The Economics of School Food Challenges and Opportunities

The Economics of School Food Challenges and Opportunities Scott Richardson Director of Research & Strategic Initiatives scott_richardson@projectbread.org

Imagine an industry where your market size is fixed retail operations are only open to customers for a fraction of the day product is highly regulated pricing is capped by federal mandate input costs are tied to unregulated external markets purchasing power is limited funding for capital investments in equipment is minimal to nonexistent brand carries historical baggage and a negative perception customers are demanding and often indifferent to your efforts management decisions are scrutinized by an under-informed public

Imagine an industry where your market size is fixed retail operations are only open to customers for a fraction of the day product is highly regulated pricing is capped by federal mandate input costs are tied to unregulated external markets purchasing power is limited funding for capital investments in equipment is minimal to nonexistent brand carries historical baggage and a negative perception customers are demanding and often indifferent to your effort management decisions are scrutinized by an under-informed public primary responsibility is to provide America s children with the healthy nutrition they require for academic achievement and global competitiveness in the 21 st century

We demand a lot from school food 4

Pick any two What is High Quality? How Fast? Why fast? Inexpensive for whom? 5

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Millions of Meals Served Annual school nutrition meal volume 8,000 7,000 6,000 5,000 SFSP SBP NSLP 7.45 billion meals served in 2014 4,000 3,000 2,000 1,000 0 Source: USDA 6

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 School meals: an increasingly critical safety net 100% % of Total NSLP Participation by Eligibility 90% 80% 70% 60% 50% 40% 30% 71% 20% 10% 0% Source: USDA 7

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Millions of Dollars Federal spending on school nutrition $25,000 $20,000 SFSP SBP NSLP Federal school nutrition 2014 spending: $20.5 billion $15,000 $10,000 $5,000 $0 Source: USDA 8

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Millions of Dollars Federal spending on school nutrition $700,000 $600,000 $500,000 SFSP SBP NSLP US DoD 2014 BUDGET: $614 billion $400,000 $300,000 $200,000 $100,000 $0 Source: USDA 9

The components of a school food business REVENUE - EXPENSES = NET INCOME / (LOSS) 10

The components of a school food business REVENUE - EXPENSES = f(x) of: Compliance with USDA regulations District size Average daily attendance Participation rate Offerings: breakfast / lunch / snack / supper / summer / Ala carte Eligibility mix Cash: USDA / State / Municipal reimbursement Ala carte sales Catering In-Kind: USDA ( commodity ) Foods NET INCOME / (LOSS) 11

Revenue: Federal / State / Local Reimbursement $3.50 $3.00 $2.50 $3.10 $3.12 $3.04 $3.06 $2.98 $3.00 $0.0575 MA CONTRIBUTION $2.00 $1.93 $0.06 CERTIFICATION $1.62 FREE $1.50 $1.00 $0.82 $1.32 $1.63 $2.58 $2.60 REDUCED PRICE PAID $0.50 $0.00 $0.41 $0.07 SNACK $0.28 $0.28 $0.28 $0.30 NON-SEVERE NEED SEVERE NEED <60% F/R >=60% F/R BREAKFAST LUNCH Source: USDA 12

Revenue: In-Kind Product - USDA Foods Based on previous year s reimbursable lunch participation rate multiplied by an entitlement rate (tied to consumer price index) Currently $0.2475 Example: 4,000 student district served 3,000 lunches per day (75% participation rate for 180 days) in school year 2013/14. SY2014/15 USDA entitlement would be $133,650 Can be used on lightly processed brown box product Can be diverted to processor for value-added product Bonus commodities are often available and can enhance entitlement levels Source: USDA 13

Ala carte sales http://www.pepsicoschoolsource.com/ 14

The components of a school food business REVENUE - EXPENSES = f(x) of: Compliance with USDA regulations District size Average daily attendance Participation rate Offerings: breakfast / lunch / snack / supper / summer / Ala carte Eligibility mix Cash: USDA / State / Municipal reimbursement Ala carte sales Catering In-Kind: USDA ( commodity ) Foods f(x) of: Food Labor Infrastructure costs Program structure Leadership & management NET INCOME / (LOSS) 15

Food expenses: many factors to consider Seasonal market prices Customer preferences vs inventory risk of introducing new items Comparison of canned / frozen / fresh price and quality Purchasing practices Contracting Purchasing power - collaboratives Equipment and inventory management considerations Storage type and capacity Spoilage concerns (volume, FIFO vs LIFO) Preparation considerations Heat n serve vs scratch vs lite scratch Labor time and training costs 16

Current school meal regulations present nutritional aspirations and financial challenges Old (1995) Current (2010) Calories Sodium Vegetables Fruit 664 average calorie minimum No calorie maximum No requirements Two fruits and/or vegetable options required 550-650 average calories Sodium reduction targets through 2022 ¾ cup required daily Minimum weekly requirements for vegetable subgroups ½ cup required daily Milk Flavored milk unregulated Nonfat chocolate milk only Source: USDA 17

Food costs drive many menu decisions $0.40 $0.35 $0.30 $0.25 Food cost per USDA-compliant (3/4c) vegetable serving $0.36 $0.27 $0.20 $0.15 $0.10 $0.12 $0.05 $0.00 Baby Spinach Tomato Sauce McCain's Shoestring French Fries Source: Calculated using MA school food distributor price lists and NFSMI Food Buying Calculator 18

Food costs drive many menu decisions Component Breakfast #1 Cost Breakfast #2 Cost Grain Whole grain honey wheat bagel $0.14 Trix Cereal Bar $0.15 Protein Egg patty $0.11 N/A $0.00 Fruit Fresh gala apple Milk White milk $0.21 $0.18 Dragon punch $0.11 Fat free chocolate milk $0.22 Total Food Cost $0.64 $0.48 Annual cost for 10,000 student district with 50% participation $576,000 $432,000 Source: Calculated using MA school food distributor price lists $144,000 difference 19

Expenses: Labor The key metric: meals per labor hour Collective bargaining Tenure and cost of living increases Training Culture 20

Expenses: Infrastructure Physical building constraints drive equipment choices Capital budgets drive long-term investment and repair decisions and, ultimately, menu decisions VS 21

School food service management structure and service delivery 22

School food service management structure and service delivery 23

Management structure and service delivery model STRUCTURE NATIONAL PLAYERS REGIONAL PLAYERS VALUE PROPOSITION FSMC Aramark Compass Group Sodexo Numerous Higher revenues Lower food costs Greater efficiency Larger net profits to district Better food Better customer experience Fewer managerial headaches Potential profitability guarantees Allows district to focus on academics Meal Vendor Mass produced / frozen: Preferred Meal Systems Small batch / fresh: Revolution Foods Numerous Program efficiency Food safety Higher quality food Lower labor costs Lower equipment costs 24

Some vended meals meet the letter of the law, but do they meet the spirit of the law? = School meal represented is from Lynn Public Schools May 2015 elementary menu FDA: Food manufacturers can show 0 grams of trans fat if a serving contains less than 0.5 gram. MA law prohibits the use of fryolators for competitive foods USDA: On any given school day, the calorie level for the meal may fall outside of the minimum and maximum levels as long as the average number of calories for the week is within the required range. Photo Sources: www.preferredmealsmenu.com; www.mcdonalds.com 25

School food convenience is big business Sources: https://biz.dominos.com/web/school-lunch-program/index 26

Reformulated products meet USDA guidelines 51% whole wheat flour Pepperoni contains 33% less fat and 50% less sodium than our traditional pepperoni 1/2 the fat of regular mozzarella 35% less sodium than our traditional pizza sauce http://www.dominosbiz.com/biz-public-en/biz+footer/school+lunch/nutrition/nutrition.html 27

What do students get when they eat the same pizza outside of school? 380 830 14 580 9 7 340 3.5 Calories per slice Sodium (mgs) per slice Total Fat (g) per slice Saturated Fat (g) per slice Domino's Smart Slice TM Hand Tossed Crust Domino's TM Hand Tossed Crust Sources: https://order.dominos.com/en/pages/content/nutritional/cal-o-meter.jsp#; http://www.dominosbiz.com/images/school_lunch_nutritionfacts_v4.pdf; Accessed 9/30/14 28

Are our cafeteria options really educating our students to make healthier choices? VS Sources: https://biz.dominos.com/web/school-lunch-program/index ; http://pizza.dominos.com/illinois/round-lake-beach/60073/308-w-rollins-rd/ 29

The promise of outsourcing Higher revenues Lower food, labor, and equipment costs Greater net income NET LOSS TO DISTRICT EQUIPMENT NET INCOME TO DISTRICT FSMC FEE REVENUE COVERING EXPENSES LABOR REVENUE COVERING EXPENSES EQUIPMENT LABOR FOOD FOOD REVENUE EXPENSES REVENUE EXPENSES SELF-OP FSMC 30

The promise of outsourcing Rigorously evaluating projected program improvements against potential fees in advance of contracting is critical NET LOSS TO DISTRICT NET INCOME TO DISTRICT FSMC FEE EQUIPMENT REVENUE COVERING EXPENSES LABOR REVENUE COVERING EXPENSES EQUIPMENT LABOR FOOD FOOD REVENUE EXPENSES REVENUE EXPENSES SELF-OP FSMC 31

Deciding to Outsource Have clear, measurable goals Choose your partner wisely make sure their values align with your goals Engage in rigorous RFP development and contract negotiation with clearly defined metrics Monitor vendors and FSMCs routinely for contract compliance and meeting agreed upon milestones 32

Business complexities can incentivize food service actions Ensure food safety Meet USDA guidelines Offer items popular with children Maximize efficiency of lunchline throughput Minimize complexity and labor for line staff SCHOOL FOOD INCENTIVES Meet USDA guidelines Offer items popular with children Minimize food, labor, and equipment costs Choose a management structure that promised success 33

School food IS about profits profits that can be reinvested in children s health REVENUE - EXPENSES = f(x) of: Compliance with USDA regulations District size Average daily attendance Participation rate Offerings: breakfast / lunch / snack / supper / summer / Ala carte Eligibility mix Cash: USDA / State / Municipal reimbursement Ala carte sales Catering In-Kind: USDA ( commodity ) Foods f(x) of: Food Labor Infrastructure costs Program structure Leadership & management NET INCOME / (LOSS) Determines ability to reinvest in program improvements and greater student impact 34