GAO concludes that contract foodservice can benefit military bases

Nation's Restaurant News, Sept 10, 2001 by Paul King

WASHINGTON -- Food management companies interested in operating foodservice on U.S. military bases received good news from the General Accounting Office. A GAO study concluded it is more profitable for the military to hire outside contractors to manage branded foodservice operations on its bases than it is for the military to operate them.

The two-year study stated that hiring contract managers -- which the GAO referred to as the "indirect" method of managing such foodservice -- was as much as 6 percentage points more profitable than the direct method.

"The Department [of Defense] may have missed opportunities to increase profits for [Morale, Welfare and Recreation] activities because its policy for operating name-brand, fast-food restaurants has not been clear, and policy implementation has not been subject to consistent management oversight," the report concluded.

The GAO noted that the study was limited, in that it compared only name-brand hamburger chains operated by the Army-Air Force Exchange Service and the Navy Exchange Service Command. The AAFES operates branded foodservice, which is a mix of commercial brands and ones it has developed on its own, on Army and Air Force bases. NEXCOM contracts with franchisees and foodservice contractors to manage its food outlets on Navy and Marine Corps bases.

Also, the GAO acknowledged that sometimes the military has justifiable reasons for managing branded units itself, such as at small, remote bases where it would be unprofitable for an outside contractor to handle the business.

However, its recommendation was that the Department of Defense revise its policy for operating fast-food restaurants "by incorporating a standard methodology that considers both profitability and other factors to be used by the exchange services to identify the most appropriate method for operating fast-food restaurants."

The report could serve as an incentive for food management firms to seek contracts similar to the one Compass Group signed earlier this year with NEXCOM. Historically, it dealt primarily with small, local franchisees and contractors. But this year's deal with Compass gives the foodservice giant control of 90 percent of NEXCOM's business in the United States.

"We realized a couple of years ago that the military market in the U.S. was severely underpenetrated," said Kurt Kimball, executive vice president of sales for Compass Group North America, based in Charlotte, N.C. "The one area where it seemed most advantageous to enter was branded foodservice. This study points up the benefit, both to the contractors and the military"

"For fiscal years 1998 and 1999," the report concluded, "NEXCOM's profits on 64 indirectly operated hamburger restaurants were about 11.5 percent and 11.4 percent, respectively, when measured as a percentage of total sales. Over the same period AAFES' profits on 164 and 171 directly operated hamburger restaurants were 7.8 percent and 5.5 percent, respectively.

"Also, our investment analysis projected that if new name-brand hamburger restaurants were to be built, the indirect method would provide a greater return on investment over a 20-year period."

The report did not discount the advantages of a service such as AAFES operating its own foodservice. GAO noted that the direct method "provides the exchange service with greater management control over restaurant operations and more flexibility in providing employment to military dependents."

However, it also pointed out that NEXCOM "has no capital invested in its 64 restaurants ... while [AAFES] has invested $131 million in its 171 restaurants."

Military exchanges' food sales for fiscal year 1999
Military exchange services
        Total food sales  Name-brand food sale
Total         734                 383
AAFES         512                 249
NEXCOM        154                  92
MCCS           68                  42
Source: General Accounting Office
Note: Table made from bar graph