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Southern's Strategy

Southern's Strategy

At A Glance

Name: Southern Foodservice Management Co.

Headquarters: Birmingham, AL

Annual Revenues: $70 million

No. of Contracts: 90

Employees: 1,200


Senior VP-Operations Fred Hoefer (l.) and Senior VP Mike Barclay oversee day-to-day management of Southern Foodservice's operations.

Under the Radar
Barclay concedes the past few years have been difficult for a company like Southern that depends so heavily on B&I. "Our growth rate has been diminished over the last few years," he concedes. "But," he quickly emphasizes, "we're very comfortable with what we're doing simply because we're healthy and we have long-term relationships. We see the market doing nothing but getting better and better for us."

Southern has always kept its focus on the idea that, ultimately, business success is measured not by how many dollars you generate but by how many you keep. And it has apparently been very, very solicitous of its bottom line. "We've never had an unprofitable year," Barclay notes proudly.

We'll have to take his word on that, since the privately-held firm doesn't release details of its financials other than the top line revenue number. Yet, something must explain the undeniable reality that Southern remains not only a factor in the B&I segment, but one that continues to post impressive account wins, most recently Fermilabs in Chicago, won away earlier this year from one of the Big Three.

In 2004, says Hoefer, Southern will have added eight new accounts while closing five. That net gain of three doesn't sound like much but does prove that the company is not gliding through the lean years merely by holding on to a small cadre of loyal longtime customers while battening down costs.

Overall, Southern has averaged about 90 accounts at a time over the past five years. About 90 percent of its business is in the B&I segment.

In B&I, Southern has attracted some impressive clients, not only in the South, despite its name, but as far away as New Mexico, Cleveland and even Seattle. It operates in 16 states, with regional offices in Chicago, Atlanta, Austin and Charlotte.

Among its clients are prestigious corporate names like Lockheed-Martin, Wachovia, 3M, Sprint, NASA's Marshall Space Flight Center, Bosch, State Farm Insurance and Blue Cross/Blue Shield. Southern also services some major public installations, including federal administrative centers in Seattle and Cleveland and the federal law enforcement training center in Artesia, NM.

To explain Southern's appeal to these clients, Barclay and Hoefer deploy the usual underdog rationales: a "closer-to-thecustomer" business model, greater operational and menu flexibility at the unit level, less pressure to meet short-term financial targets because the company is not publicly traded and a firm belief that there are clients out there who prefer going with the "little guy" rather than one of the "Big Three."

"Our goal is to be the alternative to the big companies at the table when clients decide the direction to take," says Hoefer.

How to Grow
Whether it's the "little guy" or "big guy," management companies today operate in a B&I environment with little cushion. P&L accounts are the rule. At Southern, they outnumber fee contracts four to one.

"We have to make our own way," Hoefer concedes, "and that's become somewhat more difficult with the recent escalation in food costs."

To cope, the company has to be selective and subtle. "We try to increase prices incrementally and on selected items," Hoefer says. "You have to get creative by offering higher-priced choices that have appeal so that you build those check averages and increase participation. We find that customers are willing to pay extra if they feel they are getting their money's worth. For example, food that is prepared fresh in front of the customer and customized to individual preferences can command a premium price over the same dish, but offered 'pre-prepared.'"

Is light glimmering at the end of the B&I tunnel? Bill Wallace, Southern's Southeast regional manager (with 16 accounts in the Carolinas, Georgia and Tennessee) says things are "looking up. Layoffs have stabilized, participation has shown a slight increase and check averages have remained stable." His territory has added 10 accounts in the past three years, Wallace says.

Building incremental revenues in P&L environments is one way to grow the top line. Other strategies include adding services and expanding into other segments.

But Southern has not demonstrated much interest in straying too far afield from its core competency. It did offer environmental and building management services in the past but these are miniscule parts of the business today. Also changing is its approach to vending, which used to comprise about a fifth of revenues. Today, Southern still offers vending management services but the actual execution is often subcontracted.

The most recent vending initiative has been the "Smart Snacks" program, introduced a few years ago, which offers a variety of healthful snack options (fruit, granola bars, low-fat chips) in vending environments.

As for considering other segments outside B&I, Barclay says Southern is looking primarily at niche markets that can be served using the company's existing programs and expertise. Private schools is perhaps the most prominent such foray and one with the greatest growth potential, he notes. Currently, the segment accounts for the bulk of the company's non-B&I revenues.

Barclay says private schools are a good fit for Southern because their expectations are similar to those of B&I clients and Southern can use many of its existing menu concepts to service them. The company's strengths in being able to individualize programs to fit specific clients is another advantage.

"It's a good niche for us because they like the attention we can give to them," Barclay confides.

The recreation segment is another potential area of expansion. During 2003, Southern landed the contract to offer foodservices at the Birmingham Zoo, and Hoefer says the experience could allow the company to add other similar venues in the future. "Venues like that particularly provide significant catering opportunities, and catering of course is already something we're familiar with because we run catering in many of our business locations," he notes.

The "Sore Thumb" Factor
Private schools, zoos and special event catering are nice add-ons, but in the end, Southern will rise or fall based on its success in B&I. To get the kinds of clients that fuel real growth, Southern increasingly will have to compete with the industry's Big Three. Is it up to that challenge?

To illustrate Southern's strategy to position itself as the independent alternative, Baclay cites an emerging contract opportunity where a major multi-site client is consideringconsolidating its foodservice managementoperations under one contractor. Southern already manages one of this client's sites and has qualified to be one of the bidders for the overall contract. Presumably, the Big Three will also be in the running, a prospect Barclay professes to welcome.

"I love it!" he exclaims. "I hope it's just them and us because we're going to stick out like a big ol' sore thumb."

That "sore thumb" factor is one reason Barclay also welcomes the consolidation that has radically shrunk the number of independent firms operating in the B&I sector.

"We'd love to see the Big Three keep acquiring until it's just us and them," he declares. "When we get into a situation where it's just us and them, we will win more times than not."

Wishful thinking? Surely,Barclay must know the old saying, Nobody ever got fired for going with IBM...or Aramark...or Eurest...or Sodexho...

"Sometimes you can't do anything about that," he concedes, "but I think we've made inroads. I think they don't like to get into a situation where they have to compete with a solidly managed regional contractor that already has a piece of the business, meaning it has already demonstrated what it can do."

That validation by proven performance is key to Southern's sales strategy, whether the client being pitched already has experience with the company's service, or has to be educated by others who have.

"Of course you first have to prove that you are capable of managing the business," Hoefer concedes. "But once you've done that, you can then go on to describe what differentiates you. What we've found to be especially effective is not so much us talking but our existing clients talking and saying what we've been able to do for them. Nothing we can say is as effective as having a Bosch or a Fermilabs say it because these are highly respected companies."

In positioning itself as the independent alternative for clients who prefer to work with a management company other than one of the Big Three, Barclay claims Southern is looking to become the "last independent standing."

"We're not interested in being acquired," he declares. "I can safely say that because I'm speaking the words of our owners— we're not interested in being acquired! What we're interested in is good strong growth and maintenance of bottom line operating results."

Future Growth?
Despite the aborted healthcare foray, by the mid-1990s Southern had reached $50 million in annual revenues. The late-90s saw a significant expansion, with revenues hitting $68 million by 1999, but since then growth has plateaued. Revenues for the last full year, 2003, were $68.775 million, actually down about $100,000 from 2002. This year doesn't figure to be much higher.

That begs the question: does Southern have to start growing the top line to remain a viable enterprise?

"Yes, and we will," Barclay insists. He notes not only that the company is now going after fairly big-time business for which it competes with the Big Three in almost every instance, but a number of other factors have also recently begun to impact operations in a positive way.

"The overriding thing for us has been a maturation of our management team,"

Barclay notes. "As the Big Three have gone into acquiring other companies, we have ended up attracting some people to our company with very strong backgrounds in those organizations, and that team has 'gelled' now in a way similar to how a sports team 'gells' into a championship squad."

He also notes a greater recent emphasis on training that has led to more operational efficiencies in areas like waste reduction, and an updating of in-unit marketing operations, something he credits Hoefer for.

"Being a small company," he notes, "I think we were always strong in things like client relations, being responsive, being flexible, but traditionally we tended not to be as much in touch with the industry trends— things like exhibition cooking and take-out that are more than just short-term fads— but now we are."

Sweet Home Alabama

Southern Foodservice Management Co. was originally called Southern Cafeteria Co. It was founded in 1951 in Birmingham by Clarence McDorman as an operator of commercial cafeterias, a popular away-from-home dining option across the South at the time. (Today, McDorman's son, Clarence, Jr., retains a minority 40-percent interest in the company and as an attorney he also serves as Southern's legal counsel, but otherwise has no operational role. The majority of shares are owned by company chairman Walter Berry and president Floyd Liles.)

However, some informal conversations with other businessmen looking for someone to manage their in-house cafeterias soon opened another avenue for McDorman.Those early contacts—and Southern's success at managing in-house foodservice—led to more opportunities until McDorman made the decision to concentrate solely on this side of the business. Eventually, Southern was running in-house foodservice for major clients like the local utility companies.

By the late 1960s, Southern was expanding beyond the Alabama market into other states. It began managing federal government buildings in the early 1970s and rode word-of-mouth plaudits from existing clients into additional business.

"When I joined the company in 1975 we were in three states,"recalls current Senior VP Mike Barclay, who joined Southern as a sales representative three years after graduating from the University of Alabama-Birmingham."The first account I sold was Western Electric in Atlanta.Western Electric was happy to have a small Southern company like us come in.And when people would come in from other Western Electric states—Oklahoma,Texas, North Carolina—they would say,'Hey, this is good food! Why don't you guys come over and do the same for us?' That and the federal building contracts allowed us to begin jumping states and adding business."

The geographical outreach became so pronounced that at one point Chicago represented the company's second-largest market.That's no longer the case but Southern retains a core of clients there to this day.

Also, federal facilities continue to be a strong niche though they constitute much less of the whole than in the past, when they constituted as much as 40 percent of the business.

Experimentation with other segments is what brought current Senior Operations VP FredHoefer into the business.

A Cornell graduate, Hoefer actually spent two stints with Southern. He originally joined the company in 1979 after spending three years with ARA Services (now Aramark), then rejoined ARA and spent three years in that company's healthcare division. He was persuaded to come back to Southern in 1984 to headup a new healthcare division which eventually grew to 17 accounts.

"I was pretty successful," he recalls."We grew to 17 accounts in four years, but then the company decided not to pursue that segment any more. Nevertheless, we still retain a pair of healthcare accounts from that period to this day."

A New Culinary Emphasis

FOCUS ON FOOD. Susan Forbes (l. and below) joined Southern in early 2002 as the firm's first corporate executive chef, inaugurating a new emphasis on culinary standardization and sophistication. (above) Assistant Manager Randy Cikowski finishes preparing a salad.

Southern Foodservice Management has always been about food, of course. The company manages cafeterias, after all. Yet, until recently, this side of the business has lagged somewhat in emphasis if only because much of the culinary decisions were left to individual units where local favorite dishes reigned over the menu.

However, in an era in which customers are increasingly sophisticated about food choices and bring particular expectations to their dining experiences, Southern has been forced to adapt.

It's first major initiative was a menu program called Signature Series, launched about a decade ago, which sought to bring branded sophistication to the company's cafeteria operations through alliances with major manufacturers (Sara Lee Deli, Oscar Mayer Hot Dogs, Ortega Mexican Foods, etc.).

More recently, that approach was significantly updated through the addition of a corporate executive chef, Susan Forbes, who was hired for the newly created position three years ago.

Forbes, a graduate of the Johnson & Wales culinary program who had previously worked in charter boat dining and hotel foodservice, was tasked with standardizing the company's menus while leaving sufficient room for unit-level flexibility, and also to bring some more commercial flair to the offerings.

"I needed to balance our requirements as an efficiently run company to have some central control over menus and purchasing while leaving enough room for our talented unit chefs to create dishes that will satisfy their customers," Forbes says. "A lot of the recipes we've included in our database have come from the accounts, and we've also tried to add more 'restaurant-style' food to keep up with the demands of customers."

Although Southern-style comfort foods remain popular at many of its locations, the company's menu program leaves plenty of room for incorporating cutting-edge culinary trends like ethnic foods and unusual ingredients and flavorings. Forbes cites a Caribbean Jerk Chicken Salad as a particular favorite. The menu design also takes care to accommodate such broad consumer trends as the low-carb diet fad, which has made a significant impact on Southern's operations.

The centerpiece of Forbes's makeover of Southern's culinary programs has been the transformation of the Signature Series program into the more flexible and up-to-date Signature Concepts, introduced in 2002. Not only has the transformation effected a cosmetic modernization of station appearances, but it has put more emphasis on freshly prepared food, especially preparation in front of the customer.

The branded station concepts have built-in flexibility in that they are each designed to serve a range of possible dishes under broad umbrella categories such as Stock Market for soups, Carta Classico for Italian foods and The Showplace for a variety of exhibition-prepared selections like rice bowls tacos, entrees and salads. Individual units can choose from thousands of recipes contained in Forbes' ever-growing database and adapt them within parameters to suit their particular customer bases.

For instance, a typical day's lunch selections at the Fermilab cafeteria in Chicago recently offered customers a choice of Golden Broccoli & Cheese Soup, Hickory-Smoked BBQ Pork Sandwich, Japanese Breaded Pork Cutlet, Hawaiian Marinated Chicken With Grilled Pineapple, Toasted Almond Chicken Salad on Low-Carb Bread, a Supreme Baked Pizza and Chicken Fajita Tacos.

The recipe centralization also has helped reel in food costs through standardized central purchasing of ingredient components. Purchasing is in the experienced hands of Purchasing Director Janet McDaniel, a former multi-unit sales manager for mega-distributor Sysco Corp.

Manufacturer brands are not as up-front in the Signature Concepts program as they were in the Signature Series program,"but we continue to work very closely with our manufacturer partners and get great support from them," Forbes emphasizes.

A Unit-Level View

TEAM PICTURE (l. to r.). Blue Cross Blue Shield Corporate Foodservices Director Vinnie Livoti, Palmetto GBA FSD Ida Corl, Corporate Executive Chef Susan Forbes, Southeast Regional Manager Bill Wallace.

Southern Foodservice Management's operation at Palmetto GBA (Government Benefits Administrators) near Columbia, SC, is fairly typical of the company's operations. Located in an industrial park just north of the city off I-77, the Blue Cross Blue Shield subsidiary administers benefits for public employees through some 2,400 onsite workers who seem to have an insatiable appetite for the company's food offerings, says FSD Ida Corl, who manages the on-premise foodservice operation at Palmetto GBA for Southern.

"They line up before our 7:15 opening for breakfast and then stream in throughout the day during the hours we're open to get snacks and drinks," says the veteran unit manager, who began with Palmetto GBA when it opened back in 1999. Indeed, the unit does more than a third of its business in the breakfast daypart, which goes from 7:15 to 10:45 am.The cafeteria then closes down briefly to set up lunch. It reopens at 11:15 and stays open until 1:45. (The rest of the day, including foodservices for the few dozen second and third shift workers, is handled through vending, which Southern also manages).

"The customer base is 75 to 80-percent female and we have a lot of people who watch what they eat," Corl reports."About 30 percent of the food we sell is low-carb and another 25 percent are vegetarian or other 'healthy cuisine' choices."

Everything is cooked from scratch by Corl's team of 19 FTEs. Mexican selections and " anything made with chicken" are particular favorites. The cafeteria brings in about $80,000 a month. Catering revenue is a respectable part of the total, with about $125,000 in revenues annually.

The Palmetto GBA location is one of four dining operations managed by Vinnie Livoti, corporate director of foodservices for Blue Cross Blue Shield of South Carolina.Two others are also managed by Southern while the fourth one is self-operated.

Livoti is an example of an increasingly rare breed, a corporate foodservice liaison who has a food background and therefore is more likely to appreciate the value of a sound onsite foodservice operation as well as what it takes to manage it correctly. He has a degree in hospitality management, has worked in the commercial restaurant sector and is active in the American Culinary Federation.

The value of the onsite foodservice at Palmetto GBA can be measured by the space it takes. "When we began this operation we had about 1,400 employees here," Livoti says."We now have almost twice that number and we're having to use every extra inch of space to accommodate them."

Yet the cafeteria and seating space, which take up a substantial portion of the building's ground floor, have not been considered for constriction. "What they do is too valuable," Livoti says."We find the space in other ways."

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