Contract Foodservice Special

The market for contracted foodservices from offices to stadia, airports to airlines is heating up for a number of reasons. The travel bounce-back shows no sign of slowing down dramatically in the next year and employers, employees and analysts alike all agree that fun and food (preferably together) are key parts of the future of work plans for improving the location previously known as the office.

UK Consolidation, Asia Fragmentation

The UK Business and Industry sector at the top end of the market, particularly in the South East looks something close to a game of pac-man over the last decade as various small, boutique businesses were gobbled up pre and post pandemic. Pac-man in Chief was Bill Toner of CH&Co who had picked up brands such as Vacherin and Company of Cooks over a number of years and had managed to organize them in a way that retained much of their individual appeal with the support of the bigger balance sheet. Then at the end of January, market leader Compass Group announced a super pac-man move to buy the CH&Co group.

That in itself was not too much of a shock to the industry, it had been rumored for a while. What will be interesting is what happens next. Compass USA has got a very strong track record in acquiring these infill or bolt on acquisitions, sometimes making sure a fast-growing, attention grabbing upstart became part of the group. They retain largely their own identity and operating structures and use the powerhouse of the Foodbuy business to drive value through the supply chain.

The European business though has a less clear record in the same area where acquisitions have been made with brands more likely to be folded into existing operations leading to inevitable erosion of the brand DNA, and potentially value at the same time.

All of the commentary so far suggests that the UK will follow the US model and whilst there will be some behind the scenes efficiencies the core businesses will continue to keep their own operating and culinary identity. Convincing the client that the DNA they bought into is alive and well.

SSP also dipped into the market to acquire Airport Retail Enterprises in Australia a privately owned company. When I read about this I immediately thought it was a very strong move. Australia is almost unique in Asia for having a very differentiated airport offer with localism and nationalism stronger than in most locations but it is a trend that we're seeing more broadly in many of SSP's traditionally strong markets and so as well as gaining a much stronger base in Australia I'm sure they'll learn a lot about the future they'll see in other markets over time

Its not all coming together though. The top global caterers in a pre-pandemic world were already finding the Asian market difficult. If you take Asia Pacific region as 22 markets, there are multi-national corporations in 20 of them in a significant way.

Contract caterers not so much

Compass - 6 Markets

Sodexo - 13 Markets

Aramark - 2 Markets

Elior - 1 Market

Aramark got out of their JV in Japan last year and Compass Group quietly announced that they are pulling out of China in the coming months.

Sodexo have anchored their food business around their FM business which has a value diminishing effect in more mature markets but can be attractive in these emerging markets.

Leaving China seems like a dramatic move and I have an advantage of some knowledge that can't be shared here but from the publicly shared information the message from the board is brutally clear. If the market won't drive shareholder value it will be exited, the same has happened in Africa and Central Europe, there is a ruthless focus from the leadership post-pandemic which is understandable considering the positive headroom that still exists in North America the UK and the more mature EU markets.

The Pacific countries generally have scale although as Sodexo found, trying to work in both the offshore/remote services business and the city based corporate world is a challenge with very different models and a challenging cost base to commercialize.

Hong Kong and Singapore are both places it feels you should be as a business but are both tiny commercially. The total market size isn't particularly attractive so once you slice that up between two of the global players and 2 or 3 local companies and it becomes challenging to sustain a corporate structure.

The South East Asian countries are just too difficult*. Expensive to set up an entity, culturally less welcoming of global service providers, rife with corruption and legal but less than ethical workarounds, fragmented supply chains and political instability. The market is also shared amongst hundreds of local players, none of them big enough or mature enough to buy.

China in simple terms - the juice is not worth the squeeze.

India is like VR (Virtual Reality). Every year it feels like it could be the year it finally breaks through but every year consumer pricing continues to be relatively suppressed, a lack of regulation keeps the supply chain chaotic and inconsistent, salaries edge up, food costs spike. Making a living from food in India is very very tough.

I would expect further exits from the region in the next five years, this is despite a definite trend in large corporations moving more people into the Asia region or elevating their focus on the region. So unbelievable high population campuses primarily in India, but also in the Philippines and Vietnam are evidence that the look east will continue, but I'm not sure the caterers will be quick to follow.

The Battle For the Skies

That's probably a touch dramatic but airline food is seeing a new focus and a new generation of innovation focused around freshness, quality and sustainability. Singapore Airlines, always keen to lead went over their skies towards the end of last year with a sustainability solution that led to comparisons with hospital bed pans and was swiftly reversed. Meanwhile we're seeing continuing upgraded on European carriers and Middle Eastern market leaders alike. But does it really matter?

Short answer yes it does.

The onboard refreshments continue to score highly in the scorecards of importance in both economy and business class.

The interesting challenge is the full service 'free' solution versus the budget airline paid for solution. I'll use the airlines I'm most familiar with to illustrate the point but the data we're seeing points to the same challenges in the US and the EU as we're seeing in Asia.

Singapore airlines, my carrier of choice, considering where I live provide a strong case for investing in food, likewise ANA and JAL also continue to hold on to a tradition of elegance and almost romance of flying, even if it is in the back of the plane. This results in a food experience that is pretty well aligned with the overall experience and I'm sure to some extent is reflected in the ticket price.

I don't fly budget that often, but when Taylor Swift is in town things get expensive and so I took a few Scoot flights recently. Scoot is the Singapore Airlines low cost carrier, and on a non-swifty week the cost of of the flight is around US$130 (Singapore to Manila) and the equivalent Singapore Airlines flight is around US$250.

What businesses are waking up to is the personal ROIs that individuals are now running, whether its a post-pandemic thing or a Gen Z thing is less clear but whether its calculating the value of the commute to the office versus the expense or the lifecycle cost of a T-shirt we are seeing more and more of this ROI being done, and more and more value being attributed to experience.

The hierarchy of needs on a flight, beyond the baseline of landing safely, is driven by experience, the inflight entertainment, the service of the crew, the access to refreshments.

Building that solution yourself with Netflix on an iPad, and paid for refreshments plus the premium for a more comfortable seat and baggage will get you close enough to the price of the full service solution to trade up, unless you're genuinely buying on price in which case you're on Jetstar already.

What does this mean? The competition will again become the full service solutions, as routes get built back up and new routes become viable for more airlines the in cabin experience will be the battle ground and naturally food will become the biggest part of that. In order of importance

Seat Comfort: not much wriggle room for anyone including the airline with configuration constraints.

Wi-Fi: How much does the customer give you before its free?

Food & Refreshments: The biggest bang for your buck in changes and upgrades

Entertainment Options: Hardware is relatively restricted, software might bring more - Netflix anyone?

Team Service: Costs, Unions, Shortage of talent - keeping up will be a success

What does this mean for operators? More flex in menus, more flex in service times, more pre-order options, more sustainability focus, more treats around the main meal on long haul.

What can local caterers to do to step up

1. Fresh Forward. Fresh continues to signal quality. As the single biggest indicator of quality the perception of freshness needs to be accentuated and that means bringing the chefs to the customers, visible kitchens and dish finishing in front of consumers
2. Relentless New Its tempted to expand and extend, but the impact to costs makes this a tough strategy to deploy over an longer term period. High profile Limited Time Offers. Pop-ups, Guest Chefs and Themed Menus are a more effective way of bringing continued newness to your solution
3. Customization Keeping the customization element can be difficult without impacting the length of your queues or the increases in labour costs that they can bring. Self service toppings and additions are a great way to allow customers to customize without the queue. Build Your Own Burger/Salad/Burrito/Taco/Pizza are all good options
4. Unexpected Awesome Remember how awesome it was the first time they brought you ice cream on the flight? That feeling is difficult to replicate but the unexpected delight lives longer in the memory and so afternoon treats, ice cream hawking, a welcome to the building smoothie shot all go well
5. Be Truly Local. Local can mean many different things. In Singapore it can mean 'from Asia' where as in Australia it probably means from within the state and likewise in Japan. But whatever it means locally, define it, talk about it and live it. Buying local is never that easy and it can come with a price tag. However, it really resonates with customers and plays well into the freshness topic. One watch out, traceability matters. Finding out your local product was farmed in a far off land and packed locally never goes well.

*I am a Director and Shareholder of a contract foodservice business in Philippines