Food for thought

Three-and-a-half years ago, 254-bed Providence Hospital in Washington had a self-managed, on-site delicatessen that, while it served good sandwiches, was a money pit for the provider.

“We were having problems with portion control,” says Beth Yesford, Providence's director of food and nutrition.

Yesford was grappling with ways to get the deli's costs under control when she received a call from a Blimpie sandwich-shop owner about the possibility of setting up business on the hospital's campus. It wasn't the first time Yesford had heard from the franchisee, but this time she was ready to listen.

After meeting with him, it didn't take Yesford long to realize that bringing the vendor on campus could accomplish more than simply plugging the hole in the hospital's costly venture; it could also provide a revenue source.

Encouraged by the opportunity, in 2006 Providence signed a five-year agreement that calls for the Blimpie franchise owner to pay $3,500 a month to lease space on the hospital campus and $300 monthly to cover maintenance and trash hauling. The deal also includes a revenue-sharing clause that says Providence receives 10% of any sales exceeding $35,000 a month.

The arrangement has another added benefit: “We were able to transfer our deli laborers to work at a coffee bar that we set up,” Yesford says. The bar, which brews and sells Starbucks brand coffee, brings in roughly $200,000 in annual revenue, and the hospital turned a financial loss on the deli into about $4,000 a month in regular revenue from Blimpie. Pleased with the success, Yesford says the hospital is likely to continue working with both franchise brands once the agreements are up for renewal.

Providence's experience echoes those of other hospital systems that have partnered with branded food franchises. Such partnerships are not new, but the deals are gaining popularity as hospitals seek ways to cut costs, bring well-liked cuisine to their employees and visitors, and simplify their food-service responsibilities. And in some cases, hospitals are choosing to contract or franchise with local eateries over corporate chains. “Hospitals are always trying to have a hotel-like image, so this is one reason they look to food franchises,” says Jay Edmond, director of food services for GNYHA Services, a group purchasing organization serving hospitals in New York, New Jersey and Connecticut. “Also, they're looking to take a losing proposition and turn it into a profit center.”

Bob Juerjens, senior director of program development for Premier, another GPO, concurs, saying hospitals are attracted to franchise food operations because outsourcing food services to established brand owners makes employees happy and removes a significant amount of ancillary responsibilities and costs from providers' plates.

“Hospitals more often than not subsidize the foods they serve through employee discounts,” Juerjens explains. “But when a franchise comes in they charge market rate, and employees don't quibble about paying that, where when the hospital runs the services there's the expectation that they should get a discount.”

Bringing in a franchise food vendor can also help hospitals reduce their staffing costs since in many arrangements the franchise owner is responsible for hiring, training and employing the workers.

Food franchise operations can be attractive to hospitals for other reasons as well, Juerjens says. “Some of it, from a cost perspective, is not only labor, but also capital equipment expenses, particularly when a hospital is growing and doing an expansion and they have the space for food service, but not the funds for the capital equipment.

“A hospital struggles to get the new and best medical equipment, so typically food services expenditures lose the battle” for cash resources, Juerjens adds.

Vendors coming into a space often bring in the equipment they need to prepare their foods, relieving hospitals of those capital expenses.

Huntsville (Ala.) Hospital officials found that contracting with franchise food vendors was a good option as they moved to revamp the 806-bed hospital's dining facilities and bring a nearly 50-years-outsourced food services program in-house.

Until last year, the national chain Chick-fil-A had been a presence on Huntsville's campus for about 10 years. The restaurant set up shop at the hospital under a franchise agreement it has with outsourcing company Aramark Corp., which until recently had handled all of Huntville's food services. Chick-fil-A was well liked by hospital employees, but when Huntsville decided not to renew its contract with Aramark, it also lost the restaurant.

“I don't know why, but we couldn't convince them to stay,” says Rudy Hornsby, Huntsville's senior vice president of support services. “Maybe it had something to do with their contract with Aramark.”

While the loss was disappointing, Hornsby says the hospital saw an opportunity to create a food-service program that would cater to the specific tastes of its employees and support local businesses. Instead of seeking franchise agreements with other national chains, Huntsville decided to contract with local restaurants to set up kiosks inside the newly built food court. The hospital struck a deal with a pizzeria and pasta restaurant called Mama's Pizza, about 30 miles away in Guntersville, Ala.

“Employees had been clamoring for pizza,” says Char Norton, president of the Norton Group, a healthcare food-services consulting firm that advised Huntsville on its food-services makeover. The hospital also brought in a local Japanese restaurant called Sakura to offer sushi and stir-fry dishes.

“We worked out a contract where we get a percentage of the sales,” says Hornsby, who calls the arrangements “partnerships.”

“We don't charge them rent. I think that works better, because we both will work to make it a success,” Norton says. “They're furnishing the employees and the food, and we give the space.”

The deals call for Huntsville to receive 10% of the restaurants' gross sales, and though it's too early to calculate, Hornsby expects the revenue will represent 10% to 15% of Huntsville's overall revenue from food services. The hospital also has set up a self-run barbecue kiosk in the food court and still maintains its cafeteria.

Hornsby says the franchise agreements with local restaurants have allowed Huntsville to not only keep dollars within the community, but also have greater control over the arrangement. “When I want to do a contract with a national franchise, it's a big corporation, and even though we're a large hospital we're small compared to them. We're just another site, and the whole process of doing a deal over the phone from far away is a lot more difficult than going over and doing the deal in person.”

Another upside of the franchise arrangements is that Huntsville has been able to remodel its food court with minimal investment in expensive kitchen equipment, Norton says.

“The hospital is very pleased because they have an old kitchen and really didn't have the facilities to do these concepts on-site,” she says. “The pizza restaurant makes its dough off-site, but assembles and bakes on-site. The sushi is prepared off-site, but stir-fries are done on-site with woks and rice cookers.”

Husein Kitabwalla, senior vice president of the retail brand group at food-services-management company Sodexo, says financial gain is not always the primary driver of a hospital's decision to jump into the world of franchise food offerings.

“Some of the healthcare facilities are fairly large, and they don't want workers to have to leave campus, as that can reduce productivity for them to have to get out and drive around to find what they want,” he says.

Franchises also can allow hospitals to offer more on-site food options to evening staff—something that has typically been a problem for providers whose only food services are those offered by the hospital-run cafeterias.

Kimberly Russo, chief operating officer at 326-bed George Washington University Hospital in Washington, says opening a Starbucks store in the lobby allows her hospital to serve late staff.

“Last year we extended the hours to 24 hours five days a week to meet employees' needs,” Russo says. “That was not to make money, but to give our night shift access to the same amenities that we have during the day.”

Providence Hospital's Yesford says replacing the hospital's deli with a Blimpie franchise allowed it to accomplish a similar goal. Previously, the hospital-run deli closed at 6:30 p.m. “We needed something for our night shift,” she says. The Blimpie franchise is open daily until midnight.

While franchise arrangements can provide solutions and benefits to hospitals, they aren't without potential pitfalls. For one thing, hospitals have to carefully consider whether bringing in fast-food vendors is in keeping with their mission to prevent disease and promote wellness, says Paul Gizara, vice president of product development for Aramark.

“For a while there was some skittishness because of health and wellness concerns with burger joints, but now we partner with brands that have strong health and wellness appeal, like Subway, Quiznos and Einstein Bagels,” Gizara says. “All those brands have menus that speak to consumers' concerns about health and wellness, and have lower fat and calories.”

Still, hospitals acknowledge that given the growing national focus on obesity and chronic illnesses such as diabetes and hypertension, striking a balance between offering healthier franchise food fare and offering the popular brands that drive revenue can be tricky.

Fredericksburg, Va.-based Mary Washington Hospital, which has five franchise food arrangements on its campus, including a Subway sandwich shop that has been on-site for 12 years, has dealt with such concerns by involving key clinical practitioners in a review of any branded food concepts being considered.

“The whole health and wellness piece is a big consideration,” says Penny Nicholas, the Sodexo employee who handles on-site food services operations for 442-bed Mary Washington. “We have a staff of dietitians who are involved with reviewing the concepts we consider.”

Loss of control over food operations and quality can be another problem, say some providers who've had less than stellar experiences with franchise operations.

“You have to sort of demand quality,” says Yesford, who notes that Providence had several problems when their Blimpie franchise was under a previous owner. “We had issues with uniforms, and the service wasn't that good. Some of the workers were coming in in jeans, and that's against hospital policy,” Yesford says.

Both problems have been corrected under the restaurant's new ownership, but the experience taught Yesford to plan for potential problems with a franchise vendor that could affect the hospital. “I wrote into the contract that the franchise will be penalized if we receive a bad review from food inspectors.”

While bringing franchise food operations onboard can relieve hospitals of the burden of subsidizing food-service costs, the higher prices charged by outside vendors don't always sit well with workers, and hospitals can also run the risk that they won't be able to generate enough sales volume among employees and visitors to make a franchise a successful venture.

“In a lot of instances, hospitals are signing contracts, so if the brand fails, they're responsible for all the financial burden that goes with it,” Gizara says.

As a result, Gizara advises hospitals to carefully consider the type of partnership model that will best work for them when looking to bring a branded food concept onto their campus. The arrangements between a branded vendor and a hospital can vary greatly, he says.

“In some cases the hospital will say, ‘Here's the space; pay us rent.' Sometimes they say, ‘Pay us rent and a fee,' ” Gizara says.

Large hospitals that provide food services not only to employees but also to a large number of daily visitors may choose to take a greater risk on their investment for the potential to reap greater revenue.

George Washington University Hospital partnered with Sodexo to purchase and manage its Starbucks franchise. Both organizations provided cash to cover the initial franchise fees, and the ongoing costs are covered by the coffee shop's monthly revenue. Sodexo handles the day-to-day management of the cafe.

Mary Washington, which serves about 3,000 people a day through its food franchise outlets, has adopted a mixed financial-arrangement formula for its varied branded food concepts.

The hospital pays a traditional franchise royalty fee to operate its Subway kiosk inside the food court. But for its three Starbucks kiosks, the provider chose to adopt the coffee company's “We Proudly Brew” concept, which allows the hospital to purchase the coffee products and branded containers and sell those products without paying a franchise fee.

“The ‘We Proudly Brew' arrangement allows you to sell some of your own products along with the Starbucks brand,” says Mary Washington Hospital spokeswoman Kathleen Allenbaugh, who notes the hospital sells breakfast items made by the hospital cafeteria at some of the kiosks but not at others. “We also balance a lot of the franchise offerings with our own soups and vegetables, fruits and salads.”