Business Breakdowns
· Matt Reustle, Asif Jeevanjee
[00:00:00] S0: Another theme that I was curious about is the general corporate office, which again, I'm doing exactly what you mentioned, just picturing Compass through this lens of the corporate cafeteria. But I am sure it extends elsewhere a bit into the rest of their business. But seeing businesses, rather than having one single hub, maybe move towards having several more spokes, splitting offices. You see the WeWork model and some of the other sharing models come into play. Are those net negatives? Do they have a material impact on the business? Thinking about that theme and somewhat of a shift away from the large corporate headquarters, which I think, particularly 30 to 40 years ago were the standard default. [00:00:00] S1: The office model is always evolving and I think it will continue to do so. I think Compass has also demonstrated an ability to evolve with it. Just one example of that is during the pandemic they started from scratch a delivery business which actually became quite significant over time to serve certain clients whose employees were working from home. You're right that the flexible office solution model has grown meaningfully in the last few years. And generally speaking, they tend to serve smaller headcount firms. And the reality is that those kind of businesses would not have been Compass clients anyway.
· Asif Jeevanjee, Matt Reustle
[00:00:00] S1: The office model is always evolving and I think it will continue to do so. I think Compass has also demonstrated an ability to evolve with it. Just one example of that is during the pandemic they started from scratch a delivery business which actually became quite significant over time to serve certain clients whose employees were working from home. You're right that the flexible office solution model has grown meaningfully in the last few years. And generally speaking, they tend to serve smaller headcount firms. And the reality is that those kind of businesses would not have been Compass clients anyway. [00:00:00] S0: When you start to transition in terms of seeing the earnings translate to free cash flow, thinking about the capital intensity of this business, what does that look like? The negative working capital, always a very interesting theme for a business. Is there significant capital intensity in this business? Where would that come from if it does exist and anything else in terms of thinking about the cash flow profile of Compass?
· Asif Jeevanjee
[00:00:00] S1: It is a very cash generative business and it's also fairly asset light business as well. Compass doesn't need to have a fleet of trucks to move food around. That's handled by the distributors. As I said before, they have negative working capital. But then the real kicker is the fact that they don't actually own the sites, those belong to the client. If you compare that with a restaurant business which actually has to own or lease the sites they operate out of, that's a really big difference. And one of the ways that this lends quite a competitive advantage to Compass is that whilst High Street players or Main Street restaurants, sandwich chains, etc. are going to see their costs increase partly from increasing lease rates, Compass isn't seeing that because they're not paying any rent on their premises. That's causing the pricing gap to emerge and get bigger, between what you'd pay to get a sandwich outside, versus eating in the Compass cafeteria. And I think that is a building competitive advantage. And particularly at a time when consumers are struggling with their budgets. I think that's going to drive potentially more volume back to the cafeteria.
· Matt Reustle
[00:00:00] S0: When you pair it with something like mid-to-high single digit margins, those don't scream for new competition to come into the market. They don't attract major new upstart investment necessarily. But in some ways the success of Compass to me would point to the opportunity for some of those larger players to maybe go out and look at a same acquisitive growth strategy, to roll up the market. Another theme that people love is industries ripe for roll up. Is that something that you have seen happening or what has stopped competitors from maybe going out and trying to become a more formidable force against Compass over time?
· Asif Jeevanjee, Matt Reustle
[00:00:00] S1: What would make that challenging is that, in North America, Compass bought most of the best businesses. There isn't a lot left to buy. It was rumored last year that Sodexo would buy Aramark, which would create another 800 pound gorilla, albeit not as big in food as Compass. But I think culturally that would be quite an interesting combination. We'd see how it would work out. So I think it would be challenging. And this is a really interesting aspect of Compass's strategy is, they have been exiting whole countries. Pre-pandemic, they were in about 50 countries and now they're down to 30 and I think they'll go a little bit lower than that this year. Why are they doing that? Many years ago, part of the strategy was to be a massive global player and begin emerging markets which were going to grow. But actually it doesn't quite work, because scale is only relevant at the local level. So what you really want to do is to be big in a particular country. Some of the countries where Compass has exited, they've sold to some of their competitors. So it could be that those players get very big and successful in those countries, we'll see. But I think Compass has exactly the right approach, which is to try and get big in the UK and in Germany and so on, which is mirroring the exact approach they took in the US. [00:00:00] S0: The limitations of the benefit on scale, does that cap out at the country level? Is it more regional? And I know this is more art than science, but where would you say the benefits of scale cap out when thinking about your point on region geography?
· Matt Reustle, Asif Jeevanjee
[00:00:00] S0: The limitations of the benefit on scale, does that cap out at the country level? Is it more regional? And I know this is more art than science, but where would you say the benefits of scale cap out when thinking about your point on region geography? [00:00:00] S1: Food is very much a local business. It's done at the country level. Having been very big in Germany is not going to help you in France in terms of buying food. So you really need to be big at the country level. Compass really found it challenging in some markets to get big, either because of local competition or because of the structure of the market. So they've really said goodbye to some markets that you would think might be potentially one day very big, but they've actually struggled to scale up in, and have concentrated on markets where they already have scale and where they're going to get much bigger. And with that, I think, comes long term improvements in profitability.