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BETTING ON BRANDS. Compass' proprietary brands include the Upper Crust bakery cafe. |
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Compass's brand-focused approach seems to be in line with global foodservice trends that increasingly emphasize retail-style delivery systems. |
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VERY REMOTE! The Remote Sites unit delivers about 5% of Sodexho's revenues. |
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Sodexho is committed to making a strong showing in the global B&I market by becoming a one-stop multiple services shop for large international businesses. |
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GLOBAL GROWTH. Compass Group posted gains in most of its geographic sectors, including the Far East, in the first half of its 2005 fiscal year. |
In the United States , the fierce competition among the contract management services sector's "Big Three" companies is an accepted fact of onsite industry life. However, the American market is only a part—granted, a very important part—of a larger global competition being waged by London-based Compass Group plc, Paris-based Sodexho Alliance SA and Philadelphia-based Aramark Corp.
From the tony executive dining rooms of London's financial district to the grubby oil-drilling platforms sprouting off the coasts of Africa, Asia and South America, these three mega-firms compete for hundreds of lucrative foodservice contracts each year. Each has made— and probably will continue to make—strategic acquisitions to position themselves in key emerging markets.
Their global competition certainly affects how each company operates in the United States. Given that all three are publicly traded, each faces unrelenting pressure to post financial numbers consistent with analyst expectations. With key international markets like Europe and Japan mired in sluggish economic times, the comparatively robust U.S. economy is seen as the driver of growth for the foreseeable future. None of the three can afford to be seen slipping behind the others on these shores.
While American observers often see the Big Three as fairly co-equal in size and scope, this is not the case internationally. In fact, Compass and Sodexho are considerably larger companies globally and have much greater market presence outside North America than Aramark. While the latter reported revenues of $1.8 billion for its International Food & Support Services unit in fiscal 2004, Compass's non-North American revenues were around $14.5 billion, while Sodexho's were around $7.8 billion.
Muddy Waters
For the purposes of gauging the relative sizes of the three companies, these broad numbers are muddied by the fact that they encompass both foodand non-food-related operations. Of the three companies, only Sodexho formally breaks out how much of its revenues is derived from foodservice operations. In fiscal 2004, this figure was 80%, or about $11.1 billion.
At Compass, the proportion of total revenues derived from foodservice is generally assumed to be in excess of 90%, given that the company markets itself almost exclusively as a foodservice provider. By contrast, Aramark is a firm that aggressively markets its expertise as a supplier of a broad array of outsource services, so foodservice can be expected to represent a smaller proportion of its business mix than for either of the other two.
One more caveat to keep in mind when comparing the three firms' relative financials: each reports world-wide company revenues in a different currency— American dollars for Aramark, English pounds for Compass and Euros for Sodexho. These currencies fluctuate in value against each other daily, muddying not only inter-company comparisons but internal accounting as well since operations generating revenues in a strong currency will look artificially better than others operating where the currency is weaker (to compensate, companies will sometimes note an "exchange rate effect" when discussing their financials).
Sodexho offers a conversion in its annual report that assumes an exchange rate of approx. $1.205 to one Euro while Compass's 2004 annual report, on which its full-year numbers in this article are based, used a translation rate of £1=$1.79.
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Top 10 B&I Markets
SOURCE: Sodexho |
Global Market Share
Put in context, the global competition among the major international foodservice management firms is taking place in a field that seems wide open, though estimates about the size of the total market vary. In its 2004 annual report, Compass pegs the global foodservice market to be about £250 billion, or around $450 billion, with an annual growth rate of two to four percent (Compass's figure refers only to sectors it views as business prospects; other sources estimate the entire global foodservice market, including commercial restaurants, to be around $1.7 trillion).
Of the total, about 35% is outsourced to "specialist operators," the company reported, with the percentage of the market being outsourced expanding-between six and 10 percent annually. But who gets those outsource contracts is another question. Compass reports its share of the total world contract foodservice market is about five percent, while its four major competitors manage another seven percent. That means the other 23% is outsourced to smaller contractors outside the global "Big Five" (Compass, Sodexho, Aramark, Elior and Autogrill—see sidebar on p. 54) while 65% remains self-operated.
Furthermore, the contracted portion of the market is "polarized" (Compass's term) between a large number of local and regional caterers (as contractors are often referred to in Europe) serving smaller local institutions and businesses, and the handful of large multinationals serving both a portion of smaller local markets and most of the large national and international clients.
There are few "mid-market" firms, a global situation mirrored in the United States, where most of the larger multi-regional independent contractors have been absorbed into the Big Three, leaving the market with three giants, a handful of mid-size market specialists and dozens of smaller local and regional firms.
With low barriers to entry, more competitors are expected to join the fray at the local level as global openness to outsourcing increases. However, Compass expects—and analysts generally concur—that larger clients present much greater barriers to entry and generally prefer to contract with large established companies.
Thus the challenge for the "Big Five" is to capture adequate large-contract market share vis a vis each other while also penetrating local markets to a degree sufficient to drive top-line growth.
Global Hot (and Cool) Spots
The critical North American market generates more than 80% of revenues for Aramark Food & Support Services, compared to 31% for Compass and 44% for Sodexho (based on fiscal 2004 figures).
Currently, it is the U.S. market—especially in segments like healthcare and education— that is driving much of the growth in the industry, say analysts.
B&I remains in a global slump, especially in Europe where stagnant economies in key markets like France and Germany have forestalled growth for a number of years. The United Kingdom has generated a disproportionate share of headaches for all three companies lately as major clients have tightened the screws on outsource companies in a flurry of American-style belt-tightening.
Other markets such as Ireland and Spain in Europe and Brazil and Chile in Latin America are prospering but remain too small relative to the mature U.S. and Western European markets to make a substantial impact on overall revenues at present. Meanwhile, emerging Third World economic powers like China and India present intriguing possibilities down the line but have many years to go before they can generate the kind of numbers for foodservice outsource providers Western economies routinely do.
For the largest international contracts, analysts say Compass and Sodexho are the primary competitors in most cases. Both are well regarded by the international business community and have established global operations that offer both in-house operational expertise and existing infrastructure to take on and manage contracts in multiple conditions and environments.
Compass claims to operate in more than 90 countries worldwide while Sodexho says it operates in 76. A fair number of these, analysts note, reflect both firms' extensive remote sites and offshore operations rather than traditional institutional and corporate business in large population centers. Still, they are a fair gauge of both companies' globe-spanning presence.
Aramark: Partnerships & Multiple services
Aramark by contrast has a presence in 19 countries but its operations are heavily concentrated in North America, and a sizable proportion of its remaining international presence consists of non-food-related services like facility management (indeed, its latest national market, China, was entered through the acquisition of a regional facilities firm). Canada is among its three largest non-U.S. markets, along with the UK and Germany. It claims to be among the top three in market share in each of these. Aramark also claims a substantial presence in smaller and emerging markets like Spain, Chile, Belgium and Mexico.
Where it operates, Aramark offers services similar to those we are familiar with in the U.S., but the customer base is more slanted toward B&I clients as opposed to institutions. It also maintains a niche business offering both foodservice and lodging, commissary and facility management services to remote sites like offshore drilling platforms, mining camps and so forth.
In some markets the company operates through joint venture relationships with local firms. In Japan, for example, it has a 50-50 co-ownership of local contractor AIM Services Co., Ltd. Some of these alliances were forged through the company's longstanding and successful relationship with the Olympic Games. When executing an Olympic contract in a foreign country, Aramark often establishes a relationship with a local contractor for local market expertise and access to resources that is then maintained after the Games are over. The most recent such relationship was with Greek hospitality firm Daskalantonakis Group for last year's Athens Summer Olympics.
Growth in the international arena has been steady but hardly explosive for Aramark. Between fiscal 1997 and fiscal 2004, Aramark International Food & Support Services doubled its revenues from $912 million to $1.829 billion, an approximately 10% annual growth rate. Currently, through just the first three quarters of its 2005 fiscal year, it realized sales of more than $1.85 billion, thus already exceeding the company's total for all of fiscal 2004.
Currency translations and acquisitions accounted for a substantial portion of the gains but organic growth averaged more than five percent over each of the quarters, a respectable showing but one not much above the growth of the market overall.
Much of the growth came in Canada, Germany and Spain while the company's operations in the UK were hampered by what it referred to as "challenging trading conditions and lost business," leading to sales declines.
Sodexho: Big Market Balance
Sodexho derives about 90% of its food & management services revenues in almost equal part from its North American and European (including both the continent and the British Isles) operations. Latin America, Africa, Australia and the Far East collectively represent the remaining 10 percent (food and management services represented 98% of fiscal 2004 revenues, with the other 2% coming from Sodexho's service vouchers and cards business—see sidebar on p. 92).
Growth in the company's foodservice operations is considerably more robust in the North American unit, which realized organic gains of 4.6% in the first nine months of fiscal 2005 (coming primarily in healthcare and education, with B&I showing a slight decline). By contrast, Continental Europe posted a 3.9% organic increase over the same period, led by healthy gains in B&I and healthcare.
Sales gains were surprisingly robust in the economically troubled French and German B&I sectors. However, like Aramark, Sodexho has found the UK to be a tough environment, with revenues declining 2.1% over the first nine months of fiscal 2005 in the UK/Ireland unit. That was on top of a 5.6% decline in the 2004 fiscal year that led to a number of management changes, including a new unit CEO for UK/Ireland. The rest of the world posted a very healthy 16.7% organic gain, excluding a big one-time event in Australia over the period.
Despite the challenges, Sodexho is committed to making a strong showing in the global B&I market by becoming a one-stop multiple services shop for large international businesses.
New CEO Michel Landel (the former head of US operations who succeeded company founder Pierre Bellon) recently talked about how "many multinational clients see beyond moving offshore, to bulk purchasing at a continental, or even a worldwide, level," and the opportunities that trend presents to a global multiservices provider like Sodexho.
He added that worldwide growth in the B&I sector overall has averaged 1.5% annually since 2002, with growth expected to uptick slightly to around 2% over the next few years. "Last year [i.e., 2003-04], neither ours nor our main competitors' market shares varied more than 1%," he noted. " However, our multiservice activity has great potential—twice that of foodservice."
Compass: Betting on Brands
It is a strategy Aramark also seems to be pursuing, while Compass has concentrated almost exclusively on foodservice. While it manages some non-food-related services, especially in its remote sites/offshore operations where offering a comprehensive bundle of services is fiscally necessary, Compass has pursued a strategy of being a provider of an array of foodservice brands that meet different needs in different sectors, markets and circumstances.
More recently, the company has turned more attention to expanding its non-food services, says company spokesman Paul Kelly. "The provision of support services to clients not just in the offshore and remote sites sector but also in healthcare and B&I has been growing steadily in recent years and we see this trend continuing," he notes. "We are seeing clients looking to bundle certain services such as foodservice, cleaning and reception together and we are responding to this where it makes economic sense for the client and good business sense for Compass."
Like the other two major multinationals, Compass has been bolstered by growth in the North American market, where likefor-like (i.e., excluding currency and acquisition-related factors) sales growth was 12% in the first six months of the company's 2005 fiscal year, which ended September 30. Also posting positive gains were the UK, Far East and Latin American units, while Continental Europe lagged with a minimal 2% like-for-like increase.
If there's a criticism of Compass, it is that it does not seem to deliver the sort of global bottom-line results that might be expected from a company in its position. Analysts note that Compass seems to invest large amounts of capital into its contracts, emphasizing growth over cash generation. The company implicitly has acknowledged this and has been undertaking a review of its operations to ferret out inefficiencies, especially in procurement.
The effort backfired in part about a year ago, when a UK distributor with which Compass had developed a tight partnership ran into financial difficulties after being squeezed too hard. Compass had to sink cash into repairing the damage. The incident helped send the company's stock down by almost a quarter of its value and led to the announcement earlier this year that company founder Francis Mackay would leave his post as chairman in 2006.
Then, just last month, a warning following close of the company's 2005 fiscal year that operating profit would be down significantly from 2004 not only sent Compass stock diving again but triggered the resignation of CEO Michael Bailey (Bailey apparently will stay on until the new chairman, Sir Roy Gardner, joins the company next year). Compass also confirmed rumors that it will sell off its Select Service Partner travel concessions unit in order to raise cash and focus on its core business.
The troubles at Compass may present an opportunity for competitors to gain market share. However, analysts emphasize that in the global foodservice arena, Compass remains a formidable presence, with enviable market share and worldwide penetration. Also, its brand-focused approach to the market seems to be in line with global foodservice trends that increasingly emphasize retail-style delivery systems.