As legend has it, the commissary at U-Gas Inc. was born six years ago with a challenge from company founder Paul Taylor: Let’s open a commissary and make a good sandwich.
The company had been supplied with sandwiches from a third party. But unhappy with the product quality, U-Gas hired two deli managers from a local grocery chain to develop a sandwich program from scratch. “We started off with two ladies doing it themselves, making and delivering it, going to stores and ordering what they needed,” says Curtis Springer, director of foodservice for the St. Louis-based chain.
The commissary initially filled 1,000 square feet of a strip mall in Arnold, Mo. As foodservice sales grew, so did the facility, absorbing an 800-square-foot space next door. Around this time, U-Gas opened the restaurant GiGi’s Fresh Café at one of its sites, and from there a foodservice program—GiGi’s Café Express, featuring sandwiches, wraps and salads—was born.
Its point of differentiation? Freshness. “We’re all fresh product,” Springer says. “We make everything from scratch, we crack our eggs every morning, cook turkeys, beef and chicken fresh, and cook everything each day. Everything’s made from fresh ingredients and never frozen.”
This past February, U-Gas went big time, expanding into an 11,000-square-foot commissary staffed by 35 production workers, four managers, three sanitation workers, a quality-control technician and three drivers. The venue cranks out sandwiches, fried foods, ravioli, potato chips, fruit cups, yogurt, salads, car snacks … “You name it, we make it,” Springer says.
The dissatisfied retailer that takes control of its own destiny and product is a common foodservice narrative. What’s different here is U-Gas’ size: 19 sites. This immediately begs the question: Can a chain of this rank truly realize a return on its investment?
“At the threshold of 10 to 15 stores, you’re really dancing around it to make it work,” says Deborah Holand, president of Food Sense Inc. and a consulting partner in b2b Solutions LLC, Lake Forest, Ill. As store count increases, a commissary becomes more doable, she says, but it requires several factors: short distances between sites, an established distribution chain and robust foodservice sales.
“Fifty stores makes more sense to have their own commissary than if there are only 20 stores, because you can spread the costs out,” concurs Tim Powell, principal at Technomic Inc., Chicago. “And not every c-store [justifies it]. You will have different consumers and different stores that may not want turkey sandwiches; they might just want roller grill. It’s not one size fits all.”
For U-Gas, the commissary has not been a home run—yet. “The ROI has been very challenging,” Springer admits, declining to share the exact investment but saying it was in the “high six figures.” “It has taken us a while to get there.”
While U-Gas is turning a profit in its foodservice program, the commissary has taken longer because it guarantees product to the stores. To hasten the math, the chain recently consolidated from multiple food suppliers to only one—St. Louis-based Kuna Foodservice—which trimmed food costs by 20%.
By increasing efficiencies and bringing on new business, U-Gas is showing signs that even a modest-size operator can make the commissary equation work.
Ramping Up
A small retailer may have big ambitions for its foodservice program, but certain key fundamentals must fall into place to make a commissary worth it [CSP—Oct. ’12, p. 207]. Just ask Jared Scheeler, director of retail operations for Bobby & Steve’s Auto World, an eight-store chain based in Eden Prairie, Minn. Five of the retailer’s sites have kitchens for creating its proprietary made-to-order foodservice offer. Until recently, the chain had considered installing a commissary for breakfast and deli sandwiches at one of its sites.
Bobby & Steve’s eyed several factors in favor of a commissary, such as the short distance between stores—at most 30 miles—and the fact that each site was making the same product each day.
“If stores are not going through a high enough volume, it’s really inefficient to make it fresh every day,” says Scheeler. “It’s labor-intensive, and you’re carrying a high amount of inventory in the store to make products.” The cooking and prep space in the stores is currently 650 to 700 square feet, while cooler and freezer storage command another 600 square feet.
The company was also attracted by the projected revenue and margin increase, and the potential of being more efficient with less waste. Even the cost to build a commissary was not prohibitive. Then came the other major financial consideration: distribution. Outfitting a vehicle with refrigeration and hiring a part-time driver for only four hours a day to deliver to eight stores just did not make financial sense.
“With all of those factors combined, we maybe were four stores short,” says Scheeler, who points out that until the chain reaches the magic store count, it will work on building more efficiency and productivity into the program.
An operator with fewer than 10 stores would need to make nearly $50,000 per site in foodservice sales and have close stores with a very tight, profitable distribution network to make a commissary worthwhile, says Holand of Food Sense. “Once you get to 20 to 25 stores in a 100-mile radius, you can support a commissary, if you’re doing some reasonable volumes,” she says.
U-Gas’ 19 sites are no more than 40 miles apart from each other; a 20th is scheduled to open in mid-December. One of its sites is out of state just across the border. The commissary also provides food to two Dirt Cheap liquor and tobacco outlets that U-Gas owns; the company decided not to serve additional Dirt Cheap stores because of their distance.
Most product is finished at the commissary, which also creates a few pass-through items, such as pizza and calzones, that are heated up at the stores.
“There’s not a product we can’t make,” says Springer. The chain is in the R&D phase of a fried-chicken program and take-home meals, examining everything from labor and cost studies to potential packaging.
“You don’t wake up, make a sandwich and roll,” says Springer. “We can make anything, but we have to do a lot of research.”
Other challenges include managing employees, building efficiencies, controlling costs, sanitizing and cleaning the facility, and working with an on-site USDA agent, who rotates out every three years. While labor represents the biggest portion, or 60%, of operational costs, U-Gas has made some progress. For example, it is starting to work with new automated labeling machine, coinciding with the introduction of tamper-evident packaging.
“We don’t have to do that,” says Springer, “but it’s something we want to do to show we care about food safety.”
U-Gas has also changed the commissary’s operating hours. Initially the facility was producing six days a week, but labor costs mounted with costly overtime pay. As of July, the commissary had switched to five days a week; as a result, labors costs have fallen by 10% or more.
Outside the Box
If your base isn’t big enough to warrant a commissary, consider expanding the base.
“Coming into this business, the plan was not to make money right off the bat—we’d eventually make money,” says Springer. “Now that we’re selling to outside consumers … that is getting us to where we are making money.”
Beyond its 19 sites, U-Gas sells food to nine vending companies, four outside c-stores, a college and a wildlife park. Springer has a background in foodservice sales and distribution, and he has made several contacts from which to build that base. “We’re getting a lot of business by word of mouth. People are starting to get the name and concept from us running the business,” he says.
Nearly 20% of U-Gas’ foodservice sales are from outside customers, a crucial revenue opportunity for small operators looking to turn a profit on their commissaries.
Holand of Food Sense embraces U-Gas’ approach.
“I would absolutely be generating accounts in every direction I could as the commissary manager,” she says. “His [No. 1] focus should be the retailer who owns him, but then his other focus is to make money.
“A lot of commissaries with less than 15 stores to support from one retailer can’t survive without going out and getting other accounts,” she continues, “because their volume hasn’t hit thresholds to support their paid costs of operation.”
Even though it only recently expanded into the larger commissary, U-Gas is leaving itself room for growth. Two suites nearby can accommodate an expansion. But for any retailer, small to large, looking to open a commissary, one central question must be answered: “At the lowest volume going through, will it make money?” Holand says.
“Make sure it can run lean and mean at the base level, and then from there, improve on it.”
Not there yet? Holand recommends partnering with a small caterer.
“Behind the scenes they’re supporting the fresh-food operation,” she says. “When they are not running shifts for catering, can you run three shifts to make sandwiches and salads, cross-dock muffins, cross-dock fresh foods from Sysco, put meal boxes together, and then partner that way where it really looks and feels like the operator’s commissary?”
That’s the best choice until a retailer has control over the distribution chain.
Commissary Best Practices
According to Deborah Holand, president of Food Sense Inc. and a consultant for b2b Solutions LLC, Lake Forest, Ill., retailers large and small should consider the following when setting up a new commissary.
- Shorten the EFR. An efficient foodservice response (EFR) cycle—or the timeline from food conception through production to point of sale—is essential. “For those who operate in-house and run a fresh distribution program, if the menu is right, the price is right and the product looks good, the only other thing that has them failing is because the EFR cycle is not working,” says Holand. “They will lose shelf life, profit, [gain] excess waste, and the program will not make any money and will lose money.”
- Chill out. From an equipment perspective, be sure to equip the commissary with sufficient refrigeration and freezer space, which can trip up even the biggest operators. “It’s very important whether you’re buying or building a commissary from scratch to take a good look at the menu and type of food you want to offer, how it will come in and understand the market trends of manufacturers and new products coming out,” says Holand. Most facilities need to be remodeled within four to five years, she says.
- Keep it simple. Any production item that takes more than five steps to execute should be re-evaluated to simplify the process. Often qualifying are wraps, which require workers to keep the wraps pliable, spread with condiments, filled, cut and displayed. Another complex item? Anything involving multiple components in one container, such as a meal—an entrée and two sides—or a lunchbox.
“That kind of packaged item with components or too many steps to produce it and get into packaging—that’s a problem,” says Holand. “It’s not that you don’t do it, but it requires real thought into how to execute it and transform it into something that moves through the line four times faster.”
Costing Out a Commissary
Because every situation is different, it’s tough to come up with an average cost of building your own commissary, says Deborah Holand, president of Food Sense Inc. and a consultant for b2b Solutions LLC, Lake Forest, Ill.
“Someone who’s just getting into it might be buying an existing facility and just making changes to it,” she says. “Another might be building a facility on the side of their home office and calling it their test kitchen, and creating a little commissary.” An operator could choose to buy used equipment or only focus on a certain product, which also factor into the final cost.
There is a helpful restaurant industry benchmark, however, for how much you can afford to spend, says Holand: 25% return on invested capital. “If it’s 20%, you might be considering it,” she says. “If it’s supporting a bunch of stores, then there’s an offsetting benefit. If it’s 30%—green light, go, run, quickly, do it.”
Of course, it all goes back to how much sales the existing foodservice program pulls in. If a retailer thinks it will do $1 million in annual foodservice sales, after factoring in a 10% bottom line minus depreciation, “then I can come up with an ROI fee, and that’s my budget for the commissary,” says Holand.
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