The past year has not been an easy one for contract caterers. According to the British Hospitality Association's latest Food and Service Management Survey, the market as a whole reported a 0.8% drop in turnover to £3.865b in 2005, making it the toughest year for a decade.
Business and Industry remains the biggest single sector, accounting for at least one third of the total revenue of the major operators within the sector and as much as three quarters for many others.
The other key sectors are healthcare, education, defence, offshore and local government.
Despite suffering a woeful year, including an embarrassing United Nations investigation and a series of profits warnings, the UK market is dominated by Compass, through brands such as Upper Crust, Eurest, Restaurant Associates and Scolarest.
With some 400,000 employees in 90 countries, in 2005 it reported turnover of £12.7b and a slump in pre-tax profits to £171m. In the UK, where the group employs 110,000 staff, operating profits fell to £205m on a £2.8b turnover during the same period.
But with a new and well-regarded chief executive, Richard Cousins, a new chairman in the shape of Roy Gardner and the respected Andrew Martin in the finance hot-seat, City and industry observers are hopeful of recovery within the next year to 18 months.
The sale in April of its Moto motorway service stations and Select Service Partner (SSP) travel catering business (including the Upper Crust and Harry Ramsden's brands) for a total £1.82b (nearly a third more than predicted by analysts) has also freed the company to focus on the core contract catering and support services businesses.
The other big players in the sector are undoubtedly Sodexho and Aramark.
Sodexho, with brands such as Director's Table and Sodexho Prestige, employs some 48,000 people in the UK and for the six months to the end of February 2006, reported UK turnover of â¬663m (£379.7m), 3.6% up on the â¬640m (£366.6m) for the same period in 2005. Group interim sales from food management services grew by 10.5% from â¬5.76b (£3.3b) to â¬6.37b (£3.65b).
US-owned Aramark employs around 12,000 people in the UK, where its brands include Catering Alliance It has a turnover of around £400m in the UK and some $11b (£6.2b) worldwide.
Other smaller players growing in importance include Baxter Storey, which emerged from the merger of Wilson Storey Halliday and BaxterSmith, with a turnover of around £86.6m and Elior, incorporating Avenance in the UK, which has a worldwide turnover of around â¬2.8b (£2b).
Undoubtedly, the toughness of the market has been a key trend, with Compass's woes rippling through the rest of the sector. Consultants have even admitted they are increasingly being asked to scrutinise the financial details of contracts because of the bad publicity surrounding the giant.
The furore over school meals has led to calls for catering deals to be written out of Private Finance Initiative school contracts, while Sodexho has said it is undertaking a review of its education strategy. Initial Catering has also blamed a fall in turnover on the bad publicity surrounding the school meals sector.
More generally, the key long-term trends are largely unchanged: the growing levels of risk built into contracts, tight margins, sluggish (if any) growth, demands for lower subsidies alongside more fresh and better quality food, skills shortages and rising labour costs.
While tough, the market is not all doom and gloom and there is still money to be made, argue industry watchers.
BaxterStorey, for instance, was recently voted the UK's fastest growing private catering company by The Sunday Times.
Operators such as Charlton House and BaxterStorey, while never likely to reach the size of Compass or Sodexho, are becoming ever more prominent as effective niche operators, argues consultant Chris Stern.
"They [BaxterStorey] now have something like 200 contracts and are snapping at the heels of companies like Avenance or Aramark," he says.
The woes and bad publicity surrounding the big players like Compass have also been a factor here, agrees Coverpoint managing director Jonathan Doughty.
"The intermediate sized players have done well in picking up contracts where perhaps they would not have been considered before. People are looking around more and discovering that there are others," he says.
The emphasis on more fresh food that is ethically sourced (including in terms of relationships with suppliers) will continue, predicts Stern.
The corollary of this is that contractors will continue to find it hard to achieve the sort of margins they might once have expected, so the market will remain tough. "You cannot have both things," admits Stern.
"We are going to see the niche players taking on the larger groups more and more," predicts Doughty.
Similarly the bigger companies are going to need to learn, or re-learn, the skill of building and maintaining relationships or, perhaps more appropriately, partnerships in a tight market.
"Companies do not want the formulaic contracts approach anymore, they want something more bespoke," adds John Dowman, director of international projects at Tricon.
- "Often people do not know what the brand means outside the business. What is, for instance, Director's Table, what is Baxter & Platt's or Restaurant Associates to most people?" questions Doughty.
"Companies are going to have to spend more time and money getting behind their brands," he forecasts.
Financially, there may be some consolidation and merger and acquisition (M&A) activity. Some in the City predict the catering assets of Elior, which chief executive Robert Zolade is looking to take back into private ownership, could eventually become a target for the likes of Compass.
Within B&I, adds Dowman, there is now a significant shift away from nil subsidy contracts. "There is a realisation that a subsidised service costing, say, £100 per employee per year or even one that is completely subsidised can bring benefits in terms of worker retention, satisfaction, productivity and morale," he explains.
And competition from the retail sector, particularly around grab-and-go-style foods, is going to be a continuing challenge going forwards, Dowman predicts.
|Food as a percentage of turnover||32.4%||33.2%||33.6%||35.8%|
|Average number of meals per outlet||88,993||88,806||88,135||82,359|
|Labour cost as a percentage of turnover||45.7%||44.1%||43.8%||43.6%|
- Number of outlets and meals served (2005)