Unbundling food service for the win

by Daniel J. Kodner, CEO and Founder, HHP and Lisa Perlmutter, SVP, Healthcare, HHP

Healthcare leaders have long operated under the assumption that combining inpatient and retail food and nutrition services, whether via a third party management company or self operated, is the best path to achieving success. Counter to the adage of synergies in centralization, unbundling these two offerings actually results in a superior experiential offering and improves bottom line profitability.

An earlier article touched on this approach, but let’s double-click into this topic to better understand why bifurcating these services is the right approach and that now is the right time.

The status quo results in financial loss and an experiential “meh.”

A model of misaligned incentives: Traditional foodservice arrangements are flat-fee or cost-based service contracts which incentivize the bare minimum on the retail side. Under this model, hospitals pay operators management fees to run prime retail locations, while the primary focus is on inpatient optimization. As a result, the retail is usually revenue positive but bottom line negative. Additionally, when these operators provide capital to upgrade the space, hospitals typically must pay it back over time.

Lackluster end product: This model typically results in retail spaces featuring unbranded offerings or licensed concepts that provide minimal service and zero wow factor. Restaurants in hospitals are often a “who’s who” of mass-market brands (e.g., Starbucks, Panera, Subway) that do not provide an elevated level of hospitality, are rife with unhealthy offerings, and fail to provide strategic alignment with the hospital.

The self-op catchup: Hospitals that self-operate food and nutrition services are chronically understaffed and under-resourced. Retail priorities often get pushed to the back burner in favor of the significantly more important inpatient side of the equation. This results in a limited ability to innovate on the retail side, reduced hours of operation, and potentially missed opportunities to further optimize the inpatient dining program.

A rosier financial picture

Enacting cost reductions while elevating offerings may seem like a paradox, but by privatizing retail operations, labor, food, and materials costs are shifted to tenants and (and thereby entirely off the hospital’s balance sheet). Moreover, with an amenities partner like HHP, a hospital can limit the scope of contractual services with a third-party foodservice company, further reducing the overall costs associated with food and nutrition services.

The hospital’s share of net operating income generated by HHP’s developments goes straight to a hospital’s bottom line. A facility running on a 5% profit margin would need to generate 20x the revenue to replicate the contribution margin of this income stream elsewhere.

For hospitals with retail running in the red, a shift from negative to positive (or even neutral) can have a significant impact on the bottom line -- in proportion to the scale of the operation.

Did you know?

HHP conducts financial assessments for prospective sites as part of its partnership process. Contact us at info@hhpgp.com.

A better experience for hospital stakeholders

Attract top-tier retail brands: By making the business model more flexible, hospitals can attract previously inaccessible brands to healthcare settings. These brands not only provide better offerings, but also use the latest in tech like mobile ordering and smart fridges to support specific occasions like short breaks and off-hours consumption.

Leverage retail for competitive differentiation and mission alignment: Much like above, opening your hospital up to different players means there’s more room to showcase your organization’s aspirations and values. HHP is often asked to source local brands, brands that support health or social causes, and/or minority-owned brands. The brands placed onsite become physical proof points of your organization’s priorities.

Allocate more time and resources to delivering superior inpatient dining: By focusing either contracted scope or self-op resources on inpatient dining, hospitals can create enhanced, fully-staffed programs while providing a superior retail offering.