SBJ/October 20 - 26, 2003/Special Report

No magic formula for negotiating a contract

There is no perfect formula for negotiating arena and stadium food contracts, whether structured as a profit-and-loss arrangement, flat management fee or a combination with built-in sales incentives.

Each business model has advantages and disadvantages, but the bottom line is the contractor must deliver revenues for itself and its client. If not, another food service proposal is always on the table.

"You could have 100 contracts, split 50-50 between the two types, and every single one is different," said Sal Ferrulo, a regional vice president with Boston Concessions. "I can't say one is better than the other. It all comes down to your relationship with the owner or the venue."

Generally a profit-and-loss agreement, where the concessionaire and venue operate on a split percentage of revenues, favors the facility, which can receive 35 to 55 percent of total sales depending on the extent of the concessionaire's capital investment in equipment.

Views differ on which food contracts best serve the venue, concessionaire and consumers.
"The more money they put in, the lower the commission paid to the client. Most major league venues are in the mid- to low 40s," said industry consultant Chris Bigelow. "Where a traditional commission agreement works best is for municipalities that don't want to have any financial risk. The building gets a percentage of sales, good or bad, and it's the easiest way to monitor and audit."

He said, "The downside is that it can create an adversarial relationship between the two partners. The concessionaires may want to set higher prices and cut labor costs and may not want to open for marginal events."

Conversely, the concession operator benefits from being paid a management fee to cover overhead costs, including salaries, food, repair and maintenance. Profits are split with a heavy majority, typically 90 percent, going to the facility or team, Bigelow said.

"The downside of the management fee is the facility assumes some financial risk," he said. "If the team goes on strike, the concessionaire still has costs to absorb, and the building has to share in those costs and potential losses. But the building also gets a higher piece of the profits under a fee arrangement. The most risk equals the most reward."

Bill Caruso, a consultant based in Denver, advises his clients to negotiate straight commission contracts. "There is potential upside with management fees in that the team or facility owner gets to partake in a much greater bottom line," he said. "But where is the motivation for the concessionaire? They have to bring labor on and buy food. The owner literally has to watch them like a hawk to make sure they run a tight business.

"Unequivocally, I always recommend profit and loss, because the onus is on the concessionaire to produce the bottom line. They eat the loss or make money. For every good management fee arrangement, I've seen a disaster where an owner pumps in a lot of money."

Sportservice prefers the profit-and-loss relationship, said John Fernbach, group president of contract services for Delaware North Cos., parent company of Sportservice. "A commission contract means you are on equal footing," he said. "We love the food and retail industry. What dictates contracts are the needs of the venue operator. The variables are investment and risk. We love investing in the business because we know it."

Centerplate considers itself among the leaders in management-fee contracts. Doug Drewes, senior vice president, believes a stronger partnership evolves through fee agreements, which may include a mix of commission percentages and flat fees.

"You're getting to the client's desired end result," Drewes said. "That could be a desire to have a larger say in pricing, customer service or how things operate as a whole. It's their bottom line, whether it's a fee or a percentage of the top line or a split of profits.

"Our agreements with the Kansas City Royals and Chiefs is a perfect example. We receive a fee, which is a percentage of gross revenues, and in turn we provide our client with a commission. We split any remaining profits. It's a real hybrid account."

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