Free School Meals profiteering... A THREAD.

1/ I’ve just seen the pictures from Chartwells and my heart sank. What an utter, utter disgrace. I used to be a Finance Director in the catering industry so I know the margins and practices well. I wanted to explain it a little..
2/ ....about what I think is happening here and the margins Chartwells are likely to be making. Public perception on costs is often skewed as in general people don’t understand the hidden costs of rent, distribution etc which costs more than you’d think….but not in this case.
3/ I estimate that Chartwells must be making £23-£25 profit out of £30. We've seen baskets priced up between £5-£7 online so lets use £6 as an average. Those supermarkets make money out of that so their costs are even lower, probably around £4.
4/ In general, the more you buy, the cheaper things are and Chartwells won’t be buying as much volume as a supermarket. HOWEVER, catering food is almost always cheaper as it comes in bigger packs or doesn’t have to look good on the shelves.
5/ So it is likely that Chartwells (or their provider) are buying for around the £4 mark too. BUT they have to get it to the school. The distributors in catering (wholesalers) do this for them and on these accounts they make about 25% margin, with 14% to cover fuel, trucks etc,
5/ 7% for admin and about 4% profit (which is pretty thin). So the cost to Chartwells will be about £5.30 and they probably have some admin but essentially the cost of Chartwells getting the food we’ve seen in pictures to the school will be no more than £6.
6/ It is not clear who is boxing up these packages - ie whether it arrives at the school in bulk and school staff have to divide it into boxes or they come like this from Chartwells. If it does come pre-packaged it might cost an extra £1 for the box and labour to pack it.
7/ By the way, Chartwells are owned by Compass, the biggest contract catering and are VERY good at negotiating.
8/ So that’s £23-£24 in pure profit. But how are they getting away with it? There is a way for these firms to make it look like they are buying for more than they are which is common in the industry, called "buying income" or "rebates".
9/ Hiding things isn't it’s original purpose but if you were trying to fiddle the government for more profit this is how you’d do it......
10/ Industry practice is to offer “volume discounts” to customers, so you agree a price for the product but then if the customer buys more than expected during the year they get a rebate on some of that. A very common and reasonable approach.
11/ They then tot up the volume at the end of the year and the supplier sends a cheque to the customer for the agreed amount. That in itself is not unreasonable or dishonest. BUT......
12/ it can easily be used to hide things. I'm not saying this is what Chartwells are doing, but this is an example of how it could be done.
13/ Let’s say "Wholesaler" supplies "Caterer" who supplies the Govt. The government agrees to pay Caterer's costs plus 10% but wants to audit their invoices to check the aren't profiteering (this is a common contract structure).
14/ In fact Caterer might have won the contract because they bid on the basis of costs + 10% but others bid costs + 15%. But Caterer wants to earn more than that……
15/ they agree a price from Wholesaler for apples. That price is 10p. However, they ask them to structure it so that Wholesaler invoices them for 20p instead of 10p and to treat 10p as “buying income”. Wholesaler does this.
16/ The government’s auditor comes along and checks the invoices. 20p for an apple. Tick. They go back and report that the 22p Company A is charging for the apple (their ‘cost’ of 20p + 10%) is fine.
17/ Meanwhile Company B invoices Company A for the buying income, which is 10p for every apple sold. Company B banks this, thus making a real profit of 12p out of the 22p it charges the Govt, all-the-while the Govt thinks it has got a good deal on the contract.
18/ So it is very easy to structure something that "justifies" the costs to someone who knows very little and has built a career on bluffing (ie this Govt). For what it is worth, there is NO WAY the amount of food sent per meal could be an accident.
19/ Normal margins in these businesses are razor thin and they require managing to an inch of their life. With a strong culture of measuring everything precisely, there is no way this could be an accident.

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