Business Breakdowns
· Asif Jeevanjee, Matt Reustle
[00:00:00] S1: It is a massive market. It's very hard to size it accurately if you're looking at the global market. But if we use numbers that Compass provides, and they're in about 30 countries, they think that the food service market is about $320 billion. Now that is really just for the food service part of their business. They do have another part of their business which is on support services. So this is the providing of certain add on services like reception and cleaning, which is about 14% of their revenue. Some of the big players in this market are Sodexo and Aramark, but it is quite a fragmented market otherwise, with a number of independent regional players as well as; and this is a really important part of the market, in-house operations. And really one of the exciting areas of Compass is tapping into that and driving outsourcing of that over time. [00:00:00] S0: It's interesting to hear that market size, that 320 billion is a staggering number. I can remember looking at the advertising industry, as of a few years ago it was something like 700 billion. So you think about how much that market drives so many different businesses and this being essentially half of that, but substantial. When you mentioned the fragmentation and those large players, are there any with sizable market shares? Do they break out what Compass Group has in terms of market share, whether it's by their markets or anything else? And some of the other big players that you referenced in there as well. What does a dominant market share look like in this industry?
· Matt Reustle, Asif Jeevanjee
[00:00:00] S0: It's interesting to hear that market size, that 320 billion is a staggering number. I can remember looking at the advertising industry, as of a few years ago it was something like 700 billion. So you think about how much that market drives so many different businesses and this being essentially half of that, but substantial. When you mentioned the fragmentation and those large players, are there any with sizable market shares? Do they break out what Compass Group has in terms of market share, whether it's by their markets or anything else? And some of the other big players that you referenced in there as well. What does a dominant market share look like in this industry? [00:00:00] S1: So Compass is the 800 pound gorilla in this industry. They have about 11 to 12% market share of that market. If you were to take the next two biggest players, which is Sodexo and Aramark, and add them together, their revenues would just about equal that of Compass. In the case of Sodexo and Aramark, a much bigger share of their business is in facilities management. So within food, Compass is by far and away the biggest player.
· Asif Jeevanjee, Matt Reustle
[00:00:00] S1: So Compass is the 800 pound gorilla in this industry. They have about 11 to 12% market share of that market. If you were to take the next two biggest players, which is Sodexo and Aramark, and add them together, their revenues would just about equal that of Compass. In the case of Sodexo and Aramark, a much bigger share of their business is in facilities management. So within food, Compass is by far and away the biggest player. [00:00:00] S0: That's a good opportunity to give a little bit of an understanding in terms of what these things mean. Food versus facilities services. I think I have some broader picture, but can you just talk a little bit about how the money moves through the system. I assume that Compass isn't growing and producing all of this food themselves, but what does it entail to be the food services provider for a large corporation? How did the dollars move through the system, thinking about their suppliers, and then how they supply to the customers.
· Matt Reustle, Asif Jeevanjee
[00:00:00] S0: That's a good opportunity to give a little bit of an understanding in terms of what these things mean. Food versus facilities services. I think I have some broader picture, but can you just talk a little bit about how the money moves through the system. I assume that Compass isn't growing and producing all of this food themselves, but what does it entail to be the food services provider for a large corporation? How did the dollars move through the system, thinking about their suppliers, and then how they supply to the customers. [00:00:00] S1: If you look down at the food on your plate, there are a number of participants in the ecosystem that will have made that possible. So Compass procures food from producers, farmers and other suppliers. The food is then transported from the supplier to a Compass operated client location by food distributors like Sysco and US Foods and so on. On the client site, the food is prepared by Compass Chefs and served to the consumer. When you look at the money flows, they're pretty much in the opposite direction. The consumer purchases meals on site, Compass then pays distributors and suppliers. And there can be some balancing flows between Compass and the client, depending on the contract type, the level of any subsidy and performance against service level agreements.
· Asif Jeevanjee, Matt Reustle
[00:00:00] S1: If you look down at the food on your plate, there are a number of participants in the ecosystem that will have made that possible. So Compass procures food from producers, farmers and other suppliers. The food is then transported from the supplier to a Compass operated client location by food distributors like Sysco and US Foods and so on. On the client site, the food is prepared by Compass Chefs and served to the consumer. When you look at the money flows, they're pretty much in the opposite direction. The consumer purchases meals on site, Compass then pays distributors and suppliers. And there can be some balancing flows between Compass and the client, depending on the contract type, the level of any subsidy and performance against service level agreements. [00:00:00] S0: It's a good opportunity to talk about what contracts look like in this space. Whether it's the term of the contract, how they're priced and structured. Anything that you can share on that for standard contracts, to the extent that there are standard contracts in food services.
· Matt Reustle, Asif Jeevanjee
[00:00:00] S0: It's a good opportunity to talk about what contracts look like in this space. Whether it's the term of the contract, how they're priced and structured. Anything that you can share on that for standard contracts, to the extent that there are standard contracts in food services. [00:00:00] S1: Contracts are typically three to five years. But there are exceptions where they can be longer. In particular in the sports and leisure area, and in education where contracts can run up to eight years. And there are some historical B&I contracts. B&I is business and industry, where contracts have been longer still. There are three types of contracts. There's something known as fixed price contracts where the client will agree with Compass a fixed price per meal, and then it's up to Compass to figure out how to manage their costs to make sure they make a profit. There's another contract type which is Cost plus, where Compass will simply pass on whatever costs are incurred in making the food, plus a small management fee. And then there are P&L contracts where Compass and the client will agree to share the profits earned on the operation. [00:00:00] S0: From an investor perspective, even from the business's perspective, is there a contract type of those three that is most preferred? What results in the highest margins, or something that you see a transition towards more and more?