In recent months, many clients have asked us whether a profit-and-loss, management fee, or profit-share contract is best for their institution. Unfortunately, there is no black-and-white answer, as each university’s situation differs. But if we look at how each structure works and the pros and cons of each, we can better understand what might be the best fit for your institution.
Before discussing the pros and cons, we need to understand the fundamentals of these three structures. On one end of the spectrum is the profit & loss (P&L) model. In a P&L contract, the foodservice operator collects all revenues and accrues all costs. The Operator then often provides a commission back to the school on a percentage of sales. In this model, the financial risk resides with the Operator; if the dining program operates in the red, they are on the hook to cover these losses. On the opposite side of the spectrum is a management fee model. In this model, the Operator is essentially operating the program on behalf of the institution; the institution incurs all profits or losses. In this structure, an Operator makes their profit through a management fee, usually a percentage of sales or costs. The third model, a profit share, is a hybrid between these two models. Like a management fee, the Operator is essentially managing the dining program at the institution’s behest. If the program is profitable, however, the Operator retains a portion of these profits. Now that we understand these three models, let’s look at the pros and cons of each.
The main benefit of a profit & loss model is the reduction of financial risk for an institution. The Operator is ultimately responsible for managing your dining program in a profitable manner; if they’re unable to do so, however, they are on the hook for any losses, not you. Profit & loss models usually include a commission on sales back to the institution, affording a small but steady stream of income from the dining program. While there is relatively little financial risk for a school on a P&L contract, it is considerably riskier for the Operator. Many foodservice providers outright refuse to take on a P&L contract because they don’t want to be responsible for losses that may be out of their control, such as decreasing enrollment. This need to remain profitable may also lead foodservice providers to make decisions that aren’t in your school’s best interest, such as cutting hours of operation, reducing staffing, increasing costs at retail outlets and catered events, or even shutting down locations entirely. This lack of control over one’s program has been a significant pain point for many of our clients. Another inherent concern clients have with the P&L model is participation rates or missed meal factors. All food service providers assume some portion of board meals will go unused. In the case of a P&L contract, the food service provider benefits financially when missed meals are higher than budgeted. This may create an inherent lack of alignment between the contract structure and the institutional goals.
The management fee contract puts this control back in the institution’s hands. Unlike a for-profit foodservice provider, your school can prioritize the student dining experience over profitability if it chooses to do so. This means you can require your foodservice provider to maintain late-night hours, increase food quality, or hire more employees if lines at the dining hall are getting out of control. While your institution may take a financial hit if your dining program operates at a loss in any given year, it can also generate a profit from these operations. Unlike a P&L model, your institution would retain the entirety of profits, not just a small commission percentage. Another advantage of the management fee is key performance indicators (or KPIS) can be put in place with a risk reward component which helps ensure the program is aligned with institutional goals. When putting your dining program out to bid, management fees are also much more attractive for Operators due to the lack of financial risk. Bid processes that look for a management fee almost always garner more bidders than a P&L process.
A profit share model shares many of the same risks as a management fee structure, namely the possibility of your institution incurring a loss if your dining program is unprofitable. In the event of profits, however, these are shared between your institution and your food service provider. While this reduces the return your institution might see, it ensures your Operator has “skin in the game” and might incentivize them to operate more fiscally responsibly.
These three types of contract structures all have their pros and cons. It is ultimately up to you to determine what structure will work best for you based on your institution’s priorities. Of course, JGL is always happy to help guide you through this decision based on your school’s unique needs!