Food-Service Companies Eye $5-Billion School-Lunch Market

By Ellen Flax — April 11, 1990 11 min read
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Leading food-service companies, long established as providers of meals at colleges, hospitals, and other institutions, appear bullish about their prospects for capturing a bigger share of the nearly $5-billion school-lunch market.

Noting that the market remains largely untapped by private contractors, some companies in the field say they expect their precollegiate business to grow by as much as 15 to 20 percent a year over the next several years. Other firms project smaller, but still significant, increases.

Although only 5 to 10 percent of K-12 institutions nationwide currently use private firms to manage their food programs, that figure represents a marked increase from a decade ago, when the proportion was “almost zero,” according to Constance B. Girard-diCarlo, president of the school-nutrition-services division of ara Services Inc.

Industry observers say that rising costs, as well as a desire to boost student participation, are likely to prompt more and more schools to rethink their traditional meal services and turn to private contractors.

Proponents of contracting out argue that schools stand to benefit from the management and marketing savvy of firms that have expertise in food service. Such contractors, they say, can provide school lunches that are both more economical and more appealing to students.

“They do a better job of promoting the food-service program than we did on our own,” said Gwen Selby, deputy superintendent for business of the 19,000-student Round Rock, Tex., school district, which has contracted out its cafeteria services for nearly 10 years. “Our staff was so small that we were not in the position of doing those things.”

Use of an outside firm “allows us to focus on what we can do best, which is education,” added Timothy H. Daniels, assistant superintendent for business affairs for the Upper Darby, Pa., schools. The district has been using a food-management company for more than a decade. (See related story on this page.)

Critics maintain, however, that companies with an eye on the bottom line may be too hard-nosed in their labor-management practices and could be tempted to cut corners in ways that undermine a program’s viability in the long run.

“We think the best-run programs are run by public employees,” said Kevin Dando, a spokesman for the American School Food Service Association. “Sometimes management companies promise things they can’t deliver.”

The moves to “privatize” cafeteria operations parallel schools’ increasing reliance on the private sector to provide student transportation, custodial services, and other ancillary services. This trend should be encouraged, many analysts of the phenomenon say.

“Contracting out should be routinely looked at as an option,” said Myron Lieberman, author of Privatization and Educational Choice.

“School districts should be better consumers,” said Mr. Lieberman, who is president of Educational Employment Services. “If they can get their vendors to bid, then they will be better off than if they turn [services] over to their monopoly.”

According to the U.S. Department of Agriculture, which administers the federal school-lunch program, 838 school systems, or about 4 percent of the participating districts, had contracts with food-service companies during the 1987-88 school year. The usda estimates that these companies served about 1 million students per day.

Since 1970, the usda has allowed schools in the program to hire food-service companies. Like school-managed operations, these firms are required to offer free- and reduced-price meals to students who meet federal income standards.

Industry officials and private analysts say the total number of schools relying on outside management may be more than double the figure cited by the usda

Between 5 and 10 percent of public and private schools have contracts with food-service companies, according to Ralph Rush, a senior consultant with Technomic Inc., a marketing and consulting firm specializing in the food industry. That estimate includes schools that do not take part in the federal lunch program.

Regardless of the exact percentage, the management of school food programs is a big business.

The National Restaurant Association estimates that a total of $4.7 billion was spent on such programs in 1989; of that amount, some $1.15 billion was spent by contractors and the rest by schools that prepared their own meals.

The trade group projects that $4.9 billion will be spent on school meals this year, a 4.8 percent increase over last year.

Observers and company officials, meanwhile, are predicting that the management firms’ share of the precollegiate market will grow at even a faster rate.

“Our feeling is that [contracting out] is growing faster than the market as a whole,” Mr. Rush said.

The potential for growth in the K-12 sector, industry officials note, compares favorably with the firms’ prospects in colleges and universities, where more than half of the institutions already contract with a food-service-management company.

“Your opportunity here is much greater,” said Arthur H. Bell, vice president of marketing and sales for the Preferred Meals division of Canteen Corporation. He said he expects his company’s precollegiate business to grow by 5 to 8 percent a year in the near future.

For the two largest firms serving the K-12 market, the predictions are even more optimistic. Officials at those companies, ara Services and the Marriott Corporation, say they expect 15 to 20 percent annual increases in their school business over the next few years.

“It’s a relatively young market,” said Howard Schlenker, vice president of Marriott School Food Services.

An audit report on food-service companies completed by the usda last year found that the four firms that dominate the K-12 field--ara, Marriott, Canteen, and Service America--hold more than 50 percent of the food contracts schools have made with private firms.

These companies serve more than 10 percent of the student population in eight states, according the audit. The biggest proportion is in New Jersey, where the firms serve 28 percent of students whose schools participate in the federal lunch program.

Most of the schools served by these companies are in mid-size districts with more than 3,500 students, industry officials said. The largest district to contract out its entire food program is thought to be Utah’s 75,000-pupil Granite School District in Salt Lake City.

Under a typical contract, a food-service company charges a school district a management fee that is either fixed or is based on the number of meals served. The district, which retains control over the program, typically pays for operating expenses, often including both food and labor costs.

Some contractors also guarantee schools that the program will break even or run a modest profit within a certain amount of time.

Virtually all contracts stipulate that the manager be an employee of the company. In some cases, food-service employees continue to be on the school payroll; in others, they become employees of the firm, sometimes with reduced pay or benefits.

Because management companies typically buy food and supplies in amounts far greater than those purchased by any one district, they can get significant price discounts, company officials say.

“I think a lot of school districts don’t have the experience we have buying things on the open market,” Ms. Girard-diCarlo of ara said.

In addition, companies assert, their managers benefit from better training than is typical for school employees, and have the backing of a large corporation for new ideas, research, and development. This training, they say, combined with the profit motive, means that privately run programs are more consumer-oriented.

According to the firms, this orientation includes offering students more food choices, often in settings inspired by commercial operations.

In some schools, the managers have replaced traditional cafeteria lines with “food courts” modeled on those found in shopping malls. Signs with eye-catching graphics may point student customers to the deli line, the pizza line, or the salad bar.

A Marriott-operated secondary-school cafeteria in Salt Lake City, for example, includes a Pizza Hut “kiosk” offering that company’s wares.

“Kids [today] are more sophisticated about food,” Ms. Girard-diCarlo said. “That’s what they expect to see--sizzle and glitz and promotions.”

School officials interviewed said the food-management companies they contracted with have delivered on their promises.

In the Salem-Keizer school district in Oregon, for example, a management company that has since been bought by Marriott promised to eliminate within three years a $150,000 to $200,000 deficit accumulated by the district-run lunch program.

Gerald W. Brock, director of business services for the district, said that the company met its goal, and that participation in the school-lunch program has grown every year since 1980, when the district began contracting out its food operations.

While greater participation by students has increased the Salem-Keizer program’s revenue, Mr. Brock said Marriott has also been able to save the program money by putting the food-service workers on its payroll.

While their pay remained the same, he said, pensions and other benefits were reduced.

“We couldn’t duplicate their labor costs, but we could probably duplicate their program,” Mr. Brock said.

The specter of reduced wages and benefits for cafeteria workers is one of the most controversial elements in the privatization issue.

The unions that represent school food-service workers, including the American Federation of Teachers and the National Education Association, oppose contracting out food programs, arguing that the long-term costs of using a management company exceed any short-term gains.

They contend that service suffers when, for example, companies eliminate positions or fail to replace retiring workers--common tactics used to make a workforce “leaner.”

“There is more emphasis on work output than on cafeteria ladies who typically talk to students,” said Thomas Moran, a staff assistant in the organizing department of the aft

Mr. Moran also claimed that management companies often try to save labor costs by “dumping people who have been there for years.”

Such charges are disputed by industry officials. “There are not as many jobs lost as the rhetoric would have you believe,” Ms. Girard-diCarlo said. “A lot of the time [we] get the blame for what the school district wanted to do.”

Other critics question whether school officials are adequately prepared to negotiate favorable food-service contracts and to anticipate potential drawbacks of privatization.

“They think they are getting a deal, but they are not,” said Michael Messina, a labor economist with the American Federation of State, County, and Municipal Employees.

For example, Mr. Messina said, district officials often do not calculate the amount of time it will take to monitor the outside contractor. He and others also warned that districts that are required to accept the lowest bid could be stuck with a second-rate food program.

The usda audit report indicated that concerns over the “deals” schools are getting may be well founded.

It estimated that two-thirds of the districts audited did not follow federally approved procurement procedures for awarding contracts. For example, it said, districts imposed excessive bonding and experience requirements on prospective bidders. Neither the usda nor state agencies gave schools enough guidance regarding contracts, the report said.

The audit also found that a significant minority of schools were signing contracts that held them liable for all of a lunch program’s costs, instead of for a fixed cost or a set cost per meal.

Since schools “are required to pay food-production costs for this type of contract,” the report said, “the risks of rising prices and costs associated with production inefficiencies are borne by [school food authorities],” and not by managment companies.

In light of these and other potential pitfalls, some district food-service administrators argue that schools should avoid or limit the use of outside contractors, while emulating their management and marketing techniques.

In Hamilton County, Tenn., for example, school officials have taken what they learned from a food-management company and used it to the district’s own advantage. After 10 years of contracting out, the district decided in 1987 to return to operating its own program.

Alice Yeldell, the district’s food-service director, said school officials made this decision after concluding that the management company “did all that it could do” to boost participation levels and reduce costs. The district decided to replicate the program, she said, and save the management fee.

While only 12 percent of the district’s students are eligible to receive free and reduced-price lunches, Ms. Yeldell said, about 70 percent of all students buy lunch in the cafeteria. To make meals enticing enough to attract such a high proportion of students, she said, “you pretty much here have to give the customer what they want.”

That philosophy is also evident in the district-run program in Portland, Ore. High-school students there are offered eight or more entree choices daily and can also purchase box lunches, said Robert Honson, the district’s director of nutrition services.

“If President Bush came to my school, and broccoli was in the meal, he’d have another choice,” Mr. Honson said. “We wouldn’t lose him as a customer.”

A version of this article appeared in the April 11, 1990 edition of Education Week as Food-Service Companies Eye $5-Billion School-Lunch Market


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