Back to Basics: E&S Budgets for 2010 and Beyond

Several industry-leading consultants share their perspectives on operator trends and developments when it comes to planning for their facilities and purchasing foodservice equipment and supplies.

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The media have touched on an important concept lately. Following a two-year recession that led to thousands of company closures and layoffs, tightened credit markets, housing foreclosures and out-of-control debts, the economy has reached a turning point: the closing of an era in which consumer and commercial spending reached excessive, almost wild, levels. It's safe to say most of us in our personal lives have revisited our budgets and assets, reconciled debts and started really thinking through each and every new purchase. Our culture of spending has certainly changed. We're entering a new decade of smarter, savvier, investment-driven spending.

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The foodservice industry is no different. Discretionary spending certainly remains discretionary. But at the same time, companies are making smarter, wiser choices with long-range goals in mind. In this article, we'll discuss some spending trends among members of the foodservice equipment supply chain, and how those trends impact budgets, from replacement purchases and major renovations, to capital expenditures and the bidding process, to short- and long-term operational cost savings.

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Smart Spending

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“When you buy equipment now, it has to last a long time — it better last a long time.” —James Camacho

"Foodservice operators are spending more on equipment now because more of us now realize you get what you pay for," says Zena Dater of Oswalt Restaurant Supply and FE&S' 2008 DSR of the Year. According to her most recent sales records, operators are buying equipment pieces that may cost more up front but will last over time, with the potential to carry through future economic challenges. "People aren't being cheap anymore or buying just based on price. And when they spend, they spend wisely."

Even when it comes to smallwares, Dater says she sees customers buying more on quality than quantity or price. "Even something as simple as tongs — nobody wants just a random tong; they want one that will last over the course of a year. They now realize they'll spend twice as much replacing it if it's of lower quality."

Replacement purchases also appear to be on the rise. "I think what we have begun to see, and what we're going to continue to see, are people who over the last couple years did not invest in new equipment or a service plan because of financial issues [and] are now needing to replace that equipment," says Georgie Shockey, principal of Ruck-Shockey Associates, a foodservice consulting firm. "Maybe they needed to replace an oven a while back but put it off the past couple of years because of the economy, and now that oven is about to die. As a result of this, I think the replacement business will continue to grow."

With replacement purchases becoming more prominent, other purchases are getting prioritized to an even greater degree. "If an operator doesn't need a total infrastructure redo, they tend to just change out what the public sees," Shockey says. "Many operators are fixing up the front of the house before the back of the house."

And when they do fix up the back of the house, Shockey suggests strategically limiting expensive fixtures and add-ons that the customer can't see. Doing so helps stretch limited dollars.

To help ensure a more efficient use of funds, it is important for the entire team — including the operator, consultants, engineers and the like — to come together to review the project's priorities. Doing this up front can reduce any surprise costs down the line. "By doing this on a recent hospital project, the engineers during their field work were able to identify certain drain lines with tie-ins where we could place certain equipment and outline areas that were good for placement of a hood," Shockey says. Because the team went over these details ahead of time, Shockey was able to strategically position equipment more quickly and accurately, which helped scut down on engineering costs for the overall budget as well as prevent costly layout reworking.

Planning for the Future

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“Who can afford to make a mistake nowadays with the economy the way it is and capital being so hard to justify? It’s almost like you have to make a sales pitch, and the more return on investment you demonstrate, the more leverage your ‘sale’ will get.” —Susan Wilkie

With the culture among operators encouraging smarter, tighter and better-informed equipment spending, consultants find they must work even harder to develop thorough and expertly detailed budget plans that are tailored to their clients' very individual needs. "I don't use the word budget — I like to call it a business modeling," says Susan Wilkie, principal of Wilkie Enterprises and a veteran foodservice management consultant. "Budgeting is just the end product of a larger goal. The planning leading up to it is the major portion of what has to take place to end up with a well-thought-out financial plan."

As a starting point, Wilkie sets up templates that reflect the client's vision for the menu and food, dining capacity, volume needs, customer satisfaction goals and profit projections. For example, Wilkie has been working with the Southern Alberta Institute of Technology, a technical trade college in Canada undergoing a major expansion and renovation. In addition to a number of new buildings going up, the college has looked to Wilkie to help bring its dated foodservice operation up to speed. The college's main goal for its dining facilities was to match its projections for a fast-growing campus population.

"They needed everything, new infrastructure, new concepts and overall trade dress," Wilkie says. "Not only did they need a facelift, they needed better equipment that could serve their growing customer market. The need to think and rethink about the future in this case was extremely important."

Rather than starting narrowly by building a budget line item by line item, Wilkie took a "big picture" approach and set out to build a business model that would meet all of the client's goals. To do this, extensive research was needed to find out what the students want in terms of foodservice, including how, when and where they like to eat their meals. In addition, she also had to determine the projected new capacity for the campus. It currently has an hourly meal capacity of 900 transactions, and a demand of 1,200. Wilkie knew her team would need to introduce additional points of service to meet the current demand, let alone the 2,880 transactions per hour anticipated in the future due to growth.

Energizing Efficiencies
While energy-efficient equipment can help reduce operating costs over time, so do efficient layouts and pieces of equipment that can perform multiple functions. "Anything that helps make the operation as efficient as possible helps the overall budget," Shockey says. "At the back of the house, we're looking for as many multitask equipment pieces as possible. At retail settings, we're looking for better POS systems, faster panini presses and other equipment that can do things at a better speed of service while maintaining or improving throughput. In the servery, we want equipment that can finish prepped food fast but also preserve the quality of the food. And we're looking for equipment that can do more with less space throughout the entire kitchen."

When it comes to labor efficiencies, Shockey first determines the least number of full-time employees needed to effectively run the operation and meet volumes. "Anything I can do to improve the operation without adding more FTEs, that's what my clients are looking for," she says. "Menu changes that require more production staff in the back of the house eliminates some of the dollars that will make a positive contribution to the ROI. But if I have more efficient production systems in place or multiuse equipment that can perform some of those tasks, that helps." Swapping duties among those FTEs already on staff helps reduce the number needed as well. For example, operators can train prep-kitchen staff to work induction cooking systems at a retail outlet, and vice versa. This cuts down on the need to employ two different sets of staff members.

"I think labor is going to be an increasingly important aspect of budgeting in the future," Shockey says. "It's becoming more and more expensive to employ an FTE, with unions, rising wages and heath care costs. Plus it's hard to find good, reliable labor these days."

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“I think labor is going to be an increasingly important aspect of budgeting in the future. It’s becoming more and more expensive to employ an FTE, with unions, rising wages and heath care costs. Plus it’s hard to find good, reliable labor these days.” —Georgie Shockey

Sizing the operational need is extremely important, according to Shockey. Determining realistic volumes for the operation and what it will need at its peak operational times should be at the top of the list when budget planning. "Look for ways to mitigate the budgetary impact such as reducing the quantity of a piece of equipment. For example, look into using two higher-efficiency fryers as opposed to three or four traditional ones. Or is it acceptable to order the second oven months after startup? In some cases, kitchens won't reach their full-volume potential until six to 12 months after startup, so taking this approach would provide some short-term budget relief," Shockey says.

Return on Investment
In design consultant James Camacho's eyes, operators are looking to spend wisely, for sure, but also less in general. For him, budget numbers are becoming more and more strict. "Everybody is trying to conserve money these days, it seems," says Camacho, principal of Camacho Associates. "Most of the time we are given a specific budget amount to work toward. Doing our layouts we have to really keep that total number and work toward that goal. There are times when I can offer ideas or equipment that may increase the budget, but I have to show that the payback and return on investment will happen during a relatively short time period."

For example, Camacho recently encouraged a client to invest in a variable-speed hood system that would turn on and off depending on peak hours of use. These systems are proven to save countless dollars in energy costs each year, but they become a difficult sell due to their higher up-front costs. "I can talk to the owners and say, this system will cost X thousand dollars more to put in, but if I tell them they'll get an ROI in, say, 16 to 24 months, then the client would look at it as a cost savings on operations over the years."

With utility costs on the rise, operators are increasingly concerned about monthly expenditures on gas, water and electricity. Thanks to better industry research, recording and testing, calculating return on investment numbers has become extraordinarily easier for most foodservice professionals. And knowing those ROI figures has become not only important but expected — especially when it comes to investing in energy-efficient equipment that tends to cost more up-front but save on costs over time.

"I had an email just yesterday from a restaurant owner wanting to know what was more efficient: a gas oven or an electric one," Camacho says. "I'll look at the amount of therms a typical gas oven uses and the cost per therm and then look at the cost per kilowatt use of an electrical oven and figure out the costs for both." Figuring out these added details requires more work on the consultant's part, but it's becoming the nature of business.

"There is definitely more shopping going on," Shockey says. Clients want the best value, but they're still concerned about price, both short-term and long-range. "A client may have decided on a specific brand and model they want, but purchasing departments are getting smarter and choosier when it comes to who they're buying from and what kind of deals they can get. They're also interested in the overall value of items and long-term relationships that mean extra care and service."

During the budgeting process is the best time to look into energy- and water-saving equipment and allow the projected ROI to play a role in the decision-making process. As the years progress, equipment will only get more efficient, which will lead to more resource saving. The time to buy them is now when you can, Shockey says.

Capital Budgets and Non-Commercial Spending
Federal funding is on the rise for schools, universities and even health care operations. Despite this, capital expenditure budgets appear to be getting tighter by the minute. As a result, bids for new projects must be chock-full of details such as upfront ROI calculations and evidence of a lot of prior team collaboration.

For example, working on a project for Southern Alberta Institute of Technology, which projects an increase in enrollment, Wilkie had to operate within strict budget parameters because of the massive overhaul the project required. One major point of contention dealt with the question of whether to bring in quick-serve brands to fill out retail and food-court areas. Research showed the students and faculty wanted this to happen, so the college wanted to move forward. But adding branded retail concepts would require the college to pay extra licensing fees and give away a portion of profits. As a result, projected volumes of these branded concepts must outweigh these added costs.

"It's a question of evaluating how many brands you can afford to put on campus, and which brands," Wilkie says. "The average brand may cost between 6 percent and 12 percent. You have to think of it as 8 percent of your revenue is going to pay for their licensing fees, and if you want to make a profit of at least 5 percent, now you're up to 13 percent for a target profit goal." Breaking even, or losing money is a possibility if other aspects of the design and planning — such as positioning, volume and capacity control, speed of service, throughput and other issues — fall into place.

"When trying to decide what to do, I break these development conundrums into steps," Wilkie says. "The first step is to understand your financial obligation. What level do you want to reach with respect to revenues and profits? The second step is to decide what you can afford to borrow. Step three is to determine what portion of sales can come from national brands. And step four is prioritizing what will provide the best return."

When it comes to big-ticket equipment purchasing for colleges and other noncommercial operators with capital budgets, determining capacity and volume first helps prioritize what's feasible and what's not. "I had a college once that wanted to buy a beautiful stone oven for their pizzas, but all they really could afford was a conveyor oven, or a series of deck ovens," Wilkie says. Each of these types of equipment has its pluses and minuses, and they each create a different type of crust. "With three pieces of equipment, you have three different products and in order to decide on what to buy you have to think about what students want, who is going to make the pizza and the level of training required, and how fast you have to get those pizzas out to match your volumes."

These are the types of extensive details capital budgets for noncommercial operations now require. "Who can afford to make a mistake nowadays with the economy the way it is and capital being so hard to justify?" Wilkie says. "It's almost like you have to make a sales pitch, and the more return on investment you demonstrate, the more leverage your 'sale' will get."

Federal and Military Budgets
There's a new player in the noncommercial world as military and federal foodservice projects are on the rise. With federal budget allowances going more toward defense spending, a number of bases in the United States are realigning and upgrading their living and eating quarters, according to Camacho.

"In these cases, they're looking for top-quality equipment," Camacho says. "These dining facilities can feed 1,300 or more people a day, twice or three times a day. One base here in Georgia that's realigning will get 30,000 more soldiers — that's a tremendous amount. We're talking 13 dining facilities serving three meals per day."

For obvious reasons, these bases can't afford to have equipment break down during meal service. The need for reliability increases when you factor in that service techs may be hard to come by due to security issues and distance. In addition, these types of clients don't replace equipment very often — when they get federal dollars, they spend them, and they're gone; and it's uncertain when the next round of funds will become available. "For some of these bases, only when equipment breaks down does it get repaired," says Camacho. With a number of bases going the design-build route, the time for investing in the most durable pieces is now.

Because the bidding process for major capital expenditures is becoming more complex, collaboration among project team members has become even more important than ever. "We've heard it a million times, but proper management of a capital expenditure budget can determine the success of a design-build or renovation project because this process balances all of the operation's needs," Shockey says. "It's important to work with the entire supply chain to ensure that all of the design elements and specifications are in the bid packages when they go out. Also, it's important to make sure that all parties have the opportunity to see and understand the design and the operational intent from the foodservice operator's perspective. Changing equipment and designs along the way could impact the operation year over year in expenses. Or, equipment may end up not fitting in the space allocated for it and have the potential to cause major regulatory and safety issues."

The Slippery Profit Margin Slope
As a result of the tighter business climate, the competition for new business has naturally increased. "We saw people almost giving projects away, and others bidding on cost, hoping to make money back on rebates and other means," Camacho says. As a result of this intense competition, the members of the foodservice equipment supply chain will face a bigger challenge in restoring eroded profit margins in the years to come.

On an individual basis, one way to alleviate falling bid prices and profit margins is to hold firm against "de-value engineering," as Camacho has nicknamed the practice. At the same time, it's easy to see why cash-strapped operators would want to cut corners on equipment purchases to save extra money. But in the long run, cheaper, less durable equipment will break down and lead to more service calls, more repairs and more replacements.

In fact, Camacho says he's still "blown away by how expensive equipment in kitchens [is]." Right now he estimates facilities cost about $140 to $150 per square foot for corporations, and more for universities. Camacho has a couple of church projects running at about $110 per square feet.

It seems baffling, then, that prices remain high when profits are low. So how does one strike a balance between these two critical issues — trying to keep costs down but not substituting higher-priced but longer-lasting equipment? When planning a budget, Camacho asks project team members to send their alternative equipment suggestions or requests for approvals well ahead of the bid date. "This way everyone is bidding apples to apples instead of coming in at the bid with new suggestions that will bring the price of everything down."

Given these cash-flow issues, used equipment has gained some footing among smaller, independent restaurants looking to outfit new kitchens. While buying used equipment can carry a stigma among some foodservice professionals, not all of these items are bad, Camacho says. "There are two things I tell people when it comes to used equipment. I recommend they not purchase used refrigerators or ice makers unless they know how long these units have been in operation. These pieces of equipment run 24 hours a day, and they get a lot of wear and tear. In contrast, convection ovens, mixers, even some ranges, don't run all the time. So in those cases, used equipment can work."

Like buying a used car, purchasing previously owned foodservice equipment comes with certain risk factors. It is difficult to know too much about the unit's usage history or how well it was maintained by the previous owner. "It's important to try to get a little bit of a warranty on used equipment," Camacho says. "And if you have done your research and find the right piece of used equipment, it is important to act fast. I've had clients tell me they found a great piece of used equipment and they want to buy it; but they go back the next week, and it's not there."

2011 and Beyond
So what can we expect for the New Year and beyond? "I still see smaller independents considering used equipment," Camacho says. But, he and Shockey see schools, universities, corporate facilities and other non-commercial entities continuing to look even further down the road when it comes to equipment purchasing and investments. Things will become greener as well as more durable, efficient, sophisticated and labor-saving.

"When you buy equipment now, it has to last a long time — it better last a long time," Camacho says. Shopping for better mortgages, building up a savings to match at least six months of pay, paying down credit cards and making wiser investment purchases, all of us in our personal and commercial spending lives are swapping the low cost of cheaper items for the consistency, performance and durability higher-quality equipment and supplies bring to the table.

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