The New Business Of College: Hamburger University

The New Business Of College: Hamburger University

Ah, college. Parties, pals, studying and grabbing lunch at Burger King.

If that last part surprised you, you aren't in college. Universities, hurting for funds and overwhelmed with waves of new students, face budget crunches all around. In response, they’ve scrambled to afford basic necessities like housing, food and bookstores. And frequently they’ve outsourced these functions to private industry.

Today 91% of schools outsource at least one function, up from 82% in 2000; 13% outsource over five services. The most popular areas for outsourcing are food service (61%), bookstores (52%) and the endowment fund (41%).

Robert Hassmiller, head of the National Association of College Auxiliary Services, estimates total revenues from outsourced collegiate operations at $5 billion annually, with housing growing fastest. “Privatization of housing is where bookstores and food service operations were four years ago,” he said.

It’s easy to see why. Colleges currently house just 28% of all students and face a big boost in demand as 80 million children turn 18 over the next decade, said Michael Zaransky, co-chief of Prime Property Investors, a student housing builder/operator. So schools are partnering with private firms to stem the tide. Norbert Dunkel, vice president of the Association of College and University Housing Officers International, said that a decade ago virtually no universities outsourced housing. Today up to 10% do.

One firm riding this wave is American Campus Communities (nyse: ACC - news - people ), which builds, owns and operates student housing. In 2005 it had profits of $10 million off sales of $88 million. Client schools include the University of Colorado, Texas A&M and the University of Houston.

One ACC signature complex is the Vista del Campos Apartments at the University of California, Irvine. Resembling something out of Falcon Crest--complete with luxuriant swimming pools and high-tech athletic areas--the complex cost ACC $104 million, said Richard Orr, campus asset management director at the school. All UCI provided was the land, netting $700,000 a year in rent. In return, ACC collects student rents ranging from $450 to $1,000 a month, for 3,050 beds. “This was a way to have someone else do the actual construction with their own financing,” said Orr.

Taking a different tack is Educational Housing Services, a nonprofit housing firm in New York. EHS serves schools including Baruch College, New York Law School and Pace University, and houses 2,800 students during the school year. Revenues reached $30 million in 2005, up 25% from 2004. CEO George Scott said that by 2009 EHS plans to open “the largest residence building in the country,” in Queens, housing 1,600 to 1,800 students.

But schools are doing more than just building dorms; they’re also partnering with businesses to make old dorms more efficient. One firm doing this is Sodexho Alliance (nyse: SDX - news - people ), a multinational that helps universities get more favorable natural gas rates, update boilers and build buildings with more durable materials. In one instance, Sodexho helped Scripps and Whittier Colleges, both in California, get favorable rates with utility companies by advising them to turn off their plants in the summer, when energy demand is highest. Albert Allen, president of education facilities management at Sodexho, said the schools each save $400,000 annually as a result.

Sodexho also performs other outsourcing, including catering, housekeeping and building maintenance for schools including the MIT, Arizona State University and Northwestern University. Dr. Ronald Vaughn, president of the University of Tampa, said he has used Sodexho over the past 15 years for catering, building management and construction and estimates initial savings of 20% a year.

Another student services giant is Aramark (nyse: RMK - news - people ), which provides food services for 600 schools in the U.S., including the University of Florida, Boston University and the University of Minnesota. Aramark doesn’t break out figures for its university operations, but its U.S. food related wing netted revenues of $7.1 billion in 2005, up 3.6% over 2004, and profits of $403 million, up 7%.

Hassmiller of the NACAS figures that, since 2000, 20% to 25% of schools have outsourced their food service operations, up from 5%.

National restaurant chains like Domino's Pizza (nyse: DPZ - news - people ), Subway, McDonald's (nyse: MCD - news - people ) and Burger King (nyse: BKC - news - people ) are all a common part of campus life as well. While they're not engaging in outsourcing, they frequently operate on-campus eateries, and they say the college market is an important one.

Domino's in particular has a long history of catering to students. "The roots of Domino's are in college," says spokeswoman Dana Harville. The first Domino's store, created in 1960, delivered pizza to students at Eastern Michigan University, and of the chain's 5,103 stores, 450 cater to students or are located near campuses. Domino's declined to discuss revenue totals for campus stores, but Harville says that while an average Domino's store has revenue of $650,000 a year, the college stores trend higher, in part because these stores stay open later to cater to late-night munchies.

Subway, by contrast, is still relatively new to the college world. Although it has 210 locations at universities in the U.S., they contribute less than 1% of revenues earned by the firm. Even so, the chain is interested in increasing this business and is creating 36 new stores a year in schools, says Elizabeth Rolfe, director of new business development.

Of course, efficient food service means little for schools that have no books. In this area, too, more and more schools outsource. The National Association of College Stores says 34% of campus bookstores currently outsource to private firms; outsourced stores in total have risen 22% since 2001, to 1,570. Here, the biggest names are Follett Higher Education Group and Barnes & Noble College Bookstores. Follett has 729 stores, an increase of 12% since 2001. B&N, a private, separate entity from the national chain, has 550 stores, up 28%. Typically, bookstore contracts involve staff management, store upkeep and book ordering.

Over the past several years, B&N has opened high profile “Collegiate Superstores” for schools including Yale University, the University of Pennsylvania and Ohio State University. The stores resemble typical B&N superstores, complete with Starbucks (nasdaq: SBUX - news - people ), but also stock school merchandise like textbooks and sweatshirts. They typically return a guaranteed annual commission to the school ranging from 6% - 11% of revenues annually, said Max Roberts, president of B&N College Booksellers. The company does not disclose revenues, but Roberts said the firm’s revenue and profit growth is 10% a year.

Follett is a quieter operation, seamlessly blending in with the university bookstore. Often students won’t know they’re there. For 2005, total sales equaled $2.2 billion, up 10% over 2004, although the privately held firm wouldn’t disclose profits. Follett schools include Notre Dame, Stanford University and the University of Florida.

Tom Christopher, president of Follett, said one advantage his firm offers is economies of scale. One example: The company's national used textbook database allows used books to be shipped to local stores, saving students 50% per book. “That’s an advantage we have that an individual standalone institution can’t match,” said Christopher.

Forbes, 14/09/06