The right direction

Catering giants Compass and Granada have cocked a snook at the City analysts who doubted their merger would ever succeed. Almost 18 months on, the new company, Compass Group, has become a global player to be reckoned with, as Helen Adkins reports.

On the day the media leaked news of the impending £18b merger between Compass and Granada in July 2000, the City took it badly. Compass share prices fell by 15%, despite the company achieving profit margins of more than 7% and the merger bringing together business worth £2.9b in turnover.

While some industry observers said the merger would create an unwieldy giant, others doubted the proposed synergy between the catering business and the hotels division that Granada was bringing as part of the deal.

Almost 18 months on and the outlook for Compass couldn't be more different. On 11 December, Compass Group released its preliminary results for the year ended 30 September 2001 that impressed the City. Turnover had increased to £8.71b from £5.77b the previous year. Analysts issued upbeat comments for the coming year and shares leapt 9% to 512p.

Following its subsequent demerger in February 2001 from Granada's UK media company, as well as the sale of its hotels, namely Le M‚ridien, Heritage and Posthouse, Compass Group is once again able to focus on what it does best - catering.

In the past year it has spent £2.3b on acquisitions around the world and has earmarked a further £1.5b for more this year. It recently announced the acquisition of Japanese food service group Seiyo Food Systems for £193m, as well as the former Swissair-owned Restorama and Rail Gourmet Holding for £40.7m.

Closer to home, Compass UK and Ireland has made major contract gains within the business and industry sector for Eurest Sutcliffe. This includes a five-year contract with Sainsbury's worth £40m, a £28m total-turnover contract for Royal Bank of Scotland and a £24m contract extension with Lloyds TSB. A 10-year contract with British Airways, for an undisclosed sum, was announced earlier this month.

A busy 2001 ended happily for Don Davenport, chief executive officer of Compass Group, UK and Ireland, and Frank Whittaker, sales and marketing director. Sitting in the riverside offices of Compass HQ in London's Hammersmith today, both men are relaxed and positive about the future of the company. It's a far cry from July 2000 and the negativity from investors and the industry, and driving the merger ahead of schedule must have been no easy task.

"When we merged, the competition were like vultures waiting to pick our eyes out," says Whittaker. "The whole industry was holding its breath. They thought the two cultures wouldn't come together because of the sheer size, that people would get upset, that cultures would clash. But it didn't happen. The competition was amazed and a bit disappointed."

Davenport admits he was caught off balance when the leak happened. "We hadn't thought about the issue of integrating the companies before the leak," he says. "We had to react very quickly as everyone in the company was suddenly very concerned about their jobs and what was happening."

An integration team from both companies was immediately established to come up with the philosophy and aims that would be behind the new company. The first aim was to maintain a seamless transition during the merger so that clients would see very little change. The other was to decentralise the entire business, thus retaining a customised service and silencing critics who questioned the company's claim that it could operate an individual service despite its size. Compass was subsequently able to report a contract retention rate of 95%.

"We didn't change a single area manager and created geographical areas around the country with managing directors, as you would with a small company," says Davenport. "It doesn't sound much but it is an important issue. They have all their resources locally and totally manage their bit of the business."

The creation of a corporate division within the business-and-industry sector was the next move, and one that Davenport feels was in keeping with the current trend of corporate mergers across the business world, particularly in the financial sector. As large corporations merged, Compass could focus on negotiating long-term group contracts at a competitive price, increasing volume at the same time.

According to Davenport, charging competitive prices, reducing subsidy and working with successful branding is where Compass now has the edge over competitors. While Granada brought its successful in-house branding to the merger, Compass is far advanced in the introduction of its own brands, particularly those that work in the public arena such as Upper Crust and Ritazza. When bundled together in one location, turnover has increased by 50%.

"The culture today is all about supplying different types of food and keeping people inside the building. You can do that with the right brands and the quality," says Davenport.

But it's not just the union of brands that makes the merger between Granada and Compass formidable. With Compass's foothold in the international arena and the trend towards single contracts across entire continents, a large part of that market is up for grabs.

Granada did not have that international foothold but did bring its hotel division to the table, the sale of which now richly benefits Compass. In the light of the economic downturn and the US atrocities of 11 September, the £3b cheque for the sale of the Forte group of hotels looks like a good strategy, while silencing critics who claimed a pure food service company wouldn't be able to run hotels at the same time.

"The sale of the hotels was the best deal out of the merger," says Davenport. "The food services business worldwide is worth £200b and Compass is worth about £9b. We are in 85 or 90 countries and put very little capital into it. The food services sector is also very resilient against economic downturn. You might get a blip but never any shocks. In comparison, hotels are down now, so why the hell would we want to go into hotels?

"The sale gave us a massive war chest. We can spend that on acquisitions and at a time like this, that's a phenomenal position."

Compass Group UK & Ireland

Queen's Wharf, Caroline Street, London W6 9RJ
Tel: 020 8741 8900

Chief executive officer: Don Davenport
Sales and marketing director: Frank Whittaker
Turnover 2001: £2.88m
Operating profit: £377m
Employees: around 100,000
Sites: around 8,500

Highlights of 2001

Major contract gains within the business-and-industry sector for Eurest Sutcliffe:

• Sainsbury's £40m - 150,000 staff catering at 427 UK stores.
• Royal Bank of Scotland, £28m deal across 48 offices.
• Lloyds TSB, £24m contract extension.

Eurest Managed Services won a seven-year £150m total-turnover contract to provide facilities management for British Energy.

The Restaurants and Hospitality division was set up for premier fine-dining and City contracts, and fine-dining brand Restaurant Associates was launched in the UK.

New contract wins for Medirest, the specialist health care division totalling £34m in turnover.

The division's education business rebranded to Scolarest. Major wins included a £2.4m turnover contract for Barnsley schools, plus a multisite contract in Wales.

Rebranding of 47 Granada motorway services business to Moto.

Acquisition of Vendepac, the UK's largest vending business, for £84m.