Business Breakdowns
· Asif Jeevanjee
[00:00:00] S1: It's a really interesting history, fascinating because there have been so many plot twists along the way, but also I think it's a marvelous story of resilience because Compass has faced a number of challenges over its more than 80 year history. Every time it's come out stronger. The origin story really begins in World War II. The Churchill government in Britain at the time passed legislation that said any large munitions factory has to start operating a clean and safe kitchen and produce nutritious food for the employees in the factory. This was important because up until then, many of those workers would have been subsisting on meager rations. And it was important for their productivity and contribution to the war effort that they were well fed. What was interesting is some entrepreneurs saw this legislation and decided to start a catering business to help these factories meet their obligations. Two of the companies that were started at that time were Bateman Catering and Midland Catering. I'll come back to those companies. Interestingly, after the war, the catering business basically continued to flourish because employees quite liked the idea of meals being provided by their employer. And some of the more paternalistic employers quite liked the idea of looking after their employees, and looking after their health and well being. Also, there were more and more women starting to enter the workforce. In peacetime, the industry continued to grow and grow, and in the 1960s, a British conglomerate called Grand Metropolitan acquired Bateman Catering and Midland Catering, merged them together to form, effectively, what is Compass today. The business continued to flourish, and in the 1980s, the management of the division within Grand Met did a huge management buyout of what is effectively Compass. And a year later they took it public. Compass grew and grew through the 80s and 90s. It became known as the quintessential defensive growth stock, probably what today would be a quality compounder. The trajectory came to an abrupt end though, in 2000, when another conglomerate called Granada effectively bought Compass. There was really very little overlap between the two businesses, but the industrial logic was that Granada wanted to put its hospitality assets into Compass so that it could become a pure play media company in a red hot TMT market.
· Asif Jeevanjee
So the two companies, a year later, demerged and Compass emerged as this sort of hospitality company, saddled with hotel assets and service stations and roadside eateries and so on. That then led to a few years where Compass's performance wasn't quite as good as it had been. It was less focused. That really changed in 2006 when a new board had put in place a new CEO, a guy called Richard Cousins. And Richard Cousins had come from outside the industry. He was a breath of fresh air and he looked at this business and said, "This is a good business. We've actually done well on the top line. We can do better, but we've done well, but we need to introduce more financial discipline, more rigor, more accountability." And he developed a framework called the MAP framework, which goes very well with Compass, and that stands for management and performance. And it had five elements to it, which is about winning and retaining business, winning with the consumer, and managing costs. Those are food costs, labor costs, and out of unit costs. What it was was a tool to help people across Compass talk about the business in terms that really affect the value drivers of Compass. It became a common reporting tool and it became a tool to hold people to account. And it is still used in the business today. Richard Cousins tragically died in an aviation accident in 2018, just months before his planned retirement. Luckily, his successor had already been announced, Dominic Blakemore. And he's led the business since 2018 very successfully, albeit with a huge challenge in the middle, which was the pandemic. Probably the hardest challenge that Compass has faced in its history. At one point, revenues were down 40%, something the business has never seen before. Amazingly, the business has emerged stronger from it with a bigger revenue base today than it had before the pandemic.
· Matt Reustle
[00:00:00] S0: Very interesting history. I did not appreciate that it was really born out of a war environment. And I think we've seen quite a few businesses that at least have their ties to that. It sounds like over the history, and let's remove COVID from the situation, that was certainly a unique environment, but this has been a market that has just grown substantially over time. And even some of those pivots that they've had to make were either associated with some less than attractive combinations and a lack of focus on this core business around the dot com boom. And even with the changing of the guard in the late 2000s, that sounds like it was more focused on the cost side of the equation, not on the top line. So has this just been a very healthy, steadily growing market over history, that has offered a lot of runway for them to capture? Is that a fair way to categorize it?
· Asif Jeevanjee
[00:00:00] S1: I think you're right, it has been a healthy market. But I think it's really important to give Compass credit for some of the moves they made to really capture more than their fair share. And one thing I really missed out of the history of Compass is what they did in the mid-90s, which is to really launch in the US. Compass was predominantly a UK business up till then. They realized that the US was really exploding, due to a wave of outsourcing that had been taking place since the 80s. And they sent some executives over from the UK. One of them was a guy called Gary Green, who went on to run Compass in North America, and ended up doing so for 30 years. He just retired last year after 40 years at Compass. They did a number of things which were really really smart. So Compass was not very well known in the US, obviously, at that point. They were starting from scratch, and so they went out and bought a business. They bought a business called Canteen, which offered food services and vending. This is in 1994. It was quite a big business, about a billion dollars in revenue. And perhaps on the back of that, they won a massive contract the following year with IBM. Probably one of the biggest food service contracts awarded up until that point. I think what happened then is that gave them confidence and cash flow to go out and buy other businesses. They bought many of the very best businesses, independent regional businesses in the industry. They bought Restaurant Associates, they bought Bon Appetit, they bought Morrison Healthcare, they bought Flik. This gave them some of the leading brands in the industry. It brought in a lot of talent because these were entrepreneurial businesses that have been very successful, and they retain many of the management teams. What's really interesting is they didn't then just plaster those businesses with the brand Compass. They retained those brands which were known to American purchasing managers and then they did something really smart which was to sectorize the business. Restaurant Associates, let's say, is very strong within B&I. Morrison is very strong within the healthcare industry. Let's operate along those lines, because we recognize that what a hospital system wants from its contract is going to be very different to what a university campus wants, or what an office tower wants.
· Asif Jeevanjee
That sectorization approach has been incredibly successful. Interestingly, the competitors have not adopted that. Sodexo, for example, their next biggest competitor, a French company, has really gone out with the brand Sodexo. And I've often wondered, is this out of a Napoleonic desire to centralize, or is it because they thought it would be more efficient? Which in some ways it has been, but it has also not been as effective in the marketplace. This approach, to be sectorized to keep these well-known brands and to be quite aggressive on scaling up the business through acquisition was remarkably successful. And from a standing start, they've built the US business, or North American business, I should say, to be a huge business. So if I look at Compass's revenue today, about $42 billion, more than two thirds of that is coming from North America. And in fact, because it's a more profitable business, because it's so scaled, it's more than three-quarters of Compass's profits.
· Matt Reustle
[00:00:00] S0: It's really interesting, especially your point on the decision to keep independent brands operating within their sectors. And I find this to just be an interesting dynamic across the business universe. When companies decide to consolidate and have one enterprise brand that really operates across the system versus having the independents that have their sector specialties. I certainly wouldn't want to be getting the hospital food if I'm at the business. There are certain dynamics which make a lot of sense, but it also offers some theoretical expertise or it gives that idea that there is expertise in terms of operating those systems relative to some of the competitors. An interesting one that stands out to me, and one of those themes that you see across the business universe and fun to hear about.