As I sat at my job in the dorm mailroom the other today I heard something new outside besides the normal clamoring on about dorm drama, movies, and midterms; trays. Lots to do about trays. If you haven’t heard the hub-bub here’s the gist: Sedexo the food service company on campus recently tried “Trayless Tuesday” down at Elmo’s in the SU and is starting the program up at Cascade on a trial basis. As a fourth year Economics and Finance student I thought this would make an interesting case study. To do this I will walk you through the incentive structures and probable outcomes for all vested interests: Sodexo, students consumers, and SOU’s administration. I will explain a set of basic assumption and market conditions, and their likely consequences. I invite debate about the assumptions, inferences, and consequences, but I believe a rational observer will find what I put forward to be quite reasonable.
First let’s talk about the market for food on campus. Sodexo has been given a near monopoly of food service; they run the coffee shops, the snack shacks, Elmo’s and Cascade (Residential Hall) dining. In exchange for this they pay rent to the school, have made capital improvements, and have a profit sharing agreement with SOU.
The notable exception to this monopoly is Subway in the SU. However Subway is at a significant disadvantage to Elmo’s: namely they are very small, effectively limiting how many meals they can serve during peak time periods – the ten minute break between classes – pushing time constrained customers to Elmo’s. This time constraint will likely also keep students on campus and away from Ashland restaurants.
There are two types of consumers: resident hall students and non-resident hall students. Non-resident hall students represent a competitive market for meal purchases. They can cook at home, or spend money at other off campus restaurants assuming they have time (this may not be a true assumption if students are time constrained). Resident students are effectively a captive market; they must purchase a meal plan through Sodexo and do not have easy access to refrigerators or cooking facilities. A large portion of this meal plan is in “meals per week,” which can only be spent in Cascade, the rest is in “flex-points,” which can be spent at Elmo’s, Cascade, or other on-campus establishments.
Now that we have a basic understanding of the market in which Sodexo and student consumers interact we should take a moment to understand their incentive structures or optimum outcomes. We can assume that Sodexo management’s goal like any firm is to maximize profits for its owners. We can similarly assume that students wish to maximize the value per purchase, that is the least cost for the best available combination of food volume and quality, and for environmentally conscious consumers to limit the negative externalities associated with getting fed (food waste, hot water, and soap in this tray conversation).
Let’s talk about the competitive market for food at Elmo’s first, and how a trayless program will likely play out there. Food is purchased “a la carte” at Elmo’s, so if you want a burrito, you pay for a burrito, and if you want a slice of pizza, you pay for a slice of pizza. Sodexo will have an incentive here to reduce the cost per item, increase the number of items sold, and have the most profitable sales mix in order to maximize its profit. Sodexo’s food will have to provide a high enough value to outweigh both the cost in terms of dollars and time for students to elect to spend their money in this competitive market. Sodexo has a superior size and ability with multiple registers to quickly move students through as compared to Subway. On the upside for Sodexo without a tray students will likely skew their purchases towards high margin prepackaged items that can be easily carried in hand. It will reduce the overhead cost associated with cleaning trays. However this may also reduce the amount of food items sold if students purchase less because they can’t carry as much. If this is to maximize profit for Sodexo they must save more in reduced overhead cost than they lose in reduced purchases associated with adverse consumer reaction. Thus, the outcome is unknown for Sodexo. The downside for students is the convenience of using trays and possibly being pushed into purchasing higher cost prepackaged food. The benefit is a reduction in negative environmental effects. If Sodexo wishes to recoup the cost and reduce the environmental impact of tray use, a better way to do this is to charge students who wish to use trays for the cost of cleaning them – say a quarter or a dollar at checkout.
Cascade however is a much different story. Resident students have already invested in a meal plan (sunk cost in economics lingo) at a cost of $900 to $1,300 dollars per term with a combination of “meals per week” and “flex-points.” Every meals in Cascade is “all you can eat” at a cost of $6.50 for breakfast, $7.75 for lunch, and $9.75 for dinner. These cost significantly more on average than it does to cook food at home, and is relatively competitive with local restaurants. Because of the sunk cost of a meal plan, students have an incentive to maximize the amount of food they take in order to get their money’s worth. This is why there is significant food waste. Sodexo has an incentive to reduce the cost per meal, which can be done in several ways: first by reducing the amount of food a student is able to carry (remove the tray), reduce labor cost associated with food preparation and in checkers (longer lines initially, and longer wait time to come back for a second time and in other overhead expenses (management and cleaning).
For Sodexo a trayless program in Cascade is a clear benefit, because it will likely reduce the amount of food they must produce, and continuing the perverse incentive for poor service and long lines, resulting in increased profit. The likely result for students is that they will be able to carry less food without a tray, and with long lines to pick up food, to check out, and to come back for a second time all at the same price they will be receiving less food and with a large inconvenience in time and ease all for the same price. This is a net profit gain for Sodexo and a net welfare loss for Students.
