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Saturday, Apr 01, 2023

World's biggest contract catering company Compass sees 'significant new business opportunities' ahead

World's biggest contract catering company Compass sees 'significant new business opportunities' ahead

Before COVID-19 struck, Compass Group was serving 5.5 billion meals a year around the world but, as governments around the world introduced lockdowns, it faced a calamitous collapse in business as workers and students were sent home.

Few big companies suffered the impact of the pandemic as severely as Compass Group.

Before COVID-19 struck, the world's biggest contract catering company was serving 5.5 billion meals a year around the world, not just for big business clients like Nike, Shell, Google and Coca-Cola, but also for big government bodies such as the US Pentagon, thousands of schools, colleges and universities around the world, and sporting institutions as varied as the All-England Tennis Club, Twickenham Stadium, Aintree racecourse and Tottenham Hotspur FC.

The rapid spread of coronavirus, therefore, put thousands of the company's employees on the front line - it employs around 480,000 people across 44 countries - at risk. Then, as governments around the world introduced lockdowns, it faced a calamitous collapse in business as workers and students were sent home.

Because Compass's financial year ends in September, the company never actually reported a loss due to the pandemic, but it did suffer a big drop in profits in the 2019-2020 and 2020-21 financial years.

Today, though, brought signs that the business is returning rapidly to pre-pandemic levels of performance.

For the six months to the end of March, Compass achieved an underlying operating profit of £673m, compared with £287m in the same period a year ago. Headline pre-tax profits for the period came in at £632m compared with £133m a year ago.

Sales on an underlying basis were up by just under 38% to £11.6bn.

Better still, the company said it expects sales this year to grow by around 30%, compared with the previous range of 20-25% it had given, while it has also unveiled plans for a £500m share buy-back programme. The shares rose by more than 10% at one point on the news.

Dominic Blakemore, the chief executive, said the company had enjoyed a record number of new business wins during the period and had enjoyed record retention rates among existing clients.

He added: "We continue to recover strongly from the pandemic and have achieved the important milestone of revenue exceeding our pre-COVID level on a run rate basis.

"We have seen a notable improvement in business and industry and education as employees return to the office and students to in-person learning."

"We should have a right to be at higher levels of growth"


Mr Blakemore said he expected the net new win rate to continue into the second half of the year - having won some £550m worth of new business during the first six months of the year.

He said that, through COVID, the company had kept on all its salespeople and so had not struggled to win new business as economies had reopened around the world. The company also stepped up training and said it was enjoying better good will and trust from customers.

He went on: "We can sustainably perform better than we have before.

"What makes me most excited is that…we should have a right to be at higher levels of growth."

Inflation remains a headache, but Mr Blakemore said the company was confident of mitigating cost increases, suggesting inflation might even be a boost for the long term if it encouraged more people to think about outsourcing their catering operations.

Some 30% of the company's contracts are fixed price and, although inflation had been running ahead of the 5-6% price increases Compass has recently pushed through, Palmer Brown, the chief financial officer, pointed out that the company's profit margin had actually improved during the period through initiatives such as trying hard to reduce food waste.

He added: "We have to continue doing what we're doing and work even harder we have the capabilities to do it and the confidence that we'll be able to handle things."

It was not all good news. Along with sport and leisure, business and industry - the biggest of the company's five business segments by sales - remains at pre-pandemic levels - and questions remain, with many employers clearly struggling to get employees back to the office, how quickly that will be able to pick up.

War for talent making it difficult to get employees back to office


Mr Brown said: "It's by far the slowest sector to recover, it's really the only sector that's meaningfully below 2019 levels at around 83% or so currently, but we're getting increasingly comfortable on the fact that it will recover.

"However, it will look different than it did historically. We're seeing a shift away from working in the office on a prolonged bases - it's gone from somewhere around 4.2 days or work in the office to three and a quarter.

"That's in a state of flux - we know many of our clients are wanting employees back in the office, but the war for talent is making it somewhat difficult at the moment."

But he said there were nonetheless "significant new business opportunities" in business and industry coming through from other avenues, such as micro-markets and the fact many employers offer 'pantry' and free food offers to employees. He said that even traditional workspace cafes were seeing growth even though workers were not back in the office to the extent that they were before the pandemic.

Those kinds of details may provide some kind of comfort for investors that the company is capable of returning to pre-COVID levels before long in all parts of its business - even if workers do ultimately switch to hybrid working on a permanent basis.

But Mr Blakemore's ambitions go way beyond that. One slide in the investor presentation today noted that the addressable global food services market is worth at least £220bn, of which, Compass has around 10%. The market remains dominated by so-called 'self-operated' players in charge of their own workplace catering who have yet to think about trying to save money by outsourcing.

Push towards net zero could bring further impetus for outsourcing


Further impetus for outsourcing could come from further government regulations around the world and the push towards net zero. Compass also sees opportunities in vending and in food delivery and from employers enabling employees to order their meals via an app or a digital kiosk.

In other words, while serving millions of meals every day may sound to some like an unglamorous activity, there is plenty of innovation going on and plenty more that will be made possible by digitisation.

As Greg Johnson, the travel and leisure analyst at broker Shore Capital, told clients today: "The key…is the potential for a sustained acceleration in net new business growth, more than compensating for any structural shortfall from working from home, with broader inflationary pressures a further succour to first-time outsourcing."

Shareholders in this big, structurally important company - a rare UK world leader in its field - will certainly hope so.

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