Sodexho's struggles show sector fragility

Analysts and shareholders were quick to react to last week's lacklustre figures from French catering giant Sodexho Alliance, which came hot on the heels of last month's dramatic profit warning issued by Compass.

Sodexho's share price suffered the inevitable slide and, in a jittery market, Compass's shares also nose-dived to 214.5p - the lowest since its split from Granada four years ago.

The French firm's latest set of revenue figures showed that, although performance across the world was fine, its UK and Ireland arm was still struggling.

Underlying sales for the 12 months to 31 August fell by 5.6%, while turnover fell to €1.35b (£931m), down from €1.45b (£1b) the previous year and €1.69b (£1.2b) the year before that. Two particular sore points were the subsidiary's poor client retention, which it admitted was "too weak", and its performance in the business and industry sector, which accounted for 90% of the decline in sales.

Michel Landel, Sodexho's chief operating officer, tried to temper the group's poor UK figures with tales of recent customer wins, and pointed out that the figures were affected by the strength of the euro against the dollar. Organic revenue growth across the group rose from 3.1% to 4.1% over the fiscal year.

Landel reaffirmed his belief that Sodexho in the UK would return to the same 4-5% level of growth enjoyed by other parts of the business, although he conceded that this would take at least three years.

Sodexho's problems in the UK date back to 2002 and the discovery of serious accounting anomalies. With the resulting negative publicity came a series of profit warnings.

It has also suffered trouble with its leadership. François-Xavier Bellon, son of chief executive and chairman Pierre Bellon, stepped down after only a few months as chief executive, forcing Landel to act as caretaker of the British business.

Just two weeks ago, Philip Jansen, widely regarded in the business world as a troubleshooter, took up the reins. Landel seized on this as more good news for the company, saying it would give it the strong management team it required in a tough business environment.

Catering consultant Adrian Stokes pointed out that margins in the UK have become tighter and clients are better informed, with better procurement managers. But while he believed that the recent events had been "a significant kick" for the major players, he remained optimistic that the big contract caterers would bounce back.

Fellow consultant Chris Stern was not convinced. He believed that the UK market was more mature and competitive than those in both the USA and the rest of Europe, with less in-house catering and lots of small boutique players driving quality and forcing the big companies to deliver similar standards. Not only do these smaller companies have smaller margins, they have no shareholders to keep happy.

Sodexho's widely documented leadership and financial problems have given potential clients "an excuse on a plate" to leave them out of tenders, said Stern, who believed a similar fate could now await Compass.

Whether or not Sodexho manages to bounce back in the UK within three years remains to be seen. With the group as a whole predicting that revenue growth for the fiscal year 2004-05 would be flat at 4.1% - not to mention the spectre of some costly discrimination lawsuits pending in the USA - it is clearly not out of the woods yet. And the same goes for its main rivals, Compass and Aramark.

"I wonder if the days of huge profits are numbered or even over," said Stern, adding: "It's only going to get worse."