Compass has come under fire after claims by a supplier that the caterer is levying massive rebates that it does not pass on to its clients.
Managing director Ian Sarson argues that it is no secret that Compass uses its scale to leverage its buying power and refutes suggestion that rebates are running into double-digit percentage figures.
But is Compass doing things differently to the rest of the market? Are rebates a legitimate business process or should the benefits be passed on to the client?
Hi Janie
The short answer is yes, discounts are justified, and are a legitimate business process. They are a way of life, so there is no point in ignoring them. But in my view it is the transparency and monetary level of discounts that are retained that is in question. Certainly, with the financial climate as it currently stands, clients are looking for their contractors to do what they do best – save them money whilst continuing to turn out the finest quality food and services.I can understand how discounts can become tempting, particularly in the large companies where significant margin and sales growth is a requirement and a lot of these very large discount incomes now being challenged have already been factored into their annual turnover. Often these companies are under pressure from either public shareholders or they have high levels of debt to service, and so if existing contracts are lost and margins tightened these reductions are passed back to other clients through increases in discount. But no-one can run a catering company, providing all the correct support services for the protection of the client’s employees, pupils, students, customers or residents, on a fee of £5k per annum. Any client who genuinely thinks that this can happen needs some guidance and quite frankly, this is also the reason why we are now seeing companies in the contract catering sector failing every now and then. Yes, it is a very competitive market, but a very low 'competitive' fee only means that invisible discounts kick in. If the client accepts that, then so be it, but they should know that it is there and happening and they don’t have any control over it. Far better for them to agree a realistic fee and to then get a corresponding reduction in cost!The long term answer has to be with openness and transparency between contractor and client. At Host one of our solutions to this is our collaboration and development with Caternet Ltd, of the G-Shop e-procurement system (www.caternet.co.uk). G-Shop trades with local and national suppliers and allows clients to see the cost of the food they are buying on a real time basis as well as delivery details and a full report on the cost of all commodities throughout the year (for seasonal fluctuations). This means our clients are in control financially, while we look after the day-to-day operation of staffing, HSE support and so on.Transparency and a realistic fee arrangement has to be the answer as we move forward in these challenging times.Jerry Brand, managing director, Host Contract Management
Jerry Brand and Ian Sarson are absolutely right in what they say . One of the reasons to employ a caterer is to take advantage of their purchasing power to enjoy better food prices than they might if they operate their catering directly. Responsible caterers employ whatever techniques they can to ensure they get low prices, and volume discounts is an obvious tool.
The real issue here, as Jerry says, is transparency. Clients who don't take the time to understand how caterers work often end up not seeing the benefit of the low prices negotiated by their caterers with their suppliers. It then comes as a nasty surprise when they find out. Inevitably, there are caterers out there who both retain discounts AND charge a "competitive" (as opposed to low) fee. This could be considered to be sharp business practice, but is it actually any different to any other business getting the most they can from their customers? It's no secret this is how the industry works, and clients simply need to take an active role in managing their caterer, starting by understanding the accounts. It is remarkable how few do this - although as a consultant I should be thankful I suppose, as they tend to need a helping hand from us!
One additional point worth making in the current market is how all this works in a nil subsidy or risk contract. Caterers love to say that on those occasions, the client doesn't need to get involved in the whole issue of discounts, as the risk sites with the caterer. This is a fantastic smokescreen. When setting up the initial financial model, it is critical that discounts are taken into account so that true, accurate food costs are used. If inflated costs are used, then tariffs may have to be higher and/or services are less. Similarly, once operational, it is important that caterers report true, accurate results using net net food costs. In recent project, the caterer was claiming that they were losing money on the contract. However, once about 10% food discounts (and yes - they are absolutely in double digits!) were taken into account, this was proven not to be the case. Here, as in many contracts of this nature any improvement in financial performence was shared with the client, so they got a payback, whereas in the original financial reporting they didn't.
So, as in most contract management, it's all about "buyer beware" - it's just that that keep us in business!
Interesting point about the clients. Does that mean that if a client doesn't show interest they can kiss any benefits of scale goodbye? If so, is that right?
That might be overstating it, but even when a client goes through a tender and sets the contract up with net purchasing/all discounts returned, if they don't keep an eagle eye on it, most caterers will start feeding discounts in to some degree very rapidly to increase their earnings. Of course, if the client doesn't address the issue of net purchasing and discounts at all when they first set up the contract, then the caterers MAY (but won't necessarily of course) retain some pretty significant discounts from the outset.