The future shape of contract catering

16 September 2010 by
The future shape of contract catering

Having added a host of on-site services in addition to food, the scope of large contract caterers has developed dramatically in the past decade. Chris Druce asks what the future holds for the sector's predators.

Since its wartime roots feeding munitions workers, modern contract catering as a sector has been quick to realise the advantages scale brings. The established large players we see today - Compass, Sodexo, Aramark, Elior - have fed seemingly insatiable appetites through a mix of organic growth and acquisitions, transforming themselves into multi-million pound concerns.

Times change though, and in more recent years this has led to bouts of indigestion for our now portly predators, with too many brands and interests confusing the core offer. Current sound-bites coming out to the market are all about core competencies, organic growth and focusing on the food offer. Development through acquisition is in these giants' DNA, and having got their houses in order they're leaner than they have been in years.

So as the world crawls out of recession and the money markets improve, won't the likes of Compass be tempted to gobble up a few tasty, smaller rivals once again or has the game changed?

Many independents will hope not. Having the company you've lovingly built taken over in a hostile move is one thing, but selling up is still the logical exit strategy for many where an offer to the stock market isn't on the cards. Yachts and villas in exotic climes don't buy themselves, after all. And as the recent, brutal recession has made clear, for caterers that get into trouble a sale can often be the only way to rescue a business and safeguard jobs.

So does contract catering's relative maturity in the UK mean the days of leaving a bigger employer, building a business and then selling it back to your old paymasters - such as Everson Hewett did with Compass in 2004 - are consigned to being no more than a historic footnote?

To that end it would make sense to look to the potential buyers. After an exhausting contract/brand grab in the 1990s and early 2000s, Compass Group under the leadership in recent times of Richard Cousins has streamlined the operation, not added to it.

Much the same approach has been in evidence under Andrew Main's leadership of Aramark UK since his arrival in 2005 after the Bill Toner expansion years and, after a period of painful reorganisation, Elior UK has concentrated on its core competencies and concession business.

Sodexo's chief executive Aidan Connolly, who took the reins at the French-owned caterer in March 2009, has certainly talked at length about the company's food offer, not, as you might expect given his financial background, the advantages of growth through acquisition.

However there's still much to be gained from buying rivals at a decent price, as given most caterers' low overheads (as they are based on clients' premises) it can bring a considerable turnover boost, and the larger players can usually turn a profit on most deals, thanks to their considerable, and increased, buying power.

Where it doesn't work is when larger companies swallow up smaller players and the departure of the owners - arguably the case when Compass (then Granada) acquired BaxterPlatts and founders Robert and William retired and ultimately left for new projects respectively - robs the business of its USP that made it more than the sum of its parts. Of course, with the world's banking system having only just come back from the brink, financing or lack of has undoubtedly been a factor in the slowing of the acquisition merry-go-round in recent years.

Cash-rich Compass, however, has begun to dabble once more, with the purchase of Indian catering firm Tirumala Hospitality Services and French firm Caterine Restauration. Although food service consultant Peter Smale told Caterer early this year that he thought joint-venture deals (such as Compass's £500m deal with Jockey Club Racecourses signed last year) were still more likely than straight takeovers.

"Acquisition is always a possibility, but it's not necessarily a good long-term solution. Without being unkind, why would Compass want to buy a struggling rival? It would be far better to target its rivals' contracts," Smale said in March.

Alastair Storey, as chief executive of Westbury Street Holdings, heads the UK's largest independent catering group, which is home to business and industry caterer BaxterStorey, as well as Cater Link and Holroyd Howe Independent.

Created out of a series of deals - notably the merger of Wilson Storey Halliday and BaxterSmith in 2004 - it transformed itself into a national player with the acquisition of Holroyd Howe and the quirky Benugo in 2007.

Despite the battering visited on the UK economy by the recession, the group's revenues exceeded £300m last year for the first time, making it a significant "pure catering" force. Although Westbury bought to add infrastructure and talent in its early days, Storey points out that it only put on £120m in turnover via acquisition, and believes there is scope for plenty of growth in all the areas it operates within.

"We're not interested in simply buying bulk. The good acquisitions are where the cultures and beliefs of the companies involved fit," says Storey, who nevertheless now receives numerous approaches from caterers keen to sell their business to him.

"In a market there's buying and selling but the likelihood of someone doing ‘a Compass in the Francis Mackay days' again is to my mind unlikely as the global markets have moved on. The larger companies are much more likely to continue broadening their service provision instead."

The shape of things to come

"Ten years ago you used to build a business, sell it, and run another," says food service consultant Chris Stern.

"We haven't seen that for a while and I don't think we'll ever go back to that - the sort of situation where it seemed the likes of Compass were buying everyone. The values of businesses have changed greatly and there are now more options open to owners."

Stern points out the trend to build a business up to a point where it can be sold and the founder can remain within the larger group, perhaps cutting back on their working week rather than looking for an exit, as in the case of Mike Smith at BaxterStorey who stepped down from his managing director role in 2008 but continues his involvement.

Jerry Brand, who sold Russell & Brand to Marriott in 1996 after the "dinghy" sized operation he set up in 1988 had become something akin to an oil-tanker, now runs the £20m turnover Host Contract Management.

Brand's ultimate aim with the company is to float it on the stock market, perhaps then taking a back seat. A self-confessed "non-corporate" man, Brand has also seen the strong entrepreneurial seam present among caterers thwart his attempt to do something different.

"I came very close to setting up a consortium to combine purchasing power but one caterer pulled out at the last minute and another went bust," says Brand.

With the onset of the recession and subsequent fallout he's put the idea on hold for now but notes that most operators are simply "too entrepreneurial" to go for this option, having grafted to build their businesses.

Certainly Wendy Bartlett, co-founder with Ian Mitchell of Bartlett Mitchell 10 years ago, is in no mood to sell up and relinquish control for the sake of a few more days holiday a year, although she says the firm receives on average a couple of approaches from the larger players in the sector each year.

"As caterers we're such a flexible bunch that I honestly believe the market will continue to support small, medium and large contractors - by its nature it's ripe for a mix," says Bartlett.

While the structure of the industry is predicted to remain largely unchanged, that's not to say ownership will. Food service consultant Peter Pitham thinks many of the current prey will eventually become the predators. "Those that were being preyed upon five or six years ago, such as Charlton House [CH&Co], have resisted approaches and [in Charlton House's case] ultimately bought Chester Boyd and set up new operating divisions ready for the next stage of growth," he says.

Thoughts on the future

Peter Pitham, managing director, Catering Consultancy Bureau "You might see a sixth company join the top five via a merger or acquisition but I believe in terms of scale Compass will remain king. That's not a bad thing as the likes of Compass and Sodexo bring a lot of great ideas to the table and supply the training smaller caterers can't."

Jerry Brand, managing director, Host Contract Management "I think there will be mergers at the top, although not perhaps the big five. It's clear nil-cost catering is on its way and the slush funds that have propped up a lot of catering businesses will be removed. That leaves a lot of companies with large overheads and although they've started to remove some of this, inevitably some will look to get bigger through acquisition to offset it."

Alastair Storey, chief executive, Westbury Street Holdings "I think the biggest companies will be forced to broaden their service range. Ultimately though the industry lends itself to supporting smaller, foodie companies as well, so I don't think the structure will change much from today's. All companies reach a point where they have to sell up or invest heavily to move to the next level, and not everyone is always willing to take that risk."

Damon Brown, director, Olive Catering Services "I think Compass will remain at the top and the large players won't change. Small companies will come and go as they always have. We have been established six years and reached £14m of turnover. There's no pressure or desire to sell. Instead we're expanding our head office and have put the next raft of management in place to support future growth."

small sector deals

Major buyouts have been absent from the sector in recent times but smaller deals have been done. These include:

Brighter Futures (previously Restaurants at Work) buys Yes Dining
£237,000 all shares deal
Date: September 2010

Brighter Futures buys Jill Bartlett
Date: October 2009

Catermasters buys Inn House Catering Company
Date: January 2009

Graysons buys Duchy Catering
Date: January 2009

ISS Eaton buys the Catering People
Date: October 2008

Caterplus and Taylor Shaw (merger - Waterfall Group)
created entity with £30m turnover
Date: August 2008

On the outside looking in

If the big caterers aren't necessarily looking to acquire, how about some of the large specialist facilities management (FM) companies? Having started to pick up catering jobs as part of FM contracts, FM providers quickly realised that running a successful catering operation wasn't as easy as it looked. It saw ISS gobble up Eaton in March 2004, Just Deli acquired by OCS in October of that year and the creation in 1991 of Initial Catering Services, now part of cleaning to pest control company Rentokil Initial.

Anthony Bennett, one half of the newly formed Bennett Hay, believes we haven't seen the last acquisition of a catering company by an FM player.

Bennett, who headed up the London part of FM provider Mitie's catering operations, points out that Compass and Sodexo's rush into providing FM services hasn't gone unnoticed. What started as a natural extension of the soft services provided around catering, such as reception and some cleaning, has grown to include a lot of engineering-based disciplines such as building maintenance, and its making a lot of the FM companies nervous.

"I think we will see more FM companies buying caterers - Mitie has certainly been looking at opportunities," says Bennett.

"What's quite interesting is that FM companies can see a different dynamic emerging among clients and have noted caterers' ability to reach out to the more senior people in organisations and embed themselves within as part of the long-term business."

Bennett notes that while few chief executives will get excited about the cleaning, food is far more emotive. It may be a service they eat on a daily basis, and it is often seen as being higher up the order of priorities, as it can be used to wine and dine potential clients helping to seal important deals. Unsurprisingly a number of FM companies want in, if for no other reason than self-preservation.

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