It's crunch time. Small contract caterers have been cornering the market in bespoke, flexible catering for years, but is that enough to weather the recession? Rosalind Mullen reports.
When the economy started to go south last year there were predictions that the resulting cost pressures would favour the larger contract caterers, forcing a number of smaller players to collapse.
The speculation was backed up by a Mintel report last year that revealed the value of business and industry catering would decline by 1% to £1.64b in 2008 and would drop again to £1.57b in 2009. That, plus client preference for contracts such as nil-subsidy and commercial that transfer more risk to the caterer, seemed to put smaller operators at a disadvantage during a recession.
It's certainly tough. In fact, food service consultant Peter Pitham reckons there are a few independent caterers out there with fewer than 10 contracts that could be about to succumb to the economic pressures. But, so far so good, with only two notable casualties hitting the headlines this year. Duchy Catering was bought out of administration by newcomer Graysons, and In House was snapped up by established independent Catermasters.
The fact that Graysons, which has been trading for only 18 months, made its first acquisition as the recession started to bite signals that small contract caterers are making the most of their bespoke niche in the market.
This is illustrated by another newcomer, Gold & Brown, which aims to differentiate itself even further from the big contractors such as Sodexo, Compass, Aramark and Avenance by evolving from "contract caterer" to "ethical food and beverage business" (see panel, page 27).
Obviously, Graysons and Gold & Brown didn't plan to start trading in a recession, but they argue they are subsequently well placed to match their growth and service to current business trends. Take Graysons' contract at BMW's Cowley plant, where 850 agency workers were laid off in February, resulting in the caterer having to respond swiftly to adapt its staff-feeding services.
As Rowena Edwards, chief executive at Graysons, says: "The advantage of being small is that we can change quickly. We are nimble-footed so can support clients who are going through problems and change, such as downsizing."
It has, however, become tougher to find new contracts in some business and industry sectors. Graysons, which has an annual turnover of about £17m and 60 contracts, does have deals in the pipeline, according to Edwards. But she observes that many potential clients in the financial services and manufacturing sectors have rolled their catering contracts over rather than go to market.
"This is partly because they want to wait and see what is happening and partly because they are trying to maintain some stability while there are changes in staffing levels and suchlike within their companies," says Edwards.
"Those companies that are coming to market are generally looking to replace a service they are not happy with - perhaps because the incumbent caterer is not responding to the changing market - rather than following a cyclical tender."
And this is where the smaller players believe they are outsmarting the big boys. Anecdotal evidence suggests that, at tender, the bigger caterers are losing out to the smaller independents more than they did before. For instance, most of the business and industry contracts that Graysons has taken have been from the top five contractors. "One comment I've heard is that they are inflexible," says Edwards, a Compass veteran.
This is borne out by Clive Hetherington, co-founder and finance director of Vacherin: "It's possible that smaller contract caterers provide more value for money. I'm noticing that we are bidding mainly against smaller contractors."
Some consultants, however, argue that although the smaller caterers are holding up well, the major groups still want caterers with clout who can invest in the service, ride the recession and be with them in five years' time - in other words, the likes of Sodexo and Compass.
Pitham cites the Royal Institution of Chartered Surveyors, which awarded its 10-year £30m contract to Compass's Restaurant Associates (RA) - not only because it could provide the required investment, but because it needed a big name such as RA's Roux Brothers brand to make the fine-dining facility work.
Similarly, the economies of scale that a large caterer can promise mean that international companies are more likely than ever to opt for a group contract. In turn, this means that smaller contractors miss out on winning deals with the UK division of a multinational - for example, Sodexo is favoured by Nokia in Finland, so it gets all the catering business over here, too.
That said, streetwise independents recognise that it's not wise to pitch for too much business with one company. Many will have learnt from Lexington's setback in June 2005 when the then four-year-old independent was replaced on the £5.5m T-Mobile contract, which accounted for half its turnover.
Graysons is certainly cautious. "We are selective about who we work for. Where we have been invited to tender for a big chunk of business, we have decided not to pursue it," explains Edwards.
Pitham agrees that the independents need to consider new tenders carefully in this economic climate, and adds: "Smaller contractors need a contract that provides returns. They can't afford to take on a contract that is loss-making."
Neither can independents afford to ignore their strengths. One of the advantages they reckon they have over the big boys is that they can work more closely with the client - which is proving useful in the recession.
"Big companies have a chief executive, regional director, operations director and so on. It's like Chinese whispers," says Patrick Harbour, co-founder of Harbour & Jones. "We have a director who looks after 10 clients, so the report line is flat. This is valuable [in recession] as things can happen fast. If people don't want hospitality and just want a soup and a sandwich, we can do that quickly."
Food service consultant Chris Stern adds: "You can't get to who you want to talk to with a big contractor. In that way small contractors are more in tune with specific complexities that can happen [in this market]. Big contractors are less agile."
One challenge faced by all caterers, however, is that clients are looking for innovation and value, while customers are watching their pockets - by, say, not having dessert where they did before, or by choosing buffet salads where they can take as much as they want.
"People either have less money, or behave as if they have less," says Edwards at Graysons. "So they want access to quality food at an affordable price."
Conversely, while spend is generally lower, the number of customers seems to have increased. One benefit from the recession echoed by several of the independents is that more employees are visiting the staff restaurant at lunchtime instead of hitting the high street.
"We're standing still. In some places the company has lost 100 head count but we haven't seen a drop in takings. We've got more people spending less, and the sales line is holding up," says Edwards.
The trick many independents have recognised is to take a long-term view and cut costs without compromising quality. As the more expensive protein options on the menu wane in popularity, caterers are responding with dishes such as chunky soups, slow-cooked tagines or stir-fries made with secondary cuts of meat that have lower ingredient costs.
"Clients have asked us to look at costs, but not at the expense of quality," says Hetherington at Vacherin. "We've endeavoured to be proactive and anticipate cuts. If they require more, we respond. We're earning our management fee."
Harbour, meanwhile, reckons that Harbour & Jones is pitching for more business than usual because clients recognise that as a small caterer it can provide quality at a better price. He says that unlike the big players, which traditionally have one big supplier to drive down costs, it uses more than 85 suppliers.
"We can get a better deal by dealing directly with producers, which works well in lean times," Harbour argues. "Clients see we can compete on costs."
The importance of maintaining quality is underlined by a recent study by McDonald's, which predicted that the value of informal dining, which includes staff restaurants, will drop 0.5% from last year to £40.3b in 2009, with one in nine meals eaten away from the home in 2009, down from one in eight in 2008.
The report, Eating Out in the UK 2009, produced by industry analysts Allegra Strategies, concluded that, to survive, operators would have to respond to the fact that 75% of respondents valued quality and taste of food above price, and more than half (58%) preferred to eat food sourced from the UK.
"People will still pay for quality in a recession," says consultant Stern. "If you reduce quality, your margin looks good, but your profit is rubbish because it doesn't sell. Let's face it, 30% of £1 is 30p, but 70% of zero is zero. Increased quality equals increased tariffs."
In fact, in some sites, prices are holding up. At Canary Wharf, for instance, main courses are still being sold for £4 to £5 in City bank restaurants. "They are rammed out and it's nil-subsidy," says Stern. "It doesn't work everywhere, but it does where prices in the high street are high."
While many of the independents are finding their way in the recession, however, the big contractors are still a force to be reckoned with. "Smaller contractors have agility and can be more bespoke, but larger companies will research ways of meeting client needs and then roll it out, which is equally effective," says Stern.
He points out that a lot of the marketing initiatives of the big boys are supplier-led. "They buy in branded sandwiches and crisps and package them as promotions. The public buy those brands in the high street, so they are willing consumers."
None of the companies Caterer spoke to had lost business as a result of a client going bust in the recession. It hardly needs pointing out, however, that this is where smaller contract caterers are more exposed than the big boys.
"Theoretically, we are far more vulnerable if a client goes to the wall owing us £50,000 than if we were a big contractor. However, we have fewer clients, we work closely with them and can see they all seem to be managing well. And there is quite a lot of business in the pipeline," says Hetherington.
The other danger for a smaller contractor is if it overspends in a recession, as it won't have the reserves of a big company. "If a client then refuses to increase the tariffs or subsidy, then the small contractor will fail," says Stern.
Clearly, the recession does present significant hazards for small contractors, but all in all the market is holding up. "Clients don't want to cut staff restaurants because it's a perk, and if the service changes it's a barometer that things aren't going well," says Pitham.
And, as Stern says, there are also opportunities: "The big boys say that the smaller contractors will fail in the tougher market, but why should they collapse? The market is the same. In fact, some say it's more robust in some staff restaurants."
BEATING THE CRUNCH: HARBOUR & JONES
Patrick Harbour, co-founder of Harbour & Jones, acknowledges that some clients believe they get more security from using a larger company during the downturn, but he points out that the major players also have larger overheads.
"We haven't lost business but we have been affected," says Harbour. "Clients are cutting costs, but we work with them in the hope that we will grow with them again."
The tactic used by Harbour & Jones to avoid redundancies is to run a lean ship and work harder for less. The company's turnover is £17m and is set to increase by a further £5m when pending deals are confirmed - but Harbour concedes that it's the profits that count.
To that end, the caterer has responded to consumer demand for quality food at affordable prices. For instance, Harbour & Jones simplified the menu and cut prices by 10% when it took over its first concession contract at St Paul's Cathedral last October. As a result, it saw sales grow 20%, while an Association of Leading Visitor Attractions report shows that in just one year there has been a 30% increase in value-for-money ratings.
Harbour observes that customers now want a sandwich, crisps and juice for an all-in price - so the key to survival is to give them better deals than on the high street.
"In summer we anticipate lower sales as people go out to the park and grab a sandwich, but at two law firms in particular there have been bumper sales."
THE CHANGING FACE OF CATERING: GOLD & BROWN
New to the scene last year was Gold & Brown. Co-founders Simon Elliott and Andrea Walwyn hadn't planned for recession, but are taking a positive view of it.
"The only way to go in the recession is to grow. January and February were good, but cash liquidity is challenging. Clients are hanging on to their cash, and suppliers want to be paid," says Elliott.
The company, which has five contracts and a turnover of £1.2m a year, is positioning itself away from being a "contract caterer", describing itself as an "ethical food and beverage business". It also distances itself from the purchasing discount model favoured by many of the larger caterers.
To date, Gold & Brown has been taking concessions in sites with high footfall, such as arts centres, private members' clubs and comedy clubs, but it has ambitions to break into business and industry. The aim would be to feed staff using its coffee shop and deli concept, which Elliott believes is a particularly attractive option for clients during the recession.
"We can offer a premium retail offer in the lobby and give the company back its expensive staff restaurant space to use for something else," he says.
"There is a massive niche to offer premium, ethical and value-for-money catering. I believe the days of the £1.20 plate of mushy fish and chips are limited. There will be a move towards retail, and ethical sourcing, because it is becoming more important to customers - we all want it, even in supermarkets."