Major contractors experience boom in business by inking school, health care, multisite deals

Nation's Restaurant News, June 30, 2003 by Paul King

The pace of mergers among segment-leading contract companies quieted considerably in 2002, and contractors began to focus more on building organic growth within their divisions while reaping gains from earlier acquisitions.

That approach is proving to be a challenge for the business-and-industry and airline sectors, as the effects of the economy and the travel fallout from the 2001 terrorist attacks have suppressed business for foodservice operators in those markets.

But stellar gains in education and health care contracting -- including Top 100-leading growth rates in sales by two major Sodexho Inc. divisions -- showed off the segment's underlying vitality.

"I think we did well in fiscal 2002 despite some of the problems presented by the economy," says John Zillmer, president of the Food and Support Services arm of Philadelphia-based Aramark. "Corporate Services is still a little sluggish, but we have more than made up for that with the growth we've experienced in our educational markets."

One bright spot in the corporate segment for Aramark and its competitors has been the growing trend toward awarding multisite contracts -- a practice in which a corporate client will bid all of its foodservice at once. Historically, individual units within a company have been responsible for choosing their own foodservice provider.

Such "national" contracts give a decided advantage to large contractors over smaller, regional companies, as was evident recently when Citigroup awarded Aramark a 10-year, $450 million contract to handle foodservice for 34 cafeterias and four conference centers run by Citigroup subsidiaries in 15 states.

Similarly, Met Life awarded a 10-year deal to Compass subsidiary Eurest Dining services for 20 locations.

Aramark had one of the two major acquisitions in 2002, one that will be reflected in the company's financial reports for fiscal 2003. Last November the company acquired Fine Host Corp., the $350 million manager of a variety of foodservice accounts, primarily in education, business and leisure.

The other big purchase was made by Compass Group North America, which earlier in 2002 brought Bon Appetit Management Co. into Compass' sizable fold. Bon Appetit is a $300 million "boutique" management firm that provides upscale foodservice for corporations and universities. After years of successful growth in the Silicon Valley area of Northern California, Boa Appetit has branched out into the education field, with accounts in Texas, Minnesota and New York, among other states.

"Our acquisitions have given us strong positions in most of the on-site segments in the United States," says Gary Green, chief executive of Charlotte, N.C.-based Compass. "Now we can target ways to take advantage of our strengths to grow business in our existing accounts."

In the first half of fiscal 2003, Compass seemed poised to achieve that objective. The company's six-month financial report indicated revenue growth of more than 10 percent in its health care accounts, which are managed by Morrison's Management Specialists, and education. Primary and secondary schools experienced particularly strong growth, according to Nancy Quinn, vice president of Compass' Chartwells division. Much of that was due to the landing of new accounts, she said.

Even Compass' corporate sector, despite a weak economy, registered 4-per-cent growth in the first half of this fiscal year. Only the company's vending business remained flat, Compass reported.

Most contract companies reported their greatest growth in the primary- and secondary-school markets, which until recently had resisted the trend toward outsourcing. But no company matched the rate of growth enjoyed by Sodexho's School Services division in fiscal 2002. That group saw its annual volume rise by 82 percent to an estimated $650 million so that it led all Top 100 brands in the rate of sales growth.

The rise could be attributed in part to an aggressive sales force taking advantage of school administrators' willingness to turn over their cafeterias to outside management as well as to the absorption of school accounts from Wood Dining Services, the Allentown, Pa.-based company it had acquired the previous year.

Sodexho also realized a 32-percent increase in revenue in its health care division, primarily because of the shifting of Wood's hospital and nursing-home business to that division. The Sodexho health care group's sales growth rate ranked No. 5 among all Top 100 brands.

The Gaithersburg, Md.-based contract giant, the largest arm of Paris-based Sodexho Alliance, also is optimistic that military foodservice will provide a new revenue stream. After a lengthy review by the congressional General Accounting Office, prompted by jilted bidders, Sodexho's $881 million contract with the U.S. Marine Corps was approved. Even an attempt by several politicians to scuttle the contract in retaliation for France's refusal to support the war with Iraq failed.

The contract covers virtually all of the Marine Corps' bases in the United States, including Camp LeJeune, N.C., and Camp Pendleton in San Diego County.