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.

Copyright ICAEW 2013. All rights reserved.

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PALATE LTD: ADVANCE INFORMATION

This material is issued prior to the examination session so as to allow you to familiarise yourself
with the information provided and undertake any research and analysis you think fit. This
information 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 to
spend more than two days working on it: this would include familiarisation with the information
provided, additional research and analysis, developing an awareness of the industry, discussion
and assembling your preparatory work for use in the examination. The use of pre-prepared study
material will not significantly help you in your preparation for this examination. It is essential that
you 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 with
you into the Examination Hall.
At the start of the examination you will receive some additional material which will complete the
description of the case scenario and state the Case Study requirements. Your answer must be
submitted 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 WILL
NOT 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

Structuring problems and solutions
Applying judgement
Drawing conclusions and making recommendations
Demonstrating integrative and multidisciplinary skills
Presenting appropriate appendices

20%
25%
25%
20%
5%
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 issues
do 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 for
reproducing 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 practical
commercial recommendations.

Omitting any one of these elements will have a significantly detrimental effect on your
chances 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)

The UK contract catering industry: Background

Contract catering: The business model

Palate Ltd: Overview of the business

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

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

Palate Ltd: Overview of business units (July 2012)

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

The food service supply chain

10

Palate Ltd: The way forward (the boards strategic overview, May 2013)

11

Letter dated 3 June 2013 from Morgan Catering Advisors to Palate Ltd and to Arno
Girls 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, a
contract 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 the
Director of Finance and Business Development, Samantha James.
Since joining Palate, your work has included:

Preparing financial schedules to support the companys 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 2
The UK contract catering industry: Background
Overview
Contract catering (sometimes now referred to as food service management) is the contractual
outsourcing 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 of
clients, including public sector entities (such as state-funded schools, hospitals, prisons and military
establishments); private sector companies (both staff canteens and executive dining areas); and
sport, leisure and tourist venues and attractions. It also covers catering services for private
individuals, such as weddings.
Contract catering businesses vary considerably in size and scope. At one extreme are the larger
companies such as Sodexo, Compass, Aramark and Elior which mainly focus on the mass
market (see below) and between them are estimated to represent almost 50% of total UK contract
catering revenue. They have generally grown through mergers and acquisitions, and they now cover
all 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 niche
markets or regional areas. In between are a number of independent, generally privately-owned
medium-sized companies that operate nationwide (eg, BaxterStorey).
Since 2008, rising unemployment, government cutbacks and generally weak aggregate demand in
the 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 a
compound annual rate of 4.5% (though with a temporary reversal of the decline in 2012 because of
the 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 all
clients for which the aim is to supply a high volume of meals at relatively low prices (including staff
canteens in some private sector companies), and for which the focus is less on quality of meals than
on minimising costs. Particularly important for mass market caterers is the need to develop efficient
distribution chains to keep food costs down, but it is also necessary to manage labour costs (eg, by
employing part-time and casual workers).
By contrast, at the upper end (eg, boardroom functions and weddings), the focus is on quality and
service. 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 of
the highest standard. Further, because there will be a broad spectrum of client requirements, there
will 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 both
mass 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 these
segments. Around half of them are provided in-house, and the other half outsourced to contract
caterers; but the split varies. The segments vary considerably in size and have very different profiles
and growth drivers. B&I is by far the largest, representing around 50% of the total number of outlets
and number of meals served. Education (mainly state-funded schools) is the next biggest, comprising
25-30% by both measures.
Business & Industry (B&I)
B&I encompasses staff canteens (from large-scale factory sites to city-centre headquarters) together
with corporate hospitality and buffet lunches. It reflects to a great extent the general fortunes of the
economy. Through time, B&I has gradually moved away from factory canteens towards staff
restaurants 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 meals
provided) within the B&I segment now use outsourced catering services. Caterers must balance the
demands of employers looking to cut costs and reduce risks with the need to innovate to keep up with
competition 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. The
proportion is higher in independent schools than in state-funded institutions (schools, colleges and
universities), but the absolute figure is higher in the latter as there are many more outlets. Some
experts believe that outsourcing may have declined slightly in recent years as local authorities have
taken contracts back in-house following pressure to improve quality. In addition, some caterers have
resigned 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 schools
are day schools, the rest being boarding schools (ie, pupils live in accommodation at the schools during term-time). In addition
to fees, parents are typically required to make a lump-sum payment for school lunches in advance at the start of each term. At
boarding 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 (though
there has been a fall in those attending independent schools) but in the percentage having school
lunch (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) and
38% 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 on
pupils 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 a
campaign led by celebrity chef Jamie Oliver playing a major part in improving the quality and appeal
of school meals. The UK governments 5-a-day initiative, encouraging everyone to have at least five
portions of fruit and vegetables every day, has also had an impact on the range of food provided by
schools. As with B&I, caterers need to find creative ways of adding value, thus making the school
lunch 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 as
weddings and parties has suffered from downturn-related trends (eg, reduced attendance at and/or
postponement of events). However, in 2012 it benefited from a surge in activity from the Queens
Diamond Jubilee (June) and the London Olympics and Paralympics (July-September).
Healthcare
Within healthcare, catering contracts for many large NHS (public sector) hospitals tend to be
outsourced. Outsourcing is much less common in private hospitals (where quality catering is seen to
be 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 services
being outsourced, as part of a general move to outsource more non-core activities to accommodate
an 8% cut in the Ministry of Defences 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, catering
staff recruitment, incentive scheme management and operation of vending machines. Some also
increasingly carry out a range of other services alongside catering as different facilities management
(FM) services converge. These include cleaning, maintenance, waste management, gardening and
reception / switchboard. Many commentators believe that the larger caterers are well placed to take
on the lead FM provider role because catering is seen to be more of a specialist area than services
such 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

Labour
Transport
Total costs incurred by caterer
Management fee
Total revenue to caterer
Less: sales revenue from diners
Difference = clients subsidy

320,000
300,000
5,000
625,000
50,000
675,000
(225,000)
450,000

The size of the subsidy will depend on the menu prices. For example, a school might charge its pupils
and staff 1 per meal (corresponding to sales revenue from diners in the illustration above) but the
revenue from the client to the caterer might be 3 (ie, a subsidy of 2 per meal). Some organisations
provide 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 these
contracts, the client bears the whole risk of rising food and labour costs. On the face of it, the caterer
has little incentive to seek the best deal, unless it is to prevent the client taking the business back inhouse or awarding it to a rival.
Fixed price contracts lie at the other end of the spectrum. As the name suggests, they offer more
certainty for the client, who receives a specified service level for a defined sum. The caterer must be
able to provide the service and generate an element of profit within the total contract price agreed
between 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 also
seek to employ part-time and/or casual labour where possible and to negotiate favourable terms with
suppliers.
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 tourist
attractions, 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 contracts
accounted for 11% of all contracts, versus 25% for cost-plus and 64% for fixed price. There will always
be 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 this
is ensuring that the contract is appropriate, fair and able to provide a realistic reward or incentive to the
caterer 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-plus
contracts 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 contract
types.
Labour costs vary with the mix of employees. These will include waiters/waitresses (who may not
require much training or experience) and gourmet chefs (who will be highly skilled and will have
undergone lengthy training), as well as staff in a number of other roles. There are estimated to be
over 200,000 people working in the UK industry, around 40% of whom are full-time. The remaining
60% are part-time or casual, enabling employers to be flexible and shift risk from themselves to their
workforces, as well as dealing with seasonal variations in demand. This is very important for mass
market clients, where there is significant pressure on margins.
Food & beverages costs vary with overall commodity price inflation and changes in the food supply
chain (see Exhibit 9). Specifically, where poor weather (or an external event, eg, blockade by
distributors) leads to scarcity of a key resource such as wheat or potatoes, this can have a marked
impact on a caterers cost base and it will often not be possible to pass on such additional costs to a
client.
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, to
offer not just food and drink but also the decorations, such as tablecloths and chair coverings; and
glasses, cutlery and crockery). These items will be reflected in additional charges (for example, a
higher cost per head). In times of recession, caterers may be expected by clients to provide added
value at minimal or no additional cost. They may be asked during the tendering process, or at the time
of 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 clients
premises. However, under some contracts, the caterer does all the food preparation and cooking offsite and then brings it to the clients premises to be (re)heated and served. This may occur, for
example, at schools where space is at a premium and where it is considered to provide better value
when it is used for educational purposes. Caterers operating in this way need to have their own
dedicated kitchens and equipment, which will be reflected in larger non-current asset figures in their
accounts. In some instances, they may have to hire extra equipment for a particular event. There will
need to be enough storage space, whether at the caterers or clients own premises, for any ingredients
that have to be available all the time. Caterers will also have to operate a fleet of refrigerated or heatretaining vehicles whether owned or leased to transport food between locations; alternatively, they
may use an external distribution company. In some contracts, the caterer may fund the refurbishment
of the kitchen and/or dining area at the clients 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 clients premises
can have serious ramifications for the caterers reputation as well as its financial future as it will
often lead to significant adverse publicity and possibly even punitive lawsuits. Most companies now
have written policies and procedures, as there are many legal requirements to comply with, creating
an 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 a
new 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 as
those on minimum hardness of bottled water.

Many food items are labelled with use by or best before dates. Use by dates, appearing on foods
that deteriorate quickly, specify the last date on which they can be safely eaten. They are found
typically 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 quality
will begin to decline. They appear on foods with longer shelf-lives (eg, biscuits and crisps). Most food
can be eaten well past its best before date without causing harm with the exception of eggs, which
have best before rather than use by dates and, provided that they are cooked thoroughly, can be
eaten up to a day or two afterwards.
Caterers have to be increasingly sensitive to people with special dietary requirements and to provide
menus that are flexible and varied enough to satisfy a wide range of needs. These requirements may
be 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 where
an item is not to be ordered by someone with a particular restriction or that an alternative may be
available (eg, a dish usually prepared with eggs can be prepared with an egg substitute) as well as
showing 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 with
businesses to help them produce safe food, and with local authorities to enforce food safety regulations. Everything we do
reflects our vision of Safer food for the nation. We aim to ensure that food produced or sold in the UK is safe to eat, that
consumers have the information they need to make informed choices about where and what they eat, and that regulation and
enforcement 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; openness
and independence; being science- and evidence-based), which guide our work. To reflect our greater involvement in
enforcement, following the merger with the Meat Hygiene Service, we have included a new core principle: enforcing food law
fairly. 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, and
protects 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 was
approached by Oswald, a former food purchasing manager at a prestigious London hotel, and Samantha, an
ICAEW Chartered Accountant and investor on the lookout for a new venture. Samantha had identified a gap in
the market for a contract catering company near where she lived St Albans in Hertfordshire, just outside
London 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 Samanthas 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 contributed
equally by the three of them and partly by bank finance negotiated at a competitive rate by Samantha. They
acquired 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 be
converted into offices. This has remained the head office since then and is now affectionately known as Palate
Palace. 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 three
founders. The first client was Devaneys, a local independent day school. While this provided a good initial
source of revenue, it was inevitably seasonal, with the school being closed during the summer, Easter and winter
vacations and during half-term holidays (like most day schools, it was open in total for 38 of the 52 weeks or
190 days in a year).
The school had a long-standing tradition of inviting all parents to attend a candlelit dinner and concert at the end
of 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 their
respective employers with better-quality and more reliable staff canteens and/or executive dining services than
they were receiving from their current suppliers. Over the next few months, two of these prospects were turned
into 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, and
this 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 largely
self-financing since then. Indeed, the directors have been able to draw dividends every year to supplement their
salaries.
Reflecting on their early successes and Palates rapid growth, Samantha realised that the company required a
more formal structure to take it forward. She appointed a fourth director, Nasir Khan, who had previously been
responsible 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 all
food, drink, equipment and related items and ensuring that they are properly recorded in the companys 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 Business
Development 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, thereby
creating extra demand for catering. With regard to the latter, the directors realised that it was dangerous to rely
indefinitely on word-of-mouth referrals for all new business. While the recommendations continued to come, a
more 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 Palates 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 that
arose, 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 their
tariffs or commitments. However, when tendering solely against other caterers of its own size, Palates success
rate 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 Palates prices as being too high).
Business issues
Performance measurement
In addition to traditional accounting criteria (revenue, profit margins and working capital ratios), Palate uses
other 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); number
of 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 with
clients; the final agreement will often contain additional clauses to recognise specific needs. A typical contract
will 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 extensive
database of people it can call upon to work on a casual basis at short notice in the event of need. The proportions
vary between the business units; indeed, a large number of staff work for more than one unit according to
demand. 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 the
following 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. In
most cases, this takes place in-house at Palate Palace within one of the kitchens and in one of the adjoining
rooms which has been adapted as a classroom. Those seeking more advanced qualifications as chefs are sent on
external courses (paid for by Palate). In addition, all new joiners within Head Office roles are required as part of
their induction to spend one week working in catering functions, typically 2 days in the kitchen and 2 days
as 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 to
minimise idle time among its workforce. Most school clients are open only for the statutory school terms, but
some have recently begun to be used in holidays (eg, for summer drama and arts camps for children); and
Palate 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 the
evening 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 in
all three business units (subject to availability of ingredients, as some are not always in season). It is particularly
known 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 Palates
employees) 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 or
the 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.
Palates ethos has always been to use local suppliers wherever possible. The particular ones required for each
contract are discussed and agreed with the client. Palate prides itself on having a good relationship with all its
suppliers, who are selected on their ability to meet strict quality criteria as well as on price, food safety, service
and hygiene. Some are Palates only sources for particular items notably Youngs (dairy products and eggs) and
Oldham Farms (beef) and they have been supplying Palate since its early days. As well as being regularly
assessed 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:

ICAEW/CS/J13

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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: Reducing 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 general
inventory 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 and
remaining 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 guard
fully against this, especially for items held at client and other third-party sites. As well as seeking regular
feedback from clients and their diners, Palate sometimes uses mystery diners to test all aspects of the catering
operations at a client. In addition, some of Palates 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 Palates dedicated intranet
working with finance staff to ensure that management systems are producing relevant and timely
information 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 of
purchase. It is becoming increasingly widespread; one attraction is that it significantly reduces the risk involved in having
large amounts of money on the premises and the costs of having it collected daily by security vehicles. It is used in
canteens, 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 can
add money to their cards from special machines (loaders) or via electronic bank transfers. The set-up cost for cashless
systems 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-up
on 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.

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EXHIBIT 5
EMAIL
From:
To:
Date:
Subject:

Samantha James
All Palate directors
19 July 2012
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 that
we 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 the
incumbent on reduced price terms. This has led to some pressure on the margins we earn especially at some of
our smaller TN clients but through tight cost-cutting measures we have managed to maintain an overall
healthy gross profit trend.
Wastage has increased from 4% to 5% below the industry average of 8% but still worrying. We have been
finding that the kitchen equipment at some clients is not being properly maintained, leading to health risks and
operational inefficiencies, and we have taken steps to get it replaced or upgraded. We are often contractually
required 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 last
meal 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 good
margins but in future we need to ensure that in taking on contracts of this nature, we also consider to the
importance of pursuing longer-term, recurring clients. We are delighted with the feedback received on the new
seasonal 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 Park
has now become our largest client in TN but we are mindful that the contract will be due for renewal this year
and must ensure that we are well placed to retain it, while at the same time monitoring our staffing levels at V
Park: 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 become
unprofitable 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 our
gross margins in what remains a highly competitive environment. Revenue from our three largest clients has been
encouraging; and between them, their total number of lunches served has risen by 10% during the year. One of
our main established contracts, Clarkstone, is due for renewal next year, and we are hopeful that the excellence in
client 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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BLANK PAGE

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EXHIBIT 6
Palate Ltd: Management accounts for the year ended 31 May 2012
INCOME STATEMENT
2012
000

2011
000

20,658
(18,109)
2,549
(1,770)
779
24
803
(201)
602

19,027
(16,705)
2,322
(1,574)
748
21
769
(192)
577

2012
000

2011
000

98

131

4
5

570
1,709
1,863
4,142

588
1,808
1,504
3,900

Total assets

4,240

4,031

EQUITY & LIABILITIES

Equity
Ordinary share capital: 10,000 shares of 1 each
Retained earnings

10
1,745

10
1,443

1,755
2,485

1,453
2,578

4,240

4,031

Notes
1
1
1
2

Revenue
Cost of sales
Gross profit
Administrative expenses
Operating profit
Net interest
Profit before taxation
Corporation tax
Profit for the year

STATEMENT OF FINANCIAL POSITION

Notes
ASSETS
Non-current assets
Property, plant and equipment

Current assets
Inventories
Receivables
Cash and cash equivalents

Total equity
Current liabilities

Total equity & liabilities

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STATEMENT OF CASH FLOWS

2012
000

2011
000

CASH FLOWS FROM OPERATING ACTIVITIES

Operating profit
Depreciation
Profit on sales of property, plant and equipment
Change in inventories
Change in receivables
Change in current liabilities (excluding tax)

779
69
(6)
18
99
(102)

748
83
(3)
(84)
(94)
307

Cash generated from operations

Corporation tax paid
Net interest

857
(192)
24

957
(150)
21

689

828

Payments to acquire property, plant and equipment

Receipts from sales of property, plant and equipment

(40)
10

(37)
29

Net cash used in investing activities

(30)

(8)

(300)

(250)

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

Net cash from operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

CASH FLOWS FROM FINANCING ACTIVITIES

Dividends paid
Net change in cash and cash equivalents

NOTES TO THE MANAGEMENT ACCOUNTS

1

Segmental analysis

Revenue
Cost of sales
Food and consumables
Wage costs
Location fees
Transport costs
Gross profit

XX
000
9,594

TN
000
6,337

(4,761)
(3,596)
(93)
1,144

(2,596)
(2,471)
(115)
(77)
1,078

LA
000
4,727

2012
Total
000
20,658

(2,240) (9,597)
(2,099) (8,166)
(115)
(61)
(231)
327
2,549

XX
000
9,007

TN
000
5,881

`
LA
000
4,139

2011
Total
000
19,027

(4,466)
(3,467)
(80)
994

(2,446)
(2,189)
(95)
(62)
1,089

(1,971)
(1,883)
(46)
239

(8,883)
(7,539)
(95)
(188)
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 hire
of 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 Palates own office
or from third-party contractors.
2

Administrative expenses

2012
000

2011
000

Wages & salaries, pensions and other costs

Property costs
Staff training, welfare & recruitment
Insurance
Repairs & maintenance
Marketing & promotions
Depreciation
Telephone, printing & ICT
Motor and travel expenses
Bank charges

1,171
134
63
96
49
47
69
64
45
32

1,009
122
50
81
45
58
83
58
40
28

1,770

1,574

Property, plant and equipment (PPE)

000
Cost
At 1 June 2011
Additions
Disposals

547
40
(77)

At 31 May 2012

510

Depreciation
At 1 June 2011
Charge in year
Disposals

416
69
(73)

At 31 May 2012

412

Carrying amount
At 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 and
20 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 on
Palates premises and on client and other third-party sites. They are stated at the lower of cost and net realisable
value.

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Receivables

2012
000

2011
000

Trade receivables
Other receivables and prepayments

1,450
259

1,652
156

1,709

1,808

Current liabilities

2012
000

2011
000

Trade payables
Accruals and deferred income
Corporation tax
Other current liabilities

1,454
353
201
477

1,405
511
192
470

2,485

2,578

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

Catering
Administration

ICAEW/CS/J13

2012

2011

501
40

466
34

541

500

Page 24 of 38

EXHIBIT 7
Palate 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 to
workplaces within a 50-kilometre radius of Palates offices. Palate and its three main rivals are each estimated to
have around 10% of the market within this area. Clients vary in size and needs: some involve XX only for
executive dining, while others require a full breakfast and lunch canteen service on five (sometimes seven) days a
week, 52 weeks of the year. Some are content to offer one of the standard menus suggested by Palate, while
others are very specific and sometimes very demanding in their meal requirements. Contracts range in length
from 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.
XXs revenue and gross profit may be analysed as follows:
Client

Humbells Hardware
Ross Laboratories
Greatwell
Other

2012
Revenue
000
4,059
2,226
1,373
1,936
9,594

2012
Gross profit
000
411
268
160
305
1,144

2011
Revenue
000
3,631
2,087
1,449
1,840
9,007

2011
Gross profit
000
374
267
166
187
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 at
lunchtime, 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 1,000
staff across HHs 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 the
renewal. In particular, Ogilvie noted that staff levels needed to be increased to cope with busy periods (12:3013:30 on most days) and that Palates directors did not visit HHs 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 staff
on 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 was
successful against three other bidders, mainly because of its emphasis on balanced menus (creating empathy
with the clients 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 ensure
that 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 to
regular meetings between the parties to address any short-term issues that arise. In keeping with RLs
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 Palates other two streams as it comprises more one-off
work, although there is significant regular and/or recurring annual business. The client base covers a range of
organisations (including golf clubs, country parks and museums), as well as public events (including open-air
concerts 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 the
case of recurring annual events) to the event organiser local authority or private company so as to secure the
entitlement 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 special
occasion of local or national significance). The location fee is frequently payable (up to several months) prior to
the event, in which case it is shown within prepayments in Palates accounts until the event takes place.
TNs revenue and gross profit may be analysed as follows:
Client

V Park
TG Music Festival
Hall Golf Club
Other

2012
Revenue
000
1,440
1,329
1,287
2,281
6,337

2012
Gross profit
000
224
237
246
371
1,078

2011
Revenue
000
1,085
979
1,161
2,656
5,881

2011
Gross profit
000
181
194
215
499
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 the
restaurant and bar, together with two meeting rooms used for conferences. The previous caterer had fallen out of
favour with the Council, neglecting to maintain a high standard of food on the basis that (in the Councils view)
as it was the only caterer on the premises, hungry and thirsty visitors had no choice but to use its services unless
they brought their own refreshments.
At the outset, Palate undertook some local advertising. There is a full licence to serve alcoholic drinks and to
offer a bar service at this picturesque, historic venue. The new arrangement was a success from the start, with
visitor numbers to V Park up by 20% and catering sales up 40% for the first quarter, together with a large rise in
conferences, 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 May
2012. However, the local authoritys 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 Palates catering revenue in the future.
Example client: TG Music Festival (TGMF) (length of contract: 6 years from 1 June 2008)
A highlight of the regions and indeed the UKs cultural calendar, the annual three-day TGMF has been
attracting hundreds of thousands of visitors since its inception in August 1997. It has earned a reputation for
attracting 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 discerning
individuals (the face value of a ticket is high, and some pay more than double the face value through external
internet 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 random
range 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 1
July, entitling it to place three marquees around the site venue. Palate would hire and supply at its own expense
the relevant amount of portable kitchen equipment.
The contract was a success from the outset, and both parties were amenable to continuing beyond the three-year
half-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)
Palates education clients comprise independent schools and colleges. It does not currently serve state-funded
schools 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-time
to students and staff. However, some clients are boarding schools and thus almost all pupils also eat breakfast and
their evening meal at the school, both during the week and at weekends. In addition, some day schools offer
activities 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; sandwiches
for 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 no
clear 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 well
known 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 its
tender success rate, having realised the need to focus more closely on its catering business

LAs revenue and gross profit may be analysed as follows:

Client

AGBS
Clarkstone
Devaneys
Other

2012
Revenue
000
1,147
1,019
872
1,689
4,727

2012
Gross profit
000
90
86
73
78
327

2011
Revenue
000
1,112
1,003
846
1,178
4,139

2011
Gross profit
000
83
80
54
22
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 cookery
demonstration at the schools annual careers week, when parents from a range of work environments were
invited to make presentations to final-year pupils. (Georges daughter had recently begun attending AGBS.) The
Principal, increasingly unhappy with the quality of meals at the school (which had been provided in-house since
her appointment in 1992 and indeed since its foundation a century earlier), asked George if Palate would be
interested in taking over. After consulting with Samantha and Oswald, George presented a proposal to AGBS, to
cover 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 process
resulted 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 60
minutes, thus enabling lessons to be longer. This is likely to reduce meal take-up and quality unless efficiencies
can be found, whether in staffing, equipment, serving methods or menu choices. There are no plans to change the
timings 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 been
allowed 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: excellent
service, value for money, fresh and good-quality food, an emphasis on student wellbeing and a desire to build a
strong relationship.
Clarkstone wanted to work with a partner that would provide healthy options and help pupils meet the UK
governments 5-a-day goal. It particularly wanted to increase the take-up of meals. Under the previous
incumbent, 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, to
support 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 better
morale and closer camaraderie among pupils and staff. Through these mechanisms and by totally revitalising the
food service, catering team and the restaurant, Palate increased take-up and revenue in the first year of its
contract 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 HHs 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 HHs 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 Palates invoice) for these costs, together with the
monthly 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 giving
written notice of at least 3 months.
Approximately one year before the scheduled end of the contract, the parties will jointly appoint an
independent catering consultancy to review the catering operations at the Schools 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 AGBSs 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 AGBSs 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 AGBSs 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 Palates 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 or
from food manufacturers. Currently, over half of all food sold to operators is delivered through
wholesalers, who provide a link between food producers (fresh produce), manufacturers (finished,
prepared products) and catering outlets. Distributors offer a delivery service function without actually
taking 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 farmers
through the exercise of buying-power. By contrast, small and/or niche operators may prefer to source
raw materials from wholesalers, either as unprocessed ingredients (eg, meat, vegetables) or as
wholly 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, a
fixed price contract may put pressure on achieving the lowest price for goods.
Wholesalers have traditionally purchased products from suppliers and distributed them to operators in
accordance with the operators product list. More recently, however, some larger wholesalers have
increased their remit to include client purchasing, contract distribution, food processing and
manufacture, 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 growing
number of smaller regional wholesalers specialising in food service supplies and serving as regional
hubs. These simplify the supply chain by providing a central unit to which local producers can deliver
their product. The hub then delivers the local product to the various food service depots. The unwieldy
nature of the larger operators provides a key opportunity for regional food hubs and vertically
integrated supply chains to supply produce of a higher specification, and this allows outlets in the
upper 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 are
experiencing a surge in demand for food sourced locally. In response to this, 3663 is currently
developing regional product portfolios branded local products from local people. However, the
complexity of the food service market has been a barrier to entry for local producers, along with a lack
of information as to how the supply chain operates. In addition, the major UK supermarket chains all
now have rapidly expanding portfolios of regional products. They are capturing large proportions of
local 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, with
prospective clients frequently including it amongst selection criteria. There is some debate over what
it 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 risk
of 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 provides
challenges for the industry, particularly for situations where food is less standardised and chefs have
discretion to use their skills to produce a high-quality output. The fixed costs and time required to
carry 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. This
creates opportunities for those producers able to supply British assured products. Assured Food
Standards (AFS) is an organisation that promotes and regulates food quality. It licenses the Red
Tractor quality mark, a certification programme covering a number of farm assurance schemes for
food products, animal feed and fertiliser. There are now a growing number of Red Tractor licensees in
both 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 to
other 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 its
shelf-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 favourable
conditions, 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 of
contamination, 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 manufacturers 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 be
used first).
Food that can cause allergic reaction should be kept separate from other foods, and cooked foods segregated from raw
foods. 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 be
achieved 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.

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EXHIBIT 10
Palate Ltd: The way forward (the boards 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 new
ways to develop the business further. Thus, as well as developing its penetration and expertise in its existing
segments, Palate is exploring possible new areas. In particular, it is not currently involved in the following
client markets or service lines:
1. Healthcare (private or public sector)
2. Transport
3. 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 achieve
economies of scale or which have the breadth and depth of expertise. Thus 3 may be more suited to Palates
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 clients
within 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 (to
avoid clashes with the Olympics and Paralympics or the Queens Diamond Jubilee) are scheduled to resume
in 2013. The catering contracts for these will be advertised for tender in the next few months and we must be
ready 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 and
surrounding 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 the
relevant 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 clients
when we pass these on, the directors have been considering ways in which we can control Palates costs more
effectively while at the same time trying to maintain the companys 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 the
three 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 environmentally
friendly approach
2. Review packaging policy to maximise recycling
3. Reduce distances travelled by delivery lorries by rearranging routes and increasing volumes per delivery
4. Alter all packaging and related literature to emphasise green philosophy
5. Remove the Heads of Purchasing and Inventory from each business unit and channel all future purchasing
through the central buying department
6. Maintain clear payment terms with all suppliers
7. Commission software developers to upgrade the existing inventory management system.
The expected annual cost saving would be 300,000. We believe that revenue could increase by as much as
10% since the move to a greener system will appeal to some potential clients that Palate has been unable to
attract in the past.
In due course, we would like to move to a policy whereby we buy only from assured, locally-based UK
suppliers. However, for now we will continue buying all items from the most appropriate supplier, wherever
situated within the UK. We have no plans at present to extend our supplier list beyond the UK, even if an
overseas company were to offer us generous rates.

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EXHIBIT 11
TO:
Palate Ltd
Yeats Avenue
St Albans
HERTFORDSHIRE

TO:
Arno Girls Boarding School
Harpenden
HERTFORDSHIRE

FROM:
Morgan Catering Advisors
The Business Centre
St Albans
HERTFORDSHIRE
3 June 2013

Review of catering operations (May 2013)

In accordance with the terms of the contract (Exhibit 8) dated 1 June 2009 between Palate Ltd and
Arno Girls Boarding School (AGBS), we have undertaken a review of the catering operations in May
2013. The key findings from our review are set out below:
1. Manual records showing the number of meals served for the first week of May do not reconcile to
those displayed by independent point-of-sale printouts.
2. Palates staff at the serving counters do not actively promote the loyalty scheme.
3. Staff levels on two days of our visit were 25% below those specified in the contract. This resulted
in long queues and a failure to clean tables promptly.
4. Refrigeration and other food storage practices do not conform to industry guidance or the terms
of the contract. Some inventory was found to have been used after its use by date.
5. The shortening of the lunch break since September 2012 has caused a number of problems.
Initially, some pupils were late for afternoon classes as they had to queue before receiving their
meals. Significantly more pupils now leave the premises at lunchtime to buy meals from the local
fish and chip shop (which gives a 20% discount to school pupils), enabling them to be back in time
for afternoon classes.
6. Processes and controls in respect of conference catering need to be strengthened. For one event
during the period of our visit, Palate had not been made aware that it was taking place and it
had to act hastily to ensure that appropriate catering was provided.
We look forward to your response in due course.
Yours sincerely,
Morgan Catering Advisors
Note from Oswald King to Samantha James: This letter has just arrived and there are some points
here that need dealing with urgently some by us, some by AGBS and some by both organisations.
I suggest that we arrange a meeting with AGBS over the next two weeks to determine the best
response.

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EXHIBIT 12(i)
Food price inflation set to continue (Food Figures Monthly, December 2012)
The ongoing surge in food inflation is set to continue into 2013 and beyond. By way of
illustration, vegetable prices have increased by 5.5% this year and are expected to rise further.
As one senior industry figure recently warned, we may even be heading back towards 2008
levels, where food inflation peaked at over 8%. Caterers need to find ways to manage their
business to meet these changes through smarter buying techniques and improved supply chains.

EXHIBIT 12(ii)
Keeping your clients (happy): Spotlight on catering

Contract Magazine, November 2012

As the recession continues, many UK businesses are looking for ways to cut costs. An obvious target is the
catering contract, especially if the service seems not to be meeting their requirements.
Many small and medium caterers have developed retention strategies to ensure that they lose very few
contracts. They gauge performance with a range of measures, both qualitative (eg, diner satisfaction) and
quantitative (eg, financial results) and closely monitor relationships to pre-empt potential problems.
If things are going wrong, there will be clues poor feedback, unexpectedly low meal take-up. There may
have been a change in the clients objective since the tender or a change of cost base or of strategy or a
change of company ownership. Occasionally a contract may become financially unworkable, prompting
the caterer to seek an end to it. One caterer said: "We provide value for money, even though we may not
always be the cheapest. We also withdrew from a tender where it did not fit with our business model."
What can be done? Trust and open dialogue are essential if any issues arising are to be put right. It may be
necessary to change the key contact. Find someone the client feels comfortable with in order to regain
trust, and make clear how you are going to stop the problem happening again.
Case study: Saving a school contract (T Unwin, Trenchard)
Six months into our contract, a new headmaster was appointed at ABC School and asked for a meeting.
He was unhappy with the food and was going to put the contract out to tender. At his previous school, he
had been proud of the range and freshness of food available. Although Trenchards policy is based on
fresh food, previous heads at ABC had insisted on a largely "fast-food" menu. I assured him that this was
not what we normally provided. We took him to four other schools and changed the menu at ABC to our
usual style, giving pupils more choice. The tender went ahead and we were able to fulfil our promises.
Although the re-tender was just for a year, when the anniversary came in July, he was happy to retain us.
In summary, you can remain master of the contract through these 10 simple, commonsense steps:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Visit the location to see (and sample) the catering operation yourself.
Meet the client regularly to review progress and satisfaction levels.
Understand the margins, take-up rates and other key figures.
Keep the staff motivated and provide all services with a smile.
Identify which food and drink items are popular and which are not.
Create efficiencies by flexing the opening hours and staffing levels.
Make sure that you are visibly adding value.
Carry out regular surveys.
Review the scope, cost and effectiveness of your marketing and promotion to diners.
Create an action plan that keeps the service fresh and ensures the same problems never arise again.

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EXHIBIT 12(iii)
Ravenous wins five-year school contract (Catering Now, 24 June 2012)
Ravenous has won a five-year catering contract at the new Hertfordshire High School. The deal, initially
worth around 300,000 in revenue but increasing to 600,000, will see Ravenous provide breakfast,
lunchtime and hospitality catering. Hertfordshire High School will open this September with 500
pupils. Expansion means that attendance could rise to around 1,000 (presenting major logistical
challenges for Ravenous), although some local experts have expressed doubts about this in view of the
increased competition from other schools in the area. Whatever the eventual figure, CEO Tom Stevens
is confident Ravenous can rise to the occasion, with its reputation for flexibility and attention to detail.
In July 2011, Ravenous won a three-year contract to provide catering, hospitality and vending machines
at nearby Cholton College, beating off competition from several rival bidders, including well-known
local provider Palate. Palate had quoted a lower price but lost the bid because of its refusal on moral
grounds to install vending machines and because it was unable to persuade Cholton that it could meet
the expected high demand for Halal meals from Choltons students.

EXHIBIT 12(iv)
Hertfordshire, Bedfordshire schools clear of horsemeat (Local Education At Large, 15 February 2013)
Following a Food Standards Agency (FSA) investigation, Hertfordshire and Bedfordshire officials announced
earlier this week that horsemeat has not made its way into any of the schools within the region. National
concern has been at a high level since it was discovered that some major supermarket chains had been
selling beef products, sourced from a number of named suppliers, that were found to contain horsemeat.
Among other things, the FSA tests were designed to establish whether the drug phenylbutazone (bute),
which is banned from the human food chain, was in any of the horsemeat. A spokesperson said: Our major
caterers do not source any products from the suppliers named and none of their products has been
implicated in any of these findings. All their meat products are fully traceable and meet all UK production
standards in meat. Headteachers have been informed and asked to pass this information on to parents.
The Food Standards Agency urged those responsible for catering at all schools, hospitals, prisons and
armed forces bases to make sure that they have rigorous procurement procedures in place. It also
stressed that they should deal only with reputable suppliers.

EXHIBIT 12(v)
Five men jailed for fruit scam (Fraud News, 15 May 2013)
Five men have been jailed over a scam in which a major supermarket chain was overcharged by nearly
3 million. Two directors at a supplier treated the supermarket chain's fruit buyer to hospitality and
gifts in return for lucrative contracts.
When sentencing the men in court, the judge called it "a shocking case of corruption that involved the
supermarket chain being bribed with its own money. The suppliers directors, desperate to keep the
contract, offered the buyer all the lavish entertainment he wanted, over 0.5 million of it."
In a statement, a spokesman for the supplier said: "We launched the investigation in 2010. Since then,
we have introduced strict new procedures to prevent such breaches."

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