by Brianna Crandall — December 5, 2014—Apex Insight’s latest report on the U.K. 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 labor 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.
Positive factors, drivers
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, according to the report.
Apex notes that 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, according to the report. 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 among users of the service. Compared to other catering segments, contract catering is seen as less volatile, benefits from a population of captive end-customers to serve and, as it operates from client premises, has much lower capital intensity.
Keys inputs: labor and food
Success in the industry requires effective management of the two key inputs, labor and food, which account for the bulk of operators’ costs, the report determined. 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.
Although it is customary to negotiate contract terms that pass on an element of the risk of food price volatility to the client, 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. However, since recent above-inflation increases in food costs have been passed on to customers, who largely accept this and expect it to continue in the future, contract catering margins have remained stable despite the economic downturn and rising food costs, with most companies reporting an improvement in their latest financial year, the report found.
Some convergence of FM and catering
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 are 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, found the report.
Competitive landscape
According to the report, the largest companies in the market are Compass and Sodexo. Both have expanded their service offerings 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 U.K. and hence offer them more attractive growth prospects. Sodexo derives an increasing proportion of its U.K. revenue from a range of 140 other services, while 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 U.K. 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. The FM groups include MITIE — which has had a series of successes in selling contract catering as part of its bundled service offer and has, as a 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.
Market outlook
The contract catering market is driven by a wide range of factors, which makes it challenging to predict how it might grow in the future, concludes the report. Some factors appear 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.
However, others are less positive. For example, changes in the nature of work, with more part-time workers and home-based workers who do not require a meal at their workplace, falls in university student numbers following fee increases and tighter immigration controls, and the trend for shorter hospital stays all have a negative impact on the demand for catering.
Apex Insight’s 59-page UK Outsourced Contract Catering: Market Insight Report, November 2014 explores these and other issues, and sets out a market forecast that takes into account their relative impact.
