Case Study Jul 2013 Advance Information

8/18/2019 Case Study Jul 2013 Advance Information

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Copyright © ICAEW 2013. All rights reserved. 171055

CASE STUDY

JULY 2013

ADVANCE INFORMATION

This material is issued prior to the examination session on 24 July 2013.

Candidates MUST bring this material with them to the Examination Hall.


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ICAEW/CS/J13 Page 1 of 38

PALATE LTD: ADVANCE INFORMATION

This material is issued prior to the examination session so as to allow you to familiarise yourselfwith the information provided and undertake any research and analysis you think fit. Thisinformation is also published on the website: www.icaew.com/students.

You MUST bring this material with you to the Examination Hall, annotated if you wish,together with your preparatory work. Once you have read the material, you are not expected tospend more than two days working on it: this would include familiarisation with the informationprovided, additional research and analysis, developing an awareness of the industry, discussionand assembling your preparatory work for use in the examination. The use of pre-prepared studymaterial will not significantly help you in your preparation for this examination. It is essential thatyou carry out sufficient analysis work of your own in order to have a good understanding of the Advance Information. You will not benefit from taking large quantities of additional material withyou into the Examination Hall.

At the start of the examination you will receive some additional material which will complete thedescription of the case scenario and state the Case Study requirements. Your answer must besubmitted on the paper provided by the ICAEW in the Examination Hall. Any pre-prepared papers,or papers comprising annotated exhibits from the case material, included in your answer WILLNOT be marked.

Assessment of the Case Study

The marks in the Case Study are awarded for professional skills, allocated broadly as follows:

Assimilating and using information 20%

Structuring problems and solutions 25%

Applying judgement 25%

Drawing conclusions and making recommendations 20% Demonstrating integrative and multidisciplinary skills 5%

Presenting appropriate appendices 5%

Of the total marks available, 15% are awarded for the executive summary and approximately 10%for the relevant discussion of ethical issues within your answer to the requirements. Ethical issuesdo not form a specific requirement but, within a requirement, may cover such topics as:

Lack of professional independence or objectivity

Conflicts of interest among stakeholders

Doubtful accounting or commercial practice

Inappropriate pressure to achieve a reported result.

You should be clear that marks are awarded for demonstrating your professional skills, not forreproducing facts from the case. In order to be successful, you will need to:

Demonstrate your knowledge of the case material and make use of your research

Carry out relevant analysis of the problems and structure your proposed solutions

Apply your judgement on the basis of the analysis that you have carried out

Draw conclusions from your analysis and judgement, and develop them into practicalcommercial recommendations.

Omitting any one of these elements will have a significantly detrimental effect on yourchances of success.


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July 2013 Case Study: Palate Ltd

List of exhibits

1 About you (Phil Roberts) and your employer (Palate Ltd)

2 The UK contract catering industry: Background

3 Contract catering: The business model

4 Palate Ltd: Overview of the business

5 Email dated 19 July 2012 from Samantha James to all Palate directors

6 Palate Ltd: Management accounts for the year ended 31 May 2012

7 Palate Ltd: Overview of business units (July 2012)

8 Palate Ltd: Example client contracts (summary of key terms)

9 The food service supply chain

10 Palate Ltd: The way forward (the board’s strategic overview, May 2013)

11 Letter dated 3 June 2013 from Morgan Catering Advisors to Palate Ltd and to ArnoGirls’ Boarding School, together with a note from Oswald King to Samantha James

12 Press articles


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EXHIBIT 1

About you (Phil Roberts) and your employer (Palate Ltd)

You are Phil Roberts, a final-year trainee ICAEW Chartered Accountant working for Palate Ltd, acontract catering company based in St Albans, just outside London. Palate has three business units,

each operated as a separate division, though they form a single statutory entity. You report to theDirector of Finance and Business Development, Samantha James.

Since joining Palate, your work has included:

Preparing financial schedules to support the company’s proposals for strategic development

Helping to resolve operational issues arising on individual client contracts

Assisting with calculations to support tenders for new business

Providing ad hoc advice in response to queries from the directors

Ensuring that clients are adhering to the financial terms of their contracts

You are expected to keep yourself up to date with market, economic and technical issues, enabling

you to contribute as fully as possible to all of the above tasks.


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EXHIBIT 2The UK contract catering industry: Background

Overview

Contract catering (sometimes now referred to as “food service management”) is the contractualoutsourcing of catering services to external businesses by individuals and organisations that cannot,or choose not to, provide their own catering. Within the UK, the industry serves a wide range ofclients, including public sector entities (such as state-funded schools, hospitals, prisons and militaryestablishments); private sector companies (both staff canteens and executive dining areas); andsport, leisure and tourist venues and attractions. It also covers catering services for privateindividuals, such as weddings.

Contract catering businesses vary considerably in size and scope. At one extreme are the largercompanies – such as Sodexo, Compass, Aramark and Elior – which mainly focus on the “massmarket” (see below) and between them are estimated to represent almost 50% of total UK contractcatering revenue. They have generally grown through mergers and acquisitions, and they now coverall major segments of the industry. At the other extreme are the smaller businesses, which tend to

provide bespoke products and services to more discriminating clients within well-defined nichemarkets or regional areas. In between are a number of independent, generally privately-ownedmedium-sized companies that operate nationwide (eg, BaxterStorey).

Since 2008, rising unemployment, government cutbacks and generally weak aggregate demand inthe economy have led companies, public bodies and individuals to cut back on the use of caterers’ services. In the five years to 2013, according to some estimates, revenue will have declined at acompound annual rate of 4.5% (though with a temporary reversal of the decline in 2012 because ofthe London Olympics and Paralympics).

Industry segmentation

Some analysts identify two sectors in the food service industry, which can loosely be described as the“mass market” and the “upper end”.

The mass market covers not just public sector procurement for schools, hospitals, prisons etc, but allclients for which the aim is to supply a high volume of meals at relatively low prices (including staffcanteens in some private sector companies), and for which the focus is less on quality of meals thanon minimising costs. Particularly important for mass market caterers is the need to develop efficientdistribution chains to keep food costs down, but it is also necessary to manage labour costs (eg, byemploying part-time and casual workers).

By contrast, at the upper end (eg, boardroom functions and weddings), the focus is on quality andservice. This entails employing experienced chefs and waiters/waitresses, as well as sourcing the

best produce. The object will be not so much to minimise costs as to ensure that the final product is ofthe highest standard. Further, because there will be a broad spectrum of client requirements, therewill be greater scope for relatively small caterers to operate and prosper in this sector of the market.

Alternatively, the market is often segmented by type of clients, as below. Some of these embrace bothmass market and upper end categories (eg, B&I includes both staff canteens and boardrooms).

Business & Industry (B&I)

Education (both state-funded and independent schools and colleges)

Healthcare (hospitals and nursing homes)

Catering for the public (including sport, leisure / tourist venues / attractions; private clients)

Other (prisons, military establishments, oil rigs, travel (airlines, trains, ferries / cruise ships))


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It is estimated that over 3 billion meals per year are served across all locations (“outlets”) in thesesegments. Around half of them are provided in-house, and the other half outsourced to contractcaterers; but the split varies. The segments vary considerably in size and have very different profilesand growth drivers. B&I is by far the largest, representing around 50% of the total number of outletsand number of meals served. Education (mainly state-funded schools) is the next biggest, comprising25-30% by both measures.

Business & Industry (B&I)

B&I encompasses staff canteens (from large-scale factory sites to city-centre headquarters) togetherwith corporate hospitality and buffet lunches. It reflects to a great extent the general fortunes of theeconomy. Through time, B&I has gradually moved away from factory canteens towards staffrestaurants and snack bars for office workers, and it is closely related to overall levels of employment.When the economy turned down in 2009, this segment suffered as unemployment rose.

According to the British Hospitality Association (BHA), half of sites (accounting for 95% of mealsprovided) within the B&I segment now use outsourced catering services. Caterers must balance thedemands of employers looking to cut costs and reduce risks with the need to innovate to keep up withcompetition from local alternatives (eg, sandwich shops); offer a dynamic and enticing range of food;and use marketing techniques to attract more diners.

Education

Within this segment, only around 20% of catering is outsourced, though there are variations. Theproportion is higher in independent schools than in state-funded institutions (schools, colleges anduniversities), but the absolute figure is higher in the latter as there are many more outlets. Someexperts believe that outsourcing may have declined slightly in recent years as local authorities havetaken contracts back in-house following pressure to improve quality. In addition, some caterers haveresigned from contracts that were proving unprofitable.

Independent schools

Independent – or “private” – schools are those for which parents pay fees for their children to attend. Most independent schoolsare day schools, the rest being boarding schools (ie, pupils live in accommodation at the schools during term-time). In additionto fees, parents are typically required to make a lump-sum payment for school lunches in advance at the start of each term. Atboarding schools this will also cover other meals, both those provided on weekdays and those provided at weekends.

The biggest cause of change in school meals has been not in the number of pupils at schools (thoughthere has been a fall in those attending independent schools) but in the percentage having schoollunch (ie, rather than bringing their own packed lunches from home or buying food from local shops).The latest Local Authorities Catering Association survey shows that 44% of primary (ages 5-11) and38% of secondary (ages 11-18) pupils at state-funded schools eat school meals, both significantly up

from a dip in 2009. These are partly the result of a greater emphasis on discipline and restrictions onpupils leaving school premises at lunchtime, which had been a growing trend at secondary schools.

In recent years there has been an increased focus on healthy eating in the education segment, with acampaign led by celebrity chef Jamie Oliver playing a major part in improving the quality and appealof school meals. The UK government’s “5-a-day” initiative, encouraging everyone to have at least fiveportions of fruit and vegetables every day, has also had an impact on the range of food provided byschools. As with B&I, caterers need to find creative ways of adding value, thus making the schoollunch an enjoyable experience.


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Catering for the public

This segment – which includes leisure attractions, as well as catering for private functions such asweddings and parties – has suffered from downturn-related trends (eg, reduced attendance at and/orpostponement of events). However, in 2012 it benefited from a surge in activity from the Queen’sDiamond Jubilee (June) and the London Olympics and Paralympics (July-September).

Healthcare

Within healthcare, catering contracts for many large NHS (public sector) hospitals tend to beoutsourced. Outsourcing is much less common in private hospitals (where quality catering is seen tobe a core part of the proposition) and nursing homes (typically much smaller sites).

Other

This has been a recent area of growth, with a significant proportion of catering for the military servicesbeing outsourced, as part of a general move to outsource more non-core activities to accommodatean 8% cut in the Ministry of Defence’s annual budget of £37 billion. Within travel, there has been little

change in recent years.

Additional services

Some caterers also provide ancillary services, such as consultancy, contract management, cateringstaff recruitment, incentive scheme management and operation of vending machines. Some alsoincreasingly carry out a range of other services alongside catering as different facilities management(FM) services converge. These include cleaning, maintenance, waste management, gardening andreception / switchboard. Many commentators believe that the larger caterers are well placed to takeon the “lead FM provider ” role because catering is seen to be more of a specialist area than servicessuch as cleaning (giving the caterer more scope for differentiation).


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EXHIBIT 3

Contract catering: The business model

Types of contract

The two main types of catering contract are known as cost-plus and fixed price.

In cost-plus contracts, the caterer provides its expertise and invoices the client for all operational costs(food and consumables, labour, transport), plus a management fee. This is illustrated below.

£Food and consumables 320,000Labour 300,000Transport 5,000

Total costs incurred by caterer 625,000Management fee 50,000Total revenue to caterer 675,000

Less: sales revenue from diners (225,000)Difference = client’s subsidy 450,000

The size of the subsidy will depend on the menu prices. For example, a school might charge its pupilsand staff £1 per meal (corresponding to “sales revenue from diners” in the illustration above) but therevenue from the client to the caterer might be £3 (ie, a subsidy of £2 per meal). Some organisationsprovide the meal for free: in the illustration above, the subsidy would then be the full £675,000.

Typically, such contracts have no ceiling. If the caterer fails to control costs, the client pays. In thesecontracts, the client bears the whole risk of rising food and labour costs. On the face of it, the catererhas little incentive to seek the best deal, unless it is to prevent the client taking the business back in-house or awarding it to a rival.

Fixed price contracts lie at the other end of the spectrum. As the name suggests, they offer morecertainty for the client, who receives a specified service level for a defined sum. The caterer must beable to provide the service and generate an element of profit within the total contract price agreedbetween the parties.

A fixed price contract can be appropriate for some clients, but can prove costly and inflexible for others.The caterer is exposed to the risk of rising costs (although equally it will gain if they fall) and may alsoseek to employ part-time and/or casual labour where possible and to negotiate favourable terms withsuppliers.

In some contracts, the parties agree at the start an annual amount (or possibly a guaranteed

minimum), which may be reviewed periodically, and the client pays this to the caterer in instalments.

Another (less common) type of arrangement is the concession-based contract, often used at touristattractions, concerts and so on. Here, the caterer pays a premium or “location fee” to the site operator,entitling it to provide catering for visitors, sometimes on an exclusive basis.

The BHA Food & Service Management Survey 2010 identified that concession-based contractsaccounted for 11% of all contracts, versus 25% for cost-plus and 64% for fixed price. There will alwaysbe a requirement for the different types of contract, depending on factors such as organisational needs,location, site dynamics, competition and the risk profile of the caterer and/or client. Critical to all of thisis ensuring that the contract is appropriate, fair and able to provide a realistic reward or incentive to thecaterer as well as accountability. In addition, it is hard to identify a “one size fits all” business model.Margins will vary, depending on the type of activity, as will the ratios of costs to revenue. Cost-pluscontracts typically generate a lower margin than fixed price ones.


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Cost structure

Latest available industry figures show that labour continues to represent the largest cost component(around 43%), followed by food & beverages (32%), management fees (14%) and overheads (11%).However, the consolidated figures mask significant variations between sectors and between contracttypes.

Labour costs vary with the mix of employees. These will include waiters/waitresses (who may notrequire much training or experience) and gourmet chefs (who will be highly skilled and will haveundergone lengthy training), as well as staff in a number of other roles. There are estimated to beover 200,000 people working in the UK industry, around 40% of whom are full-time. The remaining60% are part-time or casual, enabling employers to be flexible and shift risk from themselves to theirworkforces, as well as dealing with seasonal variations in demand. This is very important for massmarket clients, where there is significant pressure on margins.

Food & beverages costs vary with overall commodity price inflation and changes in the food supplychain (see Exhibit 9). Specifically, where poor weather (or an external event, eg, blockade bydistributors) leads to scarcity of a key resource such as wheat or potatoes, this can have a markedimpact on a caterer’s cost base and it will often not be possible to pass on such additional costs to aclient.

Market pressures, expectations of “added value” and extra services

For special events such as weddings, the client may require the caterer to be a “one-stop shop” (ie, tooffer not just food and drink but also the decorations, such as tablecloths and chair coverings; andglasses, cutlery and crockery). These items will be reflected in additional charges (for example, ahigher cost per head). In times of recession, caterers may be expected by clients to provide addedvalue at minimal or no additional cost. They may be asked during the tendering process, or at the timeof a contract negotiation, how they will demonstrate this. Such added value might include, for example,a wider range of options on the menu, inclusion of a drink as part of the meal, or perhaps the provision

of ancillary items, such as those listed above.

Premises and equipment

In many cases, the contract caterer carries out all the necessary work in kitchens on the client’spremises. However, under some contracts, the caterer does all the food preparation and cooking “off-site” and then brings it to the client’s premises to be (re)heated and served. This may occur, forexample, at schools where space is at a premium and where it is considered to provide better valuewhen it is used for educational purposes. Caterers operating in this way need to have their owndedicated kitchens and equipment, which will be reflected in larger non-current asset figures in theiraccounts. In some instances, they may have to hire extra equipment for a particular event. There willneed to be enough storage space, whether at the caterer’s or client’s own premises, for a ny ingredients

that have to be available all the time. Caterers will also have to operate a fleet of refrigerated or heat-retaining vehicles – whether owned or leased – to transport food between locations; alternatively, theymay use an external distribution company. In some contracts, the caterer may fund the refurbishmentof the kitchen and/or dining area at the client’s premises.

Health and safety, labelling and special dietary requirements

Health and safety is a major issue for caterers. An outbreak of food poisoning at a client’s premises can have serious ramifications for the caterer’s reputation – as well as its financial future – as it willoften lead to significant adverse publicity and possibly even punitive lawsuits. Most companies nowhave written policies and procedures, as there are many legal requirements to comply with, creatingan administrative burden that distracts from the main activity of providing food. As a result, the UK

government has recently proposed:


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A rationalisation of regulations on food safety, labelling and the listing of ingredients, as well as anew “food labelling map” to make it easier for businesses to know the rules they need to follow.

The removal of unnecessarily detailed European regulations that cost businesses money, such asthose on minimum hardness of bottled water.

Many food items are labelled with “use by” or “best before” dates. “Use by” dates , appearing on foodsthat deteriorate quickly, specify the last date on which they can be safely eaten. They are foundtypically on dairy items, meat and fish, which can cause illness if eaten after the “use by” date. According to the Food Standards Agency (FSA), it can be dangerous to eat food past the “use by”date even though it might look and smell fine. “Best before” dates indicate when the taste or qualitywill begin to decline. They appear on foods with longer shelf-lives (eg, biscuits and crisps). Most foodcan be eaten well past its “best before” date without causing harm – with the exception of eggs, whichhave “best before” rather than “use by” dates and, provided that they are cooked thoroughly, can beeaten up to a day or two afterwards.

Caterers have to be increasingly sensitive to people with special dietary requirements and to providemenus that are flexible and varied enough to satisfy a wide range of needs. These requirements maybe governed by religion or conscience (eg, Halal, Kosher, vegan); health (eg, allergies to nuts, gluten,

dairy or other products); or personal choice. Menus will often be required or expected to indicate wherean item is not to be ordered by someone with a particular restriction – or that an alternative may beavailable (eg, a dish usually prepared with eggs can be prepared with an egg substitute) – as well asshowing the calorific value (or “calorie count”) to help weight-conscious diners.

The Food Standards Agency (FSA) – adapted from its website

The FSA is an independent government department responsible for food safety and hygiene across the UK. We work withbusinesses to help them produce safe food, and with local authorities to enforce food safety regulations. Everything we doreflects our vision of “Safer food for the nation”. We aim to ensure that food produced or sold in the UK is safe to eat, thatconsumers have the information they need to make informed choices about where and what they eat, and that regulation andenforcement is risk-based and focused on improving public health. Our Strategy to 2015 (updated in 2011) sets out the

outcomes and priorities we are working to achieve. It is informed by our core principles (putting the consumer first; opennessand independence; being science- and evidence-based), which guide our work. To reflect our greater involvement inenforcement, following the merger with the Meat Hygiene Service, we have included a new core principle: enforcing food lawfairly. The six outcomes we aim to achieve are:

foods produced or sold in the UK are safe to eat

imported food is safe to eat

food producers and caterers give priority to consumer interests in relation to food

consumers have the information / understanding they need to make informed choices about where / what they eat

regulation is effective, risk-based and proportionate, is clear about the responsibilities of food business operators, andprotects consumers and their interests from fraud and other risks

enforcement is effective, consistent, risk-based and proportionate and is focused on improving public health.


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EXHIBIT 4 Palate Ltd: Overview of the business

Early history and development

Palate Ltd was formed by three individuals: George Watson, Oswald King and Samantha James. They had met

at a business networking event in London showcasing the talents of artists and craftsmen in various fields.George, a trained gourmet chef, was demonstrating his sushi-making skills to those present when he wasapproached by Oswald, a former food purchasing manager at a prestigious London hotel, and Samantha, anICAEW Chartered Accountant and investor on the lookout for a new venture. Samantha had identified a gap inthe market for a contract catering company near where she lived – St Albans in Hertfordshire, just outsideLondon – and these two new contacts looked as though they would be perfect for achieving her goal. They all

swapped business cards, and before long they were meeting at Samantha’s cottage.

Realising that their skills and personalities complemented each other very well, they began to formulate a business plan, and in 2004 Palate Ltd was incorporated, funded partly by share capital and loans contributedequally by the three of them and partly by bank finance negotiated at a competitive rate by Samantha. Theyacquired a suitable property in St Albans on a short-term leasehold – a building that had been a hotel whose

owners had recently retired. It had two large kitchens, a business centre and bedrooms that could easily beconverted into offices. This has remained the head office since then and is now affectionately known as “PalatePalace”. Palate does not own or occupy any other properties.

Palate began by gradually building up a portfolio of contracts, using the personal connections of the threefounders. The first client was Devaney’s, a local independent “day” school. While this provided a good initialsource of revenue, it was inevitably seasonal, with the school being closed during the summer, Easter and wintervacations and during half-term holidays (like most day schools, it was open in total for 38 of the 52 weeks – or190 days – in a year).

The school had a long-standing tradition of inviting all parents to attend a candlelit dinner and concert at the endof each term, and this offered a further opportunity for Palate to become known in the area. In particular, three

parents who held senior positions in large Hertfordshire companies recognised that Palate could provide theirrespective employers with better-quality and more reliable staff canteens and/or executive dining services thanthey were receiving from their current suppliers. Over the next few months, two of these prospects were turnedinto clients, giving Palate an entry into the B&I market.

Palate (the name suggesting refinement) quickly became recognised for high standards of food and service, andthis reputation proved to be the main marketing tool in developing the business further. George was frequently

to be seen at trade fairs and other events in Hertfordshire, and soon Palate was asked to be the exclusive catering provider at the Hertfordshire Late Spring Fair (HLSF), traditionally held in late May each year.

Structuring the business

The initial loan capital was eventually repaid to the directors and to the bank, and the company has been largelyself-financing since then. Indeed, the directors have been able to draw dividends every year to supplement their

salaries.

Reflecting on their early successes and Palate’s rapid growth, Samantha realised that the company required amore formal structure to take it forward. She appointed a fourth director, Nasir Khan, who had previously beenresponsible for events catering at Compass. Palate was also separated into three business units, each known by

its two-letter abbreviation:

ExecutiveExclusive (XX) – offices / executive dining

TopNotch (TN) – events (festivals / sports venues / conferences / trade fairs / weddings)

LunchAce (LA) – private schools


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The three business units were to be operated as separate divisions (though comprising a single statutory entity),each with its own management team, led by one of the main board directors:

XX – George Watson

TN – Nasir Khan

LA – Oswald King

In addition to the respective director, each management team comprises: a Head of Business, responsible for sales

and for building and maintaining client relationships; a Head of Purchasing and Inventory, tasked with buying allfood, drink, equipment and related items and ensuring that they are properly recorded in the company’s systems;and a Head of Operations. Certain functions are carried out centrally, notably Finance, Human Resources and

Information and Communications Technology (ICT). Samantha also serves as Director of Finance and BusinessDevelopment for the company as a whole, while Oswald is Director of Purchasing; George is Director of Quality

& Service; and Nasir is Director of ICT. A more detailed overview of each business unit is provided in Exhibit 7.

Continuing development

Palate continued to grow, through a combination of retaining existing clients and winning new ones. In respect

of the former, Palate was helped by the fact that several existing clients expanded their own operations, therebycreating extra demand for catering. With regard to the latter, the directors realised that it was dangerous to relyindefinitely on word-of-mouth referrals for all new business. While the recommendations continued to come, amore structured marketing and advertising strategy was required. In particular, they needed to have a system in place to respond to tenders as efficiently as possible – or to decline those that would not meet Palate’s criteria.

Palate achieved a success rate from tenders of 50% by number and 40% by value for the year to 31 May 2009.These figures would have been even higher, but the policy at the time was to tender for any opportunity thatarose, without any restrictions and without carrying out any significant due diligence on the prospective client.Thus in some cases Palate found itself competing against Sodexo and Compass, and it was unable to match theirtariffs or commitments. However, when tendering solely against other caterers of its own size, Palate’s successrate was considerably higher. It did also lose some clients over this period, usually because they chose to take

their catering in-house (which in turn was usually because they perceived Palate’s prices as being too high).

Business issues

Performance measurement

In addition to traditional accounting criteria (revenue, profit margins and working capital ratios), Palate usesother data – both financial and non-financial – to assess performance, whether of the company as a whole, the business units or individual contracts. These include: revenue per diner (employee, pupil, event visitor); numberof meals served (per day / week / month); and food wastage (measured by the weight of food refuse collected – and charged for – by external waste disposal companies; it comprises unsold cooked food; ingredients past their“use by” date; and discarded items, eg, potato peelings).

Contracts, pricing and payment

Although Palate has a set of standard contracts, these generally serve only as a starting-point for discussions withclients; the final agreement will often contain additional clauses to recognise specific needs. A typical contractwill include terms in relation to:

duration and scope of services provided

financial arrangements (including prices, basis of payment and credit terms)

health & safety

staffing

broad menu selections (including healthy options, arrangements for special diets) responsibilities of the two parties.

Summaries of two example cost-plus contracts are provided at Exhibit 8.


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Staffing and training

Like many catering businesses, Palate is flexible in its employment arrangements, with a mixture of full-time, part-time and casual staff. As well as its core team of experienced and skilled employees, it has an extensivedatabase of people it can call upon to work on a casual basis at short notice in the event of need. The proportionsvary between the business units; indeed, a large number of staff work for more than one unit according todemand. For example, a server at a school may work only two hours per weekday (over lunchtime), leaving him

or her free to assist at an office boardroom dinner the same evening and then at a Saturday night concert thefollowing weekend. (The time record for that week would show each shift separately, enabling the wage cost to be allocated between contracts.)

Once recruited, kitchen employees begin a training programme according to their particular role and needs. Inmost cases, this takes place in-house at Palate Palace within one of the kitchens and in one of the adjoiningrooms which has been adapted as a classroom. Those seeking more advanced qualifications as chefs are sent onexternal courses (paid for by Palate). In addition, all new joiners within Head Office roles are required as part oftheir induction to spend one week working in catering functions, typically 2½ days in the kitchen and 2½ daysas a waiter/waitress.

Demand and seasonality

A key challenge for Palate is to manage the seasonality of certain parts of its business, and in particular tominimise “idle time” among its workforce. Most school clients are open only for the statutory school terms, butsome have recently begun to be used in holidays (eg, for summer drama and arts “camps” for children); andPalate also provides the catering for these, priced separately outside the main contract. Even within term-time,some schools now open early to allow children to have breakfast on the premises and/or remain open in theevening for after-school clubs, at which snacks are provided – in both instances, providing additional business

for Palate.

Menu development

Through George and his assistants, Palate has developed a wide variety of dishes that are suitable for its clients inall three business units (subject to availability of ingredients, as some are not always in season). It is particularlyknown for its “ice-cream icons”, “ prestige potato pie” and (for the more health-conscious) “spicy salad

sensations” and “superb soups”. New recipes are tested by a panel of tasters (volunteers from among Palate’semployees) before they can be offered to clients; quantities of ingredients often have to be changed several times before George is completely happy with the product.

Working capital, procurement, supply chain management and sustainability

Palate has to cope with fluctuations in working capital as a result of the payment terms taken by its clients. It has

to maintain a sizeable cash balance to cover for seasonal variations (for example, in relation to annual events orthe start/end of the school year). It also recognises that healthy cashflow is vital to small suppliers and so

guarantees that all suppliers are paid between four and eight weeks from date of supply.

Palate’s ethos has always been to use local suppliers wherever possible. The particular ones required for eachcontract are discussed and agreed with the client. Palate prides itself on having a good relationship with all itssuppliers, who are selected on their ability to meet strict quality criteria as well as on price, food safety, serviceand hygiene. Some are Palate’s only sources for particular items – notably Young’s (dairy products and eggs) andOldham Farms (beef) – and they have been supplying Palate since its early days. As well as being regularlyassessed for financial stability and pricing / discounting policies, they are monitored by Palate in the following:

product quality and safety (including “traceability” of all food to its original source)

delivery methods, times and frequency

cleanliness of staff and vehicles

storage methods and temperature control.

Palate has the following accreditations in relation to its sustainability credentials:


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Fairtrade: Supporting fair terms of trade for farmers and workers in the developing world

ISO 14001: Identifying and controlling environmental impact; improving environmental performance

Red Tractor (see Exhibit 9)

Good Egg Award: Compassion for everyday farming

Marine Stewardship Council membership: Responsible fishing practices

Soil Association Food for Life: R educing “food miles” and the inclusion of some organic products.

Quality assurance and inventory control

Quality assurance is critical for Palate in all stages of its processes, notably in respect of wastage and generalinventory management. A key factor in determining the level of profit made is the effectiveness and efficiency of

this inventory management. A state-of-the art system enables Palate to monitor closely the quantities andremaining life of all food and drink items in its inventory – mostly raw materials (ingredients). Strict security

policies are also in place to prevent theft of food, drink, cutlery and crockery, though it is impossible to guardfully against this, especially for items held at client and other third-party sites. As well as seeking regularfeedback from clients and their diners, Palate sometimes uses “mystery diners” to test all aspects of the cateringoperations at a client. In addition, some of Palate’s major contracts contain a clause entitling the client to request

an audit or independent review of the catering operations.

Technology

As well as inventory control, Palate relies heavily on ICT in most other areas of its business, spearheaded by Nasir Khan. Among other duties, his remit includes:

ensuring that all kitchen equipment is correctly calibrated

liaison with clients (schools / offices) wishing to install cashless payment systems for students / staff

keeping the website up-to-date and easy to use

ensuring that suppliers are making optimal use of Palate’s dedicated intranet

working with finance staff to ensure that management systems are producing relevant and timelyinformation to optimise business decisions

maintaining employee attendance records.

Cashless catering

Cashless catering is a prepaid point-of-sale (POS) technology allowing transactions without the use of cash at the time ofpurchase. It is becoming increasingly widespread; one attraction is that it significantly reduces the risk involved in havinglarge amounts of money on the premises and the costs of having it collected daily by security vehicles. It is used incanteens, particularly those in offices and schools, as well as at some music festivals.

Cashless catering systems employ a variety of user identification methods, primarily “smart” cards. Users have a profile

which stores information such as the account balance, personal details and a photograph for verification purposes. They canadd money to their cards from special machines (“loaders”) or via electronic bank transfers. The set-up cost for cashlesssystems can vary from £5,000 to £25,000, followed by an annual maintenance charge of between £2,000 and £5,000.

Loyalty schemes

Palate encourages its clients to help maximise meal take-up by means of loyalty schemes. These are being

introduced increasingly at schools and offices. In a typical scheme, diners respectively receive a “free” £5 top-upon their cashless cards for every £100 spent over a specified period, and this has so far proved popular and

successful in encouraging users to “eat in”.

http://en.wikipedia.org/wiki/Prepayment_for_servicehttp://en.wikipedia.org/wiki/Point_of_salehttp://en.wikipedia.org/wiki/Cashhttp://en.wikipedia.org/wiki/Canteen_(place)http://en.wikipedia.org/wiki/Music_festivalhttp://en.wikipedia.org/wiki/User_profilehttp://en.wikipedia.org/wiki/User_profilehttp://en.wikipedia.org/wiki/User_profilehttp://en.wikipedia.org/wiki/Music_festivalhttp://en.wikipedia.org/wiki/Canteen_(place)http://en.wikipedia.org/wiki/Cashhttp://en.wikipedia.org/wiki/Point_of_salehttp://en.wikipedia.org/wiki/Prepayment_for_service


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EXHIBIT 5EMAIL

From: Samantha JamesTo: All Palate directorsDate: 19 July 2012Subject: Management accounts for the year ended 31 May 2012

I attach the management accounts for the year ended 31 May 2012 ( Exhibit 6).

You will see that the company has continued to prosper over this period. I am particularly pleased to note thatwe have managed to achieve revenue growth on many of our flagship clients. However, we are typically finding

that organisations are putting their catering contracts out to tender but then awarding the new contract to theincumbent on reduced price terms. This has led to some pressure on the margins we earn – especially at some ofour smaller TN clients – but through tight cost-cutting measures we have managed to maintain an overallhealthy gross profit trend.

Wastage has increased from 4% to 5% – below the industry average of 8% but still worrying. We have beenfinding that the kitchen equipment at some clients is not being properly maintained, leading to health risks andoperational inefficiencies, and we have taken steps to get it replaced or upgraded. We are often contractuallyrequired to do this, even though the equipment is usually owned, and all capital and related maintenance

expenditure is paid for, by the client.

Key features of the performance of each business unit are as follows (see also Exhibit 7):

ExecutiveExclusive (XX)

XX remains our largest business unit, but we are not complacent and know that we are only as good as the lastmeal we served. Growth in XX has come partly from a series of small contracts which we believe are one-off in

nature and are unlikely to lead to significant new business. We accepted these because they gave us goodmargins but in future we need to ensure that in taking on contracts of this nature, we also consider to theimportance of pursuing longer-term, recurring clients. We are delighted with the feedback received on the newseasonal menus that we have rolled out this year at Ross Laboratories and Greatwell.

TopNotch (TN)

TN has shown good growth in revenue this year, with satisfied clients continuing to come back to us. V Parkhas now become our largest client in TN but we are mindful that the contract will be due for renewal this yearand must ensure that we are well placed to retain it, while at the same time monitoring our staffing levels at VPark: inefficiencies here have led to a lower gross margin in 2012. Revenue from Hall Golf Club has benefited

from the high-profile biennial charity tournament held in the first week of July 2011, and the Club has already been approved to stage the event for a second time in July 2013. A number of smaller contracts have becomeunprofitable and we are already choosing not to renew some of these.

LunchAce (LA)

Revenue growth has continued on the back of several significant contract wins in the previous year. However,some of these made very little profit for us in their first year, so we are particularly pleased to have improved ourgross margins in what remains a highly competitive environment. Revenue from our three largest clients has beenencouraging; and between them, their total number of lunches served has risen by 10% during the year. One ofour main established contracts, Clarkstone, is due for renewal next year, and we are hopeful that the excellence inclient service that we continue to offer will put us in a strong position to be successful in any re-tender exercise.


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EXHIBIT 6

Palate Ltd: Management accounts for the year ended 31 May 2012

INCOME STATEMENT

2012 2011

Notes £000 £000Revenue 1 20,658 19,027Cost of sales 1 (18,109) (16,705)

Gross profit 1 2,549 2,322

Administrative expenses 2 (1,770) (1,574)

Operating profit 779 748

Net interest 24 21

Profit before taxation 803 769Corporation tax (201) (192)

Profit for the year 602 577

STATEMENT OF FINANCIAL POSITION 2012 2011

Notes £000 £000

ASSETS

Non-current assets

Property, plant and equipment 3 98 131

Current assets Inventories 4 570 588

Receivables 5 1,709 1,808Cash and cash equivalents 1,863 1,504

4,142 3,900

Total assets 4,240 4,031

EQUITY & LIABILITIES

Equity

Ordinary share capital: 10,000 shares of £1 each 10 10

Retained earnings 1,745 1,443

Total equity 1,755 1,453Current liabilities 6 2,485 2,578

Total equity & liabilities 4,240 4,031


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STATEMENT OF CASH FLOWS

2012 2011

£000 £000

CASH FLOWS FROM OPERATING ACTIVITIES

Operating profit 779 748

Depreciation 69 83Profit on sales of property, plant and equipment (6) (3)

Change in inventories 18 (84)

Change in receivables 99 (94)

Change in current liabilities (excluding tax) (102) 307

Cash generated from operations 857 957Corporation tax paid (192) (150)

Net interest 24 21

Net cash from operating activities 689 828

CASH FLOWS FROM INVESTING ACTIVITIES

Payments to acquire property, plant and equipment (40) (37)

Receipts from sales of property, plant and equipment 10 29

Net cash used in investing activities (30) (8)

CASH FLOWS FROM FINANCING ACTIVITIES

Dividends paid (300) (250)

Net change in cash and cash equivalents 359 570

Cash and cash equivalents at beginning of year 1,504 934

Cash and cash equivalents at end of year 1,863 1,504

NOTES TO THE MANAGEMENT ACCOUNTS

1 Segmental analysis

2012 2011

XX TN LA Total XX TN LA Total

£000 £000 £000 £000 £000 £000 £000 £000

Revenue 9,594 6,337 4,727 20,658 9,007 5,881 4,139 19,027

Cost of sales

Food and consumables (4,761) (2,596) (2,240) (9,597) (4,466) (2,446) (1,971) (8,883)

Wage costs (3,596) (2,471) (2,099) (8,166) (3,467) (2,189) (1,883) (7,539)

Location fees - (115) - (115) - (95) - (95)

Transport costs (93) (77) (61) (231) (80) (62) (46) (188)

Gross profit 1,144 1,078 327 2,549 994 1,089 239 2,322

Revenue is recognised in the period in which services are provided under the terms of contracts with clients.

Fixed price: In proportion to the volume of meals that Palate is contracted to supply in each period.

Cost-plus: The total of sales made to diners, plus management fee and any subsidy from the client.


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Cash received from clients in advance of the service being provided is shown in accruals and deferred income.

Food and consumables comprise purchases of food, drink and small items of tools and equipment, plus the hireof kitchen equipment where required for specific contracts.

Location fees are amounts paid by Palate to event organisers for the contractual provision of catering services.

Transport costs represent the cost of delivering such items to client premises, whether from Palate’s own officeor from third-party contractors.

2 Administrative expenses 2012 2011£000 £000

Wages & salaries, pensions and other costs 1,171 1,009Property costs 134 122Staff training, welfare & recruitment 63 50Insurance 96 81Repairs & maintenance 49 45Marketing & promotions 47 58

Depreciation 69 83Telephone, printing & ICT 64 58Motor and travel expenses 45 40Bank charges 32 28

1,770 1,574

3 Property, plant and equipment (PPE)

£000CostAt 1 June 2011 547

Additions 40Disposals (77)

At 31 May 2012 510

DepreciationAt 1 June 2011 416Charge in year 69Disposals (73)

At 31 May 2012 412

Carrying amountAt 31 May 2012 98

At 31 May 2011 131

PPE comprises short-term leasehold property & improvements, plant & machinery, fixtures, fittings &equipment and delivery vehicles. Their cost is depreciated on a straight-line basis over periods of between 5 and20 years. Specialist equipment held on client premises is depreciated over the initial contract term.

4 Inventories

Inventories comprise mainly raw material food ingredients, drinks and certain small items of equipment, held onPalate’s premises and on client and other third-party sites. They are stated at the lower of cost and net realisablevalue.


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5 Receivables 2012 2011£000 £000

Trade receivables 1,450 1,652Other receivables and prepayments 259 156

1,709 1,808

6 Current liabilities 2012 2011

£000 £000

Trade payables 1,454 1,405

Accruals and deferred income 353 511Corporation tax 201 192

Other current liabilities 477 470

2,485 2,578

7 Employee numbers

The average number of employees (full-time equivalents) during the year was as follows:

2012 2011

Catering 501 466Administration 40 34

541 500


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EXHIBIT 7Palate Ltd: Overview of business units (July 2012)

Executive Exclusive (XX)

From its initial base of clients, XX expanded rapidly and is now one of the largest local providers of catering toworkplaces within a 50-kilometre radius of Palate’s offices. Palate and its three main rivals are each estimated tohave around 10% of the market within this area. Clients vary in size and needs: some involve XX only forexecutive dining, while others require a full breakfast and lunch canteen service on five (sometimes seven) days aweek, 52 weeks of the year. Some are content to offer one of the standard menus suggested by Palate, whileothers are very specific – and sometimes very demanding – in their meal requirements. Contracts range in lengthfrom two to five years, and some have “ break ” clauses. Some operate on a fixed price basis, others on cost-plus:the exact method of determining revenue is agreed with each client individually.

XX’s revenue and gross profit may be analysed as follows:

Client 2012 2012 2011 2011

Revenue Gross profit Revenue Gross profit

£000 £000 £000 £000Humbells Hardware 4,059 411 3,631 374Ross Laboratories 2,226 268 2,087 267Greatwell 1,373 160 1,449 166Other 1,936 305 1,840 187

9,594 1,144 9,007 994

Example client: Humbells Hardware (HH) (length of contract: started 1 September 2007; renewed for 4 years

from 1 September 2011)

As well as catering for 1,200 HH staff every weekday at its Luton head office (close to St Albans) – mostly atlunchtime, but breakfast is also available – Palate provides extensive hospitality to all meeting rooms in the

building, with a superb range of buffet-style menus. It is also now the exclusive catering provider to the 1,000staff across HH’s 12 superstores in the region. Each time a new superstore opens, this presents logistical

challenges as Palate needs to reschedule its delivery routes and engage more catering staff. The current proportion of revenue earned is around 30% for head office staff lunches; 30% for superstore staff lunches; 30%

for meeting room hospitality (executive dining); and 10% for breakfasts and other items.

When the original contract came to be renewed in September 2011, Palate and HH agreed to engage Ogilvie (a

firm of independent catering consultants) to identify any issues so that these could be resolved in time for therenewal. In particular, Ogilvie noted that staff levels needed to be increased to cope with busy periods (12:30-

13:30 on most days) and that Palate’s directors did not visit HH’s sites often enough to see the catering in action – a source of disappointment to HH. This has now been resolved and indeed, to strengthen the relationship between the two companies, all Palate staff have been issued with a discount card entitling them to 10%reductions off all hardware purchases at HH superstores.

Example client: Ross Laboratories (RL) (length of contract: 5 years from 1 June 2009)

RL is one of the major pharmaceutical companies in the region, with a single site employing around 2,500 staffon an industrial park 20 kilometres from St Albans. RL had for a long time provided its own catering for staff but, as part of a review of its non-core activities, it put the contract out for tender in early 2009. Palate wassuccessful against three other bidders, mainly because of its emphasis on balanced menus (creating empathy

with the client’s health-conscious scientists) and because of its undertaking to refurbish the catering facilities before the start of the contract. During the two-month refurbishment period, Palate worked with RL to ensurethat temporary facilities were available to staff in another part of the building, serving sandwiches and salads.

The transition worked very smoothly and the contract with RL has gone from strength to strength, thanks toregular meetings between the parties to address any short-term issues that arise. In keeping with RL’s

technological image, a cashless payment system is in place.


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TopNotch (TN)

The revenue from TN is less predictable than that from Palate’s other two streams as it comprises more one-offwork, although there is significant regular and/or recurring annual business. The client base covers a range oforganisations (including golf clubs, country parks and museums), as well as public events (including open-airconcerts and theatre productions at a number of nearby venues), with contracts generally being of the“concession- based” type.

A common requirement in the case of events is that Palate must pay a non-refundable premium (each year, in thecase of recurring annual events) to the event organiser – local authority or private company – so as to secure theentitlement to provide catering. This is included within cost of sales in the accounts as “location fees”. It varies between £5,000 and £25,000, depending on the size and prestige of the event (higher if Palate wants exclusivity),and some contracts may have a clause allowing the figure to increase for a particular year (eg, if it marks a specialoccasion of local or national significance). The location fee is frequently payable (up to several months) prior tothe event, in which case it is shown within prepayments in Palate’s accounts until the event takes place.

TN’s revenue and gross profit may be analysed as follows:

Client 2012 2012 2011 2011Revenue Gross profit Revenue Gross profit£000 £000 £000 £000

V Park 1,440 224 1,085 181TG Music Festival 1,329 237 979 194Hall Golf Club 1,287 246 1,161 215Other 2,281 371 2,656 499

6,337 1,078 5,881 1,089

Example client: V Park (length of contract: 4 years from 1 December 2009)

On 1 December 2009, following a tender, Palate took over the catering at the Verulam Heritage Centre and Park

(V Park) on behalf of the local authority (Hertfordshire Council). The contract with the Council covers therestaurant and bar, together with two meeting rooms used for conferences. The previous caterer had fallen out offavour with the Council, neglecting to maintain a high standard of food on the basis that (in the Council’s view)as it was the only caterer on the premises, hungry and thirsty visitors had no choice but to use its services unlessthey brought their own refreshments.

At the outset, Palate undertook some local advertising. There is a full licence to serve alcoholic drinks and tooffer a bar service at this picturesque, historic venue. The new arrangement was a success from the start, withvisitor numbers to V Park up by 20% and catering sales up 40% for the first quarter, together with a large rise inconferences, plus a high degree of satisfaction from the client and visitors. Figures have continued to be promising, with the total number of visitors to V Park increasing from 176,000 to 209,000 in the year to 31 May2012. However, the local authority’s decision to charge an admission price to the site from 1 December 2012

will have a major impact on the number of visitors and hence Palate’s catering revenue in the future.

Example client: TG Music Festival (TGMF) (length of contract: 6 years from 1 June 2008)

A highlight of the region’s – and indeed the UK’s – cultural calendar, the annual three-day TGMF has beenattracting hundreds of thousands of visitors since its inception in August 1997. It has earned a reputation forattracting top bands and solo performers from around the UK and further afield and for its eclectic mix of styles,embracing reggae, jazz, hip-hop and classical. Visitors to the festival are generally viewed as discerningindividuals (the face value of a ticket is high, and some pay more than double the face value through externalinternet sites, both authorised and unauthorised).

The festival had a change of organisers in 2008. Among other actions that they took, the new organisers

recognised that discerning music fans deserved a better offering of food and drink than the apparently randomrange of burgers, fish and chips, tea and coffee that had previously been available. They approached Palate,knowing its reputation from its work at the HLSF, and were delighted when Palate proposed a six-year contract


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with a three-year break clause. It was agreed that Palate would pay a location fee of £20,000 each year on 1July, entitling it to place three marquees around the site venue. Palate would hire and supply at its own expensethe relevant amount of portable kitchen equipment.

The contract was a success from the outset, and both parties were amenable to continuing beyond the three-yearhalf-way point. Visitor numbers for the August 2010 event were 296,000, rising to 349,000 for August 2011.The August 2012 event is being billed as “Nostalgia Weekend”, with a number of popular food and drink items

being sold at their 2002 prices.

LunchAce (LA)

Palate’s education clients comprise independent schools and colleges. It does not currently serve state-fundedschools and colleges as it believes that their tight cost controls mean that the resulting margins would be too low.

LA clients are relatively uniform as the common requirement for all is to provide daily lunches during term-timeto students and staff. However, some clients are boarding schools and thus almost all pupils also eat breakfast andtheir evening meal at the school, both during the week and at weekends. In addition, some day schools offeractivities to their pupils and also to the local community outside regular hours. In such cases Palate will often be

retained as the caterer for these (for example, breakfast for pupils who do not have breakfast at home; sandwichesfor those attending “twilight” after-school clubs or for adult education evening classes held on the premises).

There are a number of other caterers of varying sizes also serving the education segment and, while there is noclear market leader, Palate regularly finds itself bidding against three other local companies:

Jordi: Specialist caterer to both state and independent schools since 2010; its CEO, Reg Ironton, is wellknown for his aggressive pricing practices when tendering and for not honouring contractual commitments

Ravenous: Established national caterer to several of the best-known schools in the UK; recently started to break into the Hertfordshire market having recruited a business development manager from Palate

Trenchard: A facilities management group with newly-acquired catering subsidiary; steadily improving itstender success rate, having realised the need to focus more closely on its catering business

LA’s revenue and gross profit may be analysed as follows:

Client 2012 2012 2011 2011Revenue Gross profit Revenue Gross profit

£000 £000 £000 £000AGBS 1,147 90 1,112 83Clarkstone 1,019 86 1,003 80Devaney’s 872 73 846 54Other 1,689 78 1,178 22

4,727 327 4,139 239

Example client: Arno Girls’ Boarding School (AGBS) (length of contract: 5 years from 1 June 2009)

Palate first became involved with AGBS when the Principal asked George Watson to give a cookerydemonstration at the school’s annual careers week, when parents from a range of work environments wereinvited to make presentations to final-year pupils. (George’s daughter had recently begun attending AGBS.) ThePrincipal, increasingly unhappy with the quality of meals at the school (which had been provided in-house sinceher appointment in 1992 and indeed since its foundation a century earlier), asked George if Palate would beinterested in taking over. After consulting with Samantha and Oswald, George presented a proposal to AGBS, tocover breakfast, lunch and evening meals for pupils and staff. This was duly accepted.

Before taking over, Palate had completed its own survey among the 60 staff and 500 pupils, to establish exactly

what they wanted, and a series of menus was developed in line with the responses received. This processresulted in far less wastage than before (down from 15% to 8%), as well as satisfied customers. Many girls had previously received weekly food parcels from home to supplement the school food, but this practice had almost

completely stopped since Palate became involved with AGBS.


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For the school year beginning 1 September 2012, the length of the lunch break is to be reduced from 75 to 60minutes, thus enabling lessons to be longer. This is likely to reduce meal take-up and quality unless efficienciescan be found, whether in staffing, equipment, serving methods or menu choices. There are no plans to change thetimings or other arrangements for breakfast or for the evening meal.

AGBS is also a popular venue for conferences and other group events during school holidays, and in 2010 Palate

accepted an invitation to become the exclusive caterer for these (in the past, the organiser of each event had beenallowed to bring in its own caterer). Conference catering makes up a growing proportion of revenue from AGBS.

Example client: Clarkstone (length of contract: 4 years from 1 September 2009)

Palate has the exclusive contract for catering services at Clarkstone (an independent day school with 1,700 pupils and 170 staff). Palate won the competitive tender with a bid that highlighted its key strengths: excellentservice, value for money, fresh and good-quality food, an emphasis on student wellbeing and a desire to build astrong relationship.

Clarkstone wanted to work with a partner that would provide healthy options and help pupils meet the UKgovernment’s “5-a-day” goal. It particularly wanted to increase the take-up of meals. Under the previousincumbent, there had been growing dissatisfaction with the choice of food, and a significant number of pupils

had regularly left the school premises at lunchtime to buy snacks from nearby sandwich shops and burger bars.Clarkstone was recognised as a specialist sports school and the Headteacher was anxious to ensure that, tosupport this status, its pupils were seen to eat healthily.

Under the terms of the contract, Palate would provide food for an average of 95% of pupils each day (to allow

for absences) and budget accordingly. Staff were also encouraged to eat with pupils, leading in turn to bettermorale and closer camaraderie among pupils and staff. Through these mechanisms and by totally revitalising thefood service, catering team and the restaurant, Palate increased take-up and revenue in the first year of itscontract in comparison with the previous provider, thus achieving a healthy profit. Eating school lunches became attractive again and the 95% target take-up was achieved. As in most schools, diners collect their meals

at serving counters using trays and are then expected to clear away their waste when they have eaten.


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EXHIBIT 8

Palate Ltd: Example client contracts (summary of key terms)

(1): HUMBELLS HARDWARE (HH)

Period of contract

An initial period of 4 years beginning 1 September 2011 and continuing until terminated by either party

giving written notice of at least 3 months.

Shortly before the half-way point in the contract, the parties will jointly appoint an independent catering

consultancy to review the catering operations. .

Responsibilities of Palate

Provide lunch to HH employees daily 11:30-14:00 and breakfast daily 07:00-09:30:

o At head office: from Monday to Friday

o At superstores: 7 days per week.

Provide all required staffing, containers, cutlery, crockery, disposables, cleaning materials, plus all cleaning

and washing-up services, as well as removal of all leftover or out-of-date food at all times.

Maintain cleanliness and abide by HH’s health & safety policies and practices at all times.

Be responsible for maintaining and servicing all kitchen equipment; also instruct HH to replace any

equipment that has reached the end of its useful life or has broken down irreparably.

Provide for special religious and medical diets at no extra charge.

Employ sufficient persons to provide the service at all times and in all respects to the required standard.

Be fully responsible for such persons and their actions while performing contracted services at HH. All such

personnel will be employees of Palate and will not be considered employees or agents of HH.

Responsibilities of HH

Grant access for Palate staff to the part of HH’s premises used for the preparation and provision of meals.

Provide washing-up facilities free of charge.

Maintain suitable facilities (including water, power, refrigeration, ventilation, drainage, refuse facilities, safe

and secure food storage areas) in line with accepted industry standards.

Provide a catering office, telephone line and computer hardware.

Pricing, payment and financial arrangements

Palate will prepare an annual operating budget and monthly management reports.

Palate will pay all food, labour, distribution and other costs.

Each month, HH will pay Palate (within 30 days of Palate’s invoice) for these costs, together with themonthly management fee.

Each month, Palate will prepare a record of the total number of meals ordered.

Sustainability

Palate is required to meet the following sustainability targets:

o Energy saving: 10% reduction in annual electricity consumption from the year ending 31 August

2012 to the year ending 31 August 2013, with further reductions (to be agreed annually) in each of

the following three years.

o Food miles: 25% reduction in total number of deliveries to HH premises from the year ending

31 August 2012 to the year ending 31 August 2013, with further reductions (to be agreed annually)

in each of the following three years.


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(2) ARNO GIRLS’ BOARDING SCHOOL (AGBS)

Period of contract

An initial period of 5 years beginning 1 June 2009 and continuing until terminated by either party givingwritten notice of at least 3 months.

Approximately one year before the scheduled end of the contract, the parties will jointly appoint anindependent catering consultancy to review the catering operations at the School’s premises.

Responsibilities of Palate

Provide the following meals daily to staff and pupils Monday to Sunday during term-time:

o Breakfast: between 07:30 and 08:30

o Lunch: between 12:15 and 13:30 (from 1 September 2012: between 12:15 and 13:15)

o Evening meal: between 18:30 and 20:00.

Provide all required staffing, containers, cutlery, crockery, disposables, cleaning materials, plus all cleaning

and washing-up services, as well as removal of all leftover or out-of-date food at all times.

Maintain cleanliness and abide by AGBS’s health & safety policies and practices at all times.

Be responsible for maintaining and servicing all kitchen equipment; also instruct AGBS to replace any

equipment that has reached the end of its useful life or has broken down irreparably.

Consider AGBS’s Healthy Eating Policy in preparing menus without unduly restricting scope for choice.

Provide for special religious and medical diets at no extra charge.

Employ sufficient persons to provide the service at all times and in all respects to the required standard. A

minimum of twelve persons should be on duty during the lunch period and ten during breakfast and the

evening meal.

Be fully responsible for such persons and their actions while performing contracted services at AGBS. All

such personnel will be employees of Palate and will not be considered employees or agents of AGBS.

Require them while on AGBS premises to carry out their duties and behave in a quiet, orderly manner.

Responsibilities of AGBS

Grant access for Palate staff to the part of AGBS’s premises used for the preparation and provision of meals.

Provide washing-up facilities free of charge.

Maintain suitable facilities (including water, power, refrigeration, ventilation, drainage, refuse facilities, and

safe and secure food storage areas) in line with accepted industry standards.

Provide a catering office, telephone line and computer hardware.

Pricing, payment and financial arrangements

Palate will prepare an annual operating budget and monthly management reports.

Palate will pay all food, labour, distribution and other costs.

Each month, AGBS will pay Palate (within 30 days of Palate’s invoice) for these costs, together with the

monthly management fee.

Each month, Palate will prepare a record of the total number of meals ordered.


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EXHIBIT 9 The food service supply chain

Overview

The majority of companies in the food service supply chain can be classified as one or more of:

Operators of food service outlets (whether in-house or as outsourced contract caterers)

Wholesalers of food to distributors and/or food service outlets

Distributors to food service outlets.

Operators may buy commodities (eg, milk, cheese and butter) from farmers direct, via wholesalers orfrom food manufacturers. Currently, over half of all food sold to operators is delivered throughwholesalers, who provide a link between food producers (fresh produce), manufacturers (finished,prepared products) and catering outlets. Distributors offer a delivery service function without actuallytaking ownership of the goods.

Large operators (typically those supplying mass market outlets) will find it advantageous to integrate

vertically and assure their supplies of cheap raw materials by securing the best prices from farmersthrough the exercise of buying-power. By contrast, small and/or niche operators may prefer to sourceraw materials from wholesalers, either as unprocessed ingredients (eg, meat, vegetables) or aswholly or partly processed products (eg, prepared meals, rolled pastry).

In many instances, producers supply the contract caterer direct rather than the actual outlet. However,the contract agreed with the client may limit the caterer in terms of supply choices; for example, afixed price contract may put pressure on achieving the lowest price for goods.

Wholesalers have traditionally purchased products from suppliers and distributed them to operators inaccordance with the operators’ “product list”. More recently, however, some larger wholesalers have

increased their remit to include client purchasing, contract distribution, food processing andmanufacture, new product development and own brands, menu development, category management,product advice and kitchen design.

Among the largest UK wholesalers are two companies, 3663 and Brakes, but there are a growingnumber of smaller regional wholesalers specialising in food service supplies and serving as regionalhubs. These simplify the supply chain by providing a central unit to which local producers can delivertheir product. The hub then delivers the local product to the various food service depots. The unwieldynature of the larger operators provides a key opportunity for regional food hubs and verticallyintegrated supply chains to supply produce of a higher specification, and this allows outlets in theupper end of the industry to differentiate using quality, environmental, cultural and other factors.

With the growing proportion of consumers questioning the origins of their food, caterers areexperiencing a surge in demand for food sourced locally. In response to this, 3663 is currentlydeveloping regional product portfolios branded “local products from local people”. However, thecomplexity of the food service market has been a barrier to entry for local producers, along with a lackof information as to how the supply chain operates. In addition, the major UK supermarket chains allnow have rapidly expanding portfolios of regional products. They are capturing large proportions oflocal food supplies, thus limiting availability for other operators, including caterers.

Sustainability and related matters

Leading contract caterers are adopting corporate social responsibility (CSR) as an important part of

their operational approach. Sustainability is integral to this: it is increasing in importance, withprospective clients frequently including it amongst selection criteria. There is some debate over whatit means in practice, but examples of steps taken by caterers include:


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removing certain items from menus to protect endangered fish species

switching to only British meat to reduce distances travelled (“food miles”) and to minimise the riskof exposure to overseas malpractice within the supply chain

initiatives to reduce waste and energy consumption.

As part of its ongoing drive to combat health issues such as obesity, the Foods Standards Agency

(FSA) is encouraging caterers to include the calorific value of meals on menus. This provideschallenges for the industry, particularly for situations where food is less standardised and chefs havediscretion to use their skills to produce a high-quality output. The fixed costs and time required tocarry out analysis of a meal may also discourage the use of locally-sourced and seasonal ingredients,while increasing emphasis on portion control, particularly in self-service outlets.

There is an increasing demand for freshly-prepared local foods with appropriate “assurance”. Thiscreates opportunities for those producers able to supply British assured products. Assured FoodStandards (AFS) is an organisation that promotes and regulates food quality. It licenses the RedTractor quality mark, a certification programme covering a number of farm assurance schemes forfood products, animal feed and fertiliser. There are now a growing number of Red Tractor licensees inboth operational and wholesale food service (eg, Sodexo, Brakes, 3663). Caterers realise the

importance that their clients attribute to such accreditation, so there are opportunities to extend it toother caterers, provided that they have the required robust independent audit arrangements in place.

Stock Control (Food Standards Agency (FSA))

Stock Control is a term used to describe the measures taken to ensure that food stock (inventory) is not kept beyond itsshelf-life. It also refers to measures taken to prevent certain types of contamination, especially during storage, defrosting,“hot holding”, service and transportation. It is important because if high-risk food is kept too long, even under favourableconditions, harmful bacteria may multiply. Additionally, even foods with a longer shelf-life (whether dried, canned or frozen)may deteriorate if they are kept for too long. Food which is being stored may also become contaminated by food handlers,pests and the catering environment.

What Stock Control measures could be used?

Incoming food should not be accepted if its packaging is seriously damaged, exposing the product to the risk ofcontamination, or if the food is obviously contaminated.

Incoming food must not be accepted if its “use by” date has expired.

In terms of good practice, stock beyond its “best before” date should be considered for rejection.

Stored food must not be used if its “use by” date has expired.

High-risk food which has been removed from its packaging should be re-labelled with a new suitable “use by” date,based on manufacturer’s instructions.

High-risk foods prepared on the premises and stored for later use should be labelled with an appropriate “use by” date.

Stock should be rotated on a first-in-first-out basis and damaged stock removed from the main storage area.

Dried food should be stored in large waterproof containers and not topped up with new stock (existing food should beused first).

Food that can cause allergic reaction should be kept separate from other foods, and cooked foods segregated from rawfoods. It is vital not to lose the product description and traceability following unpacking and storage.

What food protection measures can be used?

Food being stored, defrosted, held hot, displayed or transported must be protected from contamination. This may beachieved by the use of suitable containers or packaging.

Food on display should be protected as far as practicable, eg, by the use of sneeze guards and/or covers.

http://en.wikipedia.org/wiki/Certification_markhttp://en.wikipedia.org/wiki/Product_certificationhttp://en.wikipedia.org/wiki/Farm_assurancehttp://en.wikipedia.org/wiki/Farm_assurancehttp://en.wikipedia.org/wiki/Product_certificationhttp://en.wikipedia.org/wiki/Certification_mark


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EXHIBIT 10 Palate Ltd: The way forward (the board’s strategic overview, May 2013)

Existing and new markets

Palate has grown to its current size by earning an enviable reputation for quality and service. However, the

directors recognise that they cannot rest on their achievements and that they need to be constantly seeking newways to develop the business further. Thus, as well as developing its penetration and expertise in its existingsegments, Palate is exploring possible new areas. In particular, it is not currently involved in the followingclient markets or service lines:

1. Healthcare (private or public sector)2. Transport3. Ancillary services (eg, consultancy, catering staff recruitment, incentive scheme management)

Of these, 1 and 2 are typically dominated by large companies (such as Compass and Sodexo) that can achieveeconomies of scale or which have the breadth and depth of expertise. Thus 3 may be more suited to Palate’s

current size and skills.

For our existing business units, the main opportunities are considered to be as follows:

XX: Like many caterers operating on a similar scale, Palate has historically restricted itself to serving clientswithin a relatively small geographical area. We believe that we are doing ourselves a disservice by failing to

explore the scope for new B&I clients elsewhere and by not extending our radius from 50 to 100 kilometres.

TN: A number of local annual events that did not take place in June, July, August and September 2012 (toavoid clashes with the Olympics and Paralympics or the Queen’s Diamond Jubilee) are scheduled to resumein 2013. The catering contracts for these will be advertised for tender in the next few months and we must beready to react to them as soon as possible.

LA: Two new independent schools and four new state-funded schools are due to open in Hertfordshire andsurrounding areas in the next two years – and they all need to provide meals for their staff, students and

visitors. This growth is needed in order to accommodate an increase in the number of children within therelevant age-group living in the region or expected to move there with their families.

Key threats to the business

As part of its ongoing risk management initiative, Palate has identified a number of threats to the continued prosperity of the business, which it has grouped into categories of importance:

Major threats

Pressures within the competitive environment

Failure of a key supplier or other supply chain problem (eg, entry of inappropriate product) Breakdown in client relationships, leading to loss of major contracts

Adverse publicity

Health & hygiene

Medium threats

Impact of recession

Legal and regulatory changes and constraints

Availability, recruitment and retention of suitably trained and qualified staff

Food price inflation

Scarcity of key ingredients (arising from, eg, poor weather, strikes)

Seasonal peaks and troughs in demand

Equipment failures and electrical outages


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Minor threats

Energy cost inflation

Increasing client requirements for added value

Menu items becoming unfashionable

Our key 2013 initiative – Project Greenbuy

In view of the ongoing increases in food prices, and the resistance received from some of our cost-plus clientswhen we pass these on, the directors have been considering ways in which we can control Palate’s costs moreeffectively while at the same time trying to maintain the company’s “green” image. This has led to Project

Greenbuy, to be launched on 1 June 2013, following the pattern of “key initiatives” introduced in each of thethree previous years:

2010: Client Care Charter: A ten-point system for measuring our performance on existing contracts

2011: Tender Terms: Qualitative / quantitative guidelines to determine whether to bid for a new client

2012: Super Support: Maximising the value we obtain from our administrative functions

Project Greenbuy has the following key objectives:

1. Reduce quantities of all items purchased to help cut wastage to 3% and adopt a more environmentallyfriendly approach

2. Review packaging policy to maximise recycling3. Reduce distances travelled by delivery lorries by rear

Case Study Jul 2013 Advance Information

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Transcript of Case Study Jul 2013 Advance Information