Will Compass find a new direction?
Compass, for many years the golden boy of the London Stock Exchange, has lost its gleam after three profit warnings in the last 12 months.
Shareholders have grown impatient with a policy of acquisition-led growth that made it the world's largest contract caterer but has, according to some, left it with a shaky bottom line.
The poor figures were followed by the departure of UK boss Don Davenport and announcements that chairman Sir Francis Mackay and group chief executive Mike Bailey were also departing.
But high-profile exits may not be enough, and Compass has begun a wide-ranging review of the way it does business. According to food service consultant Chris Stern, this is "probably a good thing" - but where exactly is it headed?
Travel concession In May Compass announced a plan to save 50m in overheads and rationalise its back office. It has since halved its geographic divisions to four. More recently, it surprised many with plans to sell its lucrative but capital-intensive travel concession business SSP in Europe and the UK.
Compass said SSP faced rising competition and it wanted to concentrate on its core contract catering business. But the move is unlikely to please shareholders if the sale raises less than £1b.
One of the biggest hot potatoes for Compass and its peers is the snowballing debate over "invisible earnings" - the practice whereby caterers keep clients in the dark over the huge discounts they squeeze out of suppliers. Deutsche Bank suggests that caterers inflate buying costs to customers by up to 40% and many predict the issue will lose them revenue on two fronts.
As Mike Murphy, analyst at Panmure Gordon, puts it: "Suppliers are waking up to the fact that they're being screwed and clients are waking up to the fact that they're being screwed too. The sensible suppliers are lowering their reliance on Compass."
Compass's aggressive stance with suppliers cost it dearly last year after its UK profits took a £100m hit from the demise of key supplier Peter's Food Service. Compass has since shortened the time it takes to pay suppliers from 90 to 60 days.
"Compass needs to change so that it works with suppliers and not against them," concludes Murphy. "In five years' time the business model will be less adversarial and more a partnership."
It must also adapt to a more clued-up customer. "Clients are less receptive to the large corporates as they think they're being ripped off," says food service consultant Jonathan Doughty.
Setting the pace of change is Host Management, whose founder Jerry Brand sees his net pricing policy as the formula for the future, claiming to save customers up to 30%.
Brand believes companies which have grown fat from invisible earnings will find it hard to switch quickly to transparent pricing policies.
"Once you have your hand in the sticky tin it's very difficult to get it out," he says. He forecasts that a series of mergers and downsizings will see a new set of players dominating the scene within five years.
Sean Valentine, managing director of Missing Ingredients, reckons clients are now more concerned about receiving a quality service at an agreed price. Nevertheless, with the key business and industry sector largely static, Valentine believes Compass has to be more upfront about its pricing in order to build up "longer-term, sustainable relationships with clients rather than having contracts retendered on an annual basis".
Less reliant The trend in business and industry is towards boutique-style operations and freshly prepared, healthy food. This benefits smaller niche players less reliant on heavily discounted convenience and processed foods.
But Compass's acquisitive past has netted it a vast stable of quality brands to tap into this market. "Compass has niche businesses within its estate but it has to play these niche cards more," said Doughty. The snag is that the sheer variety of names blurs their unique offer, especially when several bid for the same contract. Doughty expects Compass to trim them down to fewer, more sharply focused brands.
Valentine suspects that Compass may follow the supermarkets in exploring new markets in which food is not the core element - perhaps forming alliances to boost its presence in facilities management by selling catering on the back of a bundle of services. Investors' historic preference for an undiluted food-service operation could, however, prove a hurdle.
Bob Payne at consultancy Tricon predicts a more commercial approach based on high street trends, brands and franchising that builds upon the success of Simply Food, Compass's joint venture with Marks & Spencer. Payne sees enormous opportunities in partnerships to pursue concessions catering at big sports events, such as Compass's joint venture on the Oval Stand at Surrey County Cricket Club.
Investors, on the other hand, may not warm to projects that can entail high upfront costs and delayed rewards.
While Compass clearly faces some challenging times placating the City and reworking its business model, it remains a highly profitable company with margins others can only dream about. As a result, most commentators are confident it will ride out the storm and emerge as a stronger and shrewder organisation.
