Business Breakdowns
· 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.
· Asif Jeevanjee
[00:00:00] S1: That's right. Sectorization is a really interesting approach and it enables a number of benefits. So one is the ability to use reference contracts in a pitch more effectively. If a potential client is, say, a hospital system, Compass can show them what they've accomplished in another hospital system of a similar size, maybe in the same state. And that's much more persuasive than showing something generic or from a different sector. And down to the site level, contracts are very bespoke and Compass's brand and sectorization approach has really helped with that. In fact, it has been so effective that Compass has taken things to the next level and sub-sectorized the business. So today, Compass operates along 27 sub-sectoral lines. I've got a fun story to illustrate that this really is how Compass functions. During the pandemic, Compass, along with the rest of the sector, was under intense pressure due to the lockdowns. And I had a hunch that if Compass were feeling the heat, then the self-operated part of the market were going to be feeling it even more keenly and that that might actually drive more outsourcing. To test the theory, I commissioned a survey to ask various organizations whether or not they currently outsource their catering, and if not, whether they planned to do so. And if they did plan to outsource, who were they considering partnering with? Was it Compass? Was it Aramark, Sodexo or someone else? When the results of the survey came back, they did indeed show that many organizations were contemplating subcontracting out their currently in-house operation. But Compass hardly came up as a choice. This was a bit of a head scratcher. And then it hit me that whilst we investors know who Compass is, the decision makers at the clients don't necessarily know the name Compass. They deal at the subsector level with brands like Bon Appetit and Flik and Morrison and Chartwells and so on. And a revised questionnaire did bear this out. So that was quite a nice proof point about sectorization.
· Matt Reustle
[00:00:00] S0: On the point of market penetration, the adoption of food services, whether it's versus the alternative of providing in-house services or just not having any services at all. Do you have any sense of where that stands today in terms of market penetration and however that might be measured?