Contract caterers have faced their most challenging year in a decade, according to the British Hospitality Association's annual survey.

The Food and Service Management Survey 2006, which was published on Tuesday at the Royal Garden Hotel in London, showed a 2.3% drop in the number of catering outlets to 17,608.

This fall led to a 0.8% decline in turnover, to £3.86b; a slump in the number of meals served to 1.57 billion; and a fall in staff numbers with 120,335, 2.8% fewer than in 2004.

Phil Hooper, chairman of the BHA food and service management forum and corporate affairs director at Sodexho, said: "2005 was the most challenging year for a decade for the industry."

But he added the sector would continue to be face key challenges, including the growing levels of risk built into contracts, tight margins, sluggish growth and recruitment issues.

Last year saw the number of total risk and profit-and-loss concession contracts double to 6,164, accounting for 35% of the total.

Overall, 70% of contracts involve some element of risk for catering companies, compared with 10 years ago when most contracts were cost-plus.

The pressure on caterers to increase prices to business and industry customers also grows as clients increasingly demand lower subsidies, fuelling a greater drive to increase revenue per customer.

The annual survey highlighted that this had seen more healthy options on menus, which now make up 40-60% of dishes.

Labour costs were up by 2.8% to £1.78b, despite a decline in overall staff numbers.

Hooper said: "Staffing remains one of the fundamental issues facing the sector today with difficulties experienced in recruiting most workers, but especially chefs."

The report found that the industry needed to recruit another 25,000 full-time and 23,000 part-time staff just to replace those who left, but faced tough competition for skilled staff.

Falling contract numbers was partly a result of the Ministry of Defence's consolidation of business into single, multi-service contracts.

Operators also continued to ditch uneconomic contracts, especially in the education sector, where some blame was apportioned to Jamie Oliver's campaign for better school meals.

Hooper added that Oliver had "unrealistically" raised the bar on school meal standards.

"The expectations of some local education authorities and parents are unrealistic, leading them to believe that the food quality of school meals could be improved without an increase in food costs."

The full report is available from the BHA for £50.

UK Contract catering - the key figures

	2005	2004	% change
Turnover	£3.856b	£3.898b	-0.8%
Number of outlets	17,608	18,028	-2.3%
Number of meals served	1.57 billion	1.60 billion	-2.1%
Number of employees*	120,335	123,261	-2.8%

* includes full-time and part-time workers but excludes 100,000 casual employees

By Angela Frewin