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Financial turmoil could take toll on contract feeders

NEW YORK Business-and-industry contract feeders could be stiffed on fees and left with emptier host facilities because of the ongoing meltdown in the financial community, according to on-site consultants.

They point to a potential fallout at Restaurant Associates and Aramark Corp., which respectively handle the corporate-dining accounts at Lehman Brothers and Merrill Lynch, two of the financial institutions that have figured heavily in recent news headlines. Lehman filed for Chapter 11 bankruptcy protection after failing to find a buyer, while Merrill agreed to be acquired by Bank of America for $50 billion.

“[Contract feeders are] in real hot water because that’s the fattest part of their businesses,” said Tom Mac Dermott, founder of the Clarion Group consultancy in Kingston, N.H.. “They’re going to have to retrench because this is going to do some damage to their bottom lines.”

Officials of Restaurant Associates said it was too early to assess how the upheaval in New York’s financial community could affect its sales, profits and operations. Aramark declined to comment.

Mac Dermott said he expects “between 3,000 and 5,000 foodservice jobs to be cut in New York alone” from the personnel rosters of the nation’s contract feeders.

“Assuming [these investment companies] survive after taking several billion dollars as write-downs, they’re going to be looking at foodservice as a place where they can economize,” he said.

The RA executives disputed the scale of layoffs that Mac Dermott cited, but they acknowledged there could be cutbacks in personnel.

“There is going to be a shakeout,” said Dick Cattani, RA’s president and chief executive. “The problem is [Wall Street] is going to have to contract to get back to equilibrium and [the foodservice industry] is going to have to contract with them. We’ll have to right size the operations. It is like we’ve seen in the past, in 1987 and 2001, but it’ll come back out of it. What goes down has to come back up.”

John Cornyn, chief executive of the Portland, Ore.-based consultancy The Cornyn Fasano Group, said the turmoil in New York would almost certainly curtail such activities as catering, traditionally a lucrative business for contract feeders.

“For the operator, there will be, if not a complete prohibition of catering, than at least a partial one,” he said. “We’ve seen this occur several times in history, and it’s fairly consistent in the way these cycles go in respect to catering getting shut down to virtually nothing.”

As creditors begin pressuring troubled financial institutions for payment, on-site feeders could be left waiting for what they’re owed on multimillion-dollar contracts, Cornyn said.

“Most likely, if [the foodservice companies] want to keep those contracts, they’re going to have to be renegotiated,” he said. “But the bigger question is whether companies like RA even want to stay given they have a bigger outstanding liability. Assuming that Lehman Brothers owes them, this crisis happened so quickly you have to wonder how fast adjustments were made to rein things in. Now, with the bankruptcy, they become an unsecured creditor.”

Cornyn advised contract companies that could be affected by ripples from the week’s developments to make sure they “secure some financial guarantees” such as “asking the client to pay upfront, at least a month in advance, in order to get some kind of payment. At least this protects them for 30 or more days out.”

RA executive vice president Charles LaMonica said that is just one option the company will consider when it negotiates future B&I contracts.

“All options are under consideration,” he said, “because everything is so fluid. It’s really all about minimizing risk exposure in an unpredictable environment.”

Mac Dermott said the foodservice contracts at financial firms of Merrill Lynch’s scale could range between $5 million and $10 million. However, he said, the larger on-site foodservice providers can absorb the hit because of their size and breadth.

“In terms of the value of their businesses, it’s big. But a 10-percent return on a $10 million business is just $1 million,” he said. “What does that mean for a company worth between $5 billion and $7 billion? Not much, but it’s still not fun. They’re not going to go out of business, but there won’t be anything going on to help them.”

He contended that midsize feeders and streetside restaurants could catch the most damage.

“There’s going to be a tremendous ripple effect into the restaurant business,” he said. “Everyone is going to look to cut back, especially as clients go out of business.”

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