread sandwich $4.99-$6.99, fresh-baked muffins $1.10, bagel $1.30, donuts $1.00,

pizza $3.29, burger $3.75, combo meal $7.99, beverages $1.10- $2.99, prepackaged

salads $5.99.

The capital investment of up to $28,300 will support the efficient delivery of Third

Cup's food-service programs. Third Cup will maintain market-based pricing to employees

at the consulting firm and honor existing prices upon commencement of services. In

addition, Third Cup will provide Morgan with a detailed operating statement each month.

The assumptions behind the proposal included the following:

• Morgan's on-site employee base to remain at a minimum of 1,155 employees for the

term of the contract.

• Catering sales to remain consistent over the term of the contract (if Morgan were to

eliminate catering at meetings this would impact the overall revenues and all costs).

• Hours of operation of Morgan office and cafe´ to remain the same as proposed.

• The client is responsible for repairs, power, electrical, etc. to remain the same over

the life of the contract (e.g., if Morgan decides they no longer are willing to pay for

the electricity bills for the cafe´ , that would be an additional expense Cucina would

incur and it would affect the operating statement).

• Labor rates, food costs, and paper costs to remain consistent with consumer price

index (CPI) increases.

• Increase in cafe´ and catering prices based on CPI increases.

MORGAN'S RESPONSE

Robert Fung reviewed the food-service proposals and, after much deliberation and

calculation, he rated Third Cup as first choice among the four competitors. Robert selected

Third Cup based on its proposal, as it seemed to have the potential to meet Morgan's

objectives for food services. Specifically, Robert selected Third Cup as the front-runner for

the following reasons:

• Qualified food-service professional with national experience: numerous positive

references provided by current Third Cup accounts across the country.

• Financial: the capital investment offered by Third Cup was greater than the other

bidders.

• Risk: zero financial risk.

Accordingly, Robert requested a meeting with Third Cup to discuss this opportunity

and to negotiate the contract.

Suspecting that you were rated as the first choice, you decided to bring to the meeting

Mr. Samuel Chin, Controller at Third Cup, who has over five years of experience in

negotiating and finalizing food-service contracts.

MEETING WITH MORGAN

You and Samuel met with Robert at the appointed time. After the usual formalities, you

asked Robert to specify Morgan's objectives for the cafe´ . Robert explained that senior

management wanted the participation rate to increase by 15 percentage points over the term

of the five-year contract, which would indicate employees were highly satisfied with the

food and services. He went on to say that senior management believed greater participation

would assist with improving morale, productivity, and work-life balance, as employees

would be able to treat themselves to healthy food on site.

A bonus equal to five percent of the fifth-year revenues would be provided by Morgan

to Third Cup if the 15 percent improvement in participation was achieved or exceeded.

Robert specified that Morgan wanted important performance measures incorporated into a

five-year budget, which was to be included in the contract. He added that the budget must

be acceptable to Morgan before the contract was signed.

Third Cup required each food-service contract to at least break even. With supplier

rebates, Third Cup would have achieved its profitability requirements at breakeven, that is,

when accrual income was zero.

You (Paulo) must now prepare a five-year budget or plan for the Morgan opportunity.

For the budget to be acceptable, it will need to meet the profitability requirements of Third

Cup and the participation improvement expectations of Morgan.

I have been given this case. Please let me know how to start and all the major steps i should do.