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Three Food Services Companies That Can Minimize The Impact Of ACA

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It’s no news that the food industry is one of the biggest losers of the post Affordable Care Act (ACA) era. Over the years, the industry has been known for its exceptional ability to be cost efficient. One of the ways through which companies in the industry cut costs is by employing workers on part-time and seasonal basis, enabling them to keep labor expenditures at a minimum.


However, with the ACA now in the picture, costs in the industry would inevitable rise. Even if food services companies choose to cut down the number of hours to reduce the number of full-time employees they have, there are still certain costs that come with having a large staff base.


Fortunately, food services companies with super cost-efficient models would suffer a lot lesser than others. Ideally, such companies are those whose business models are based off franchising. What plays to the advantage of such companies is the fact that they aren’t responsible for the cost of health insurance of their franchise employees.


In addition, food services companies whose expansion strategies don’t depend on opening more shops would be able to keep costs low. Here is how. When a company expands by opening new shops, it is inevitable that the company would need to employ new hands, which would increase their staff base. In the end, they will be caught by the ACA. So if a company doesn’t have to open new locations to expand, it will be able to keep costs at a minimum.


Three Potential Winners

DineEquity, Inc. (NYSE: DIN), Buffalo Wild Wings (NASDAQ: BWLD) and small-cap company SoupMan (OTCQB: SOUP) are examples of companies that can minimize the impact the ACA.

DineEquity looks to be the biggest winner here. The company’s strategy is largely based off franchising. According to the company, as of the end of 2013, 99% of its 3,631 restaurants were franchised. The company operates only 33 restaurants, which it uses mainly to improve the quality of its products.


Impressively, the company has just 500 full-time employees. That’s impressive compared to the 10,000-industry average, and the 206,578 and 54,653 employees of Darden Restaurants, Inc. (NYSE: DRI) and Brinker International, Inc. (NYSE: EAT) respectively – two of its closest competitors. That DineEquity won’t have a big need to employ more staffs means it can keep ACA’s impact at a minimum

Moreover, this strategy has been working perfectly for the company in that its current gross margin of 60% -- compared to the industry average of 19% -- is one of the biggest in the industry.


While Buffalo Wild Wings’ full-time employees of 2,900 is about six times more than that of DineEquity, it’s still quite small compared to the industry average. Moreover, with the company taking franchising more seriously, and unlike what will be the case for most food services companies, it should be able to improve on its gross margin of 24%.


In addition, with the company looking to digitalize certain aspects of its operations, its need for human workforce in those areas will be minimal. So, in the long-term, the company should also be able keep ACA costs at a minimum.


Finally, SoupMan will also have huge control over its ACA associated costs. Apparently, its full-time employee base of eight workers indicates that the company is still very small. However, it’s been around for a while. First, the company doesn’t have up to the threshold number of employees for ACA rules to kick in. So the company has enough weapons to work on improving its margins in the near term.


Moreover, with the company’s super cost-efficient model of selling its products through established grocers, there will be little need for employing new staffs going forward. For instance, it currently has its soups on the shelves of grocers like Wall-Mart and Whole Foods, which won’t require the company to employ staffs for these grocers to sell its soups.


SoupMan is also going the way of franchising. The company said in a recent press release that it is working on opening 25 franchised units in casinos across the US, which it expects to be worth $2 million in annual sales. This makes this company a potential winner in the longer term.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.


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