Apex Insight report on UK contract catering market finds signs of recovery

Apex Insight’s latest report on the UK contract catering market finds greater cause for optimism regarding its prospects.

The industry was impacted by the economic downturn with the 2009 fall in employment leading to fewer people in the workplace requiring to be fed. Changes in the structure of the labour market, with increased part-time and flexible working, mean that the more recent recovery in levels of employment has not automatically led to a similar recovery in workplace catering.  However, other factors appear increasingly positive, such as the rise in the number of people in employment as the economy recovers, the increase in numbers of schoolchildren as the effects of higher recent birth rates feed through, and the increasing number of older people requiring residential care as the population as a whole ages.

Outsourcing has long been an important driver of the market, although its level, and hence potential impact on market growth, varies between different segments.

The market has several attractive characteristics. Compared to many support services, the provision of meals offers greater scope for differentiation and has impact on the overall satisfaction of employees. This helps to elevate the purchasing decision from being one purely driven by price and makes customers reluctant to terminate a contractor relationship while satisfaction levels are high amongst users of the service. While compared to other catering segments it is less volatile, benefits from a population of captive end-customers to serve and, as it operates from client premises, has much lower capital intensity.

Success in the industry requires effective management of the two key inputs, labour and food, which, as the chart shows, account for the bulk of operators’ costs.  As employers of large numbers of relatively low-paid workers, a key challenge for contract caterers is the recruitment, training, motivation and retention of their workforce.  This is critical as incidences of service failure are often the triggers of a decision to review a contract.  Caterers generally have some exposure to food price volatility.  It is customary to negotiate contract terms which pass on an element of this risk to the client however, in most cases, part of the risk does remain with the caterer and catering margins are likely to be impacted by above-inflation increases in food prices, as has been the case in recent years

There is evidence of convergence between contract catering and facilities management with many of the leading catering companies offering additional services to enable them to increase revenue per contract. Views of customers split between those who are keen on the idea of contract catering being part of an FM service bundle, to obtain cost and efficiency benefits, and those who see value in keeping it separate.

The largest companies in the market are Compass and Sodexo. Both have expanded their service offer to include a wide range of non-catering services and are now global companies with presence in a large number of countries, many of which are less mature contract catering markets than the UK and hence offer them more attractive growth prospects. Sodexo derives an increasing proportion of its UK revenue from a range of 140 other services. While, as it recently stated, its food service volumes continue to decline as a result of employee downsizing and cost-saving measures taken by its clients. Compass reports that over a quarter of its UK revenue (around 10% of its global revenue) derives from non-catering activities.

The two leaders have lost significant market share in recent years to a series of smaller rivals. These include specialists, such as Baxter Storey – which has continued to achieve year-on-year growth driven by a series of new contract wins – and facilities management groups. These include MITIE – which has had a series of successes in selling contract catering as part of its bundled service offer and has, as result, been able to double its revenue in the last two years – and Servest and Interserve, which both stepped-up their presence in contract catering following their recent acquisitions of Initial and 7-Day Catering respectively.

Prices have increased. Above-inflation increases in food costs have been passed on to customers, who largely accept this and expect it to continue in future. As a result, contract catering margins have been stable despite the economic downturn and rising food costs, with most companies reporting an improvement in their latest financial year.

About Apex Insight

Apex Insight is an independent provider of research and consulting services covering business and financial services markets in the UK and Europe. It publishes insightful market reports and carries out commercial due diligence and other bespoke consulting exercises to support managers, investors and advisers in making better business decisions.