Aramark making plenty of dough but plans next to cut bread suppliers

Aramark shares closed Wednesday at their highest level since the firm went public two years ago.

Shares of the Philadelphia food-service provider gained 2.95 percent, or 98 cents, to close at $33.86, one day after Aramark impressed analysts with increased projections of higher profit margins over the next three years.

At its first-ever investor day, Aramark officials explained how they would reduce $3 billion in annual food costs and $6 billion in labor costs to boost the company's profit margin to 7.2 percent from 6.2 percent.

One percentage point in extra profit margin would amount to roughly $150 million in added profits, if Aramark meets growth goals.

Among the strategies Aramark has explored to reduce food costs is a dramatic reduction in the varieties of bread it uses.

For example, in a recent pilot in 23 accounts in Philadelphia, Aramark cut the number of types of sliced white bread from 38 to five. It also slashed bread suppliers from 12 to two, Harrald Kroeker, Aramark's senior vice president of transformation, told analysts Tuesday.

The company declined to provide more details about the pilot.

Historically, Aramark let managers at schools, hospitals, or prisons make decisions on what supplies to buy, Kroeker said. "We operated like thousands of individual businesses."

The opportunity to tighten the reins is what gives Aramark the chance to hike profits, and please analysts.

"We like that the keys to unlocking value in the stock rest internally," Andrew J. Wittmann, an analyst with Robert W. Baird & Co., wrote Wednesday in a note for investors.

As it is, Aramark's profit margin in North America, which contributes 80 percent of its revenue, trailed competitor Compass Group North America, by nearly 2 percentage points in fiscal 2015, Goldman Sachs analyst Stephen Grambling said.

Kroeker said Aramark will gradually expand efforts to cut the variety of products - distinguished not just by types of goods, but also by package sizes and other factors.

Gary Bisbee, an analyst with RBC Capital Markets, said he was confident that Aramark can hit its target for margin gains, but expected they would come more from food than labor.

On a broader scale, Aramark is trying to standardize recipes in each of its 62 regions, which could allow the company to leverage its buying power.

To do so, the company started adopting a database program called "Master the Menu" last spring.

Before, "a location could have managed menus on anything ranging from a one-off software program, an Excel spreadsheet, or a piece of paper in a three ring binder," Kroeker said.

Now all of the company's recipes are in a unified database. "The bad news is that we have over 10,000 recipes in the database," Kroeker said.

Those recipes require the purchase of more than 120,000 items, called stock-keeping units, or SKUs, he said. Not for long.

"Over the next few months, we're going to be rolling out the next version of [Master the Menu], which will take the number of recipes in any one region down to about 700 and reduce the number of SKUs in any one region down to about a 1,000," Kroeker said.

hbrubaker@phillynews.com

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