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Contract catering – the sustainable foodservice

Contract catering refers to food preparation and serving on a contractual basis at businesses, schools, hospitals and other organisations. As part of the broader facilities-management market, contract catering offers the highest outsourcing rate of 45–50% vis-à-vis other sub-segments (viz., people and business services, infrastructure and equipment services, etc.). Koncept Analytics expects the global contract-catering market to demonstrate a healthy CAGR of 4% over 2016–21, driven by both demographic and technological factors.

Demographically, the contract-catering market is benefitting from the global rise in disposal income and the concomitant increase in demand for customised food options focused on health, wellness and nutritional value. Simultaneously, technological evolution is providing a powerful tailwind. For instance, contract caterers are now using predictive analytics to maximise their operational efficiency and margin sustainability. This not only minimises wastage and expedites the procurement cycle, it also allows industry players to control procurement costs, which accounts for ~40% of the total operating costs in the contract catering market. Advanced technologies also enable contract caterers to create more efficient and cost-effective solutions, which in turn heightens client retention.

The increasingly competitive business environment is compelling organisations to focus on their core competencies, which is driving the rise in outsourcing of non-core functions such as foodservices to professional service providers. North America leads the global foodservices outsourcing market with an FY16 share of 51%, followed by Asia Pacific (30%) and Europe (28%). The primary end-markets include business and industry defence, offshore and remote, education, healthcare and senior, and sports and leisure.

The contract-catering market is also more resilient to macroeconomic uncertainties compared to the tourism industry, which was hit in 2016 by the political turmoil (and the Zika virus) in Latin America, the weak oil market in the Middle East, terrorist attacks in Continental Europe, and the weakness in the Chinese outbound market. Despite adverse business environment globally, the earnings of catering majors such as Compass, Elior and Sodexo demonstrated a positive growth trajectory.

Multi-year contracts are critical for long-term growth in contract catering, as they not only provide a sustainable source of operating cash flow, they also allow players to plan their capital structure (optimal mix of debt and equity funding), which supports both organic and inorganic growth. Large, integrated players tend to benefit from their diversified service portfolio and extensive global outreach. Their robust cost structures also create high entry barriers, which supports long-term profitability and the contract-based delivery business model. Industry players are also employing economies of scale through global purchasing organisations (e.g., Sodexo’s subsidiary entegra allows the company to efficiently manage food procurement across different client segments).

In this context, Sodexo stands as a perfect example. It has presence in ~80 countries, an operating margin of ~5.5% (FY12–16) and multiple contracts across various end-markets such as mining (Rio Tinto), aerospace (United Airlines), consumer staples (Colgate-Palmolive), sports (French Tennis Federation), telecommunications (Huawei) and O&G (Seadrill). The company’s guidance for 3% organic growth in FY17 and lower gearing vs. peers provides confidence over its FCF-generation capability in the long term.

 

Author
Ravi Kumar

Equity Expert

Data & recommendations as of February 27th, 2017 close

This document is an objective and independent explanation of the content of the recommendation and cannot be considered as adapted to a person or based on the analysis of the situation of a person.