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Compass has the experience in the U.S. with these markets to exploit this opportunity. The military and offshore markets have also been identified by management as strong potential sources of growth in the UK.

Another opportunity is with new markets, which include arenas, zoos and other public facilities. This emerging market is relatively untapped, and its size somewhat undetermined, pending the creativity of the catering industry. There appears to be good opportunity for growth that involves the maintenance of traditional margins, if Compass can win first-mover advantages at each facility.

One other source of opportunity is in existing markets, even the mature ones. The industry in the UK still has many smaller competitors. Compass can compete with these firms on price, and also on the provision of ancillary services, which many of the smaller firms simply do not have the expertise, equipment or manpower to provide. This gives Compass the opportunity to win market share by simply outcompeting the smaller firms, or by acquiring them to gain their customers.

In the U.S., there are several key threats. The first is the stagnation in the core businesses of Business & Industry and Vending. These businesses amount to almost half of Compass' revenues but the markets have reached maturity. Margins are already tight, and 75% of the industry is contracted. The remaining non-contracting segment is viewed optimistically by management, but those customers who have not switched to a major institutional food provider may have good reasons for not doing so. It may be difficult to improve revenues in this sector going forward.

The U.S. market, for most businesses, has always been subject to intense competition. The three largest providers of institutional food service are all heavily active in North America. Sodexho has a dominant position in the education sector through the Marriott acquisition and Aramark is the dominant company in the market (Weinbeger, 2005). Those three companies, however, account for less than half of the total market. That share is growing, but there are also a number of smaller competitors who ultimately will be forced to compete on bases other than price. With price pressures from the two major competitors, a host of smaller competitors driving the service side, the U.S. market's competition level will test Compass in the years to come.

Another threat is that of oil prices. In the UK, the cost of transportation is not high, given the small size of the country. In the U.S., transport costs represent a significant threat, given the distances goods must travel between their place of production and end destination. Goods must be mass-produced and then distributed nationally, but this model requires low transport costs. A significant rise in fuel prices will cut into, or erode entirely, Compass' margins.

There are a couple of key opportunities. Health care is pre-eminent among them. The U.S. was subject to one of the world's largest baby booms, and those boomers are entering their senior years. An extrapolation of demographic trends indicates the demand for nursing homes will continue to increase for years to come. This is the strongest growth sector available in North America, representing significant opportunity for Compass.

The other opportunity is margin increase. The U.S. still has room for growth in many key markets. The U.S. has many more potential suppliers than does the UK. Compass is growing. Put together, this creates a climate where Compass has stronger power relative to its suppliers than it enjoys in the UK. Yet, there remains a gap between the margins in the two countries. There appears to be opportunity, and management agrees, to increase margins in the U.S. And help close that gap.

Q3. The UK is the most troublesome market for Compass. It is the second-largest for the company, but suffers from major structural problems - stagnant revenues, declining margins and limited opportunity. For the time being, Compass can consider their B&I business to be going nowhere and leave it be. For management's plans and optimism, the ever-declining margins in the UK, led by this sector, are a burden on shareholder value. In lieu of finding a way to staunch the bleeding, Compass should look at avenues to divest itself of this business. They should instead focus their resources on areas with opportunity, in particular health care. This market still has growth potential, and the UK still generates better margins than does the U.S. For the time being. The major risk to this strategy is that it undermines management's view that economies of scale can help to restore profitability. This view is optimistic rather than grounded in facts, so this risk is not as great as management believes it to be. They seem to have an emotional attachment to the B&I business in the UK, and are starting to throw good money after bad at it.

In the U.S., Compass should continue to focus on the health care market, and should also put money into education. Though the nutritional value of their food is no better in the U.S., the culture seems more forgiving of this, so the threat to this market is not as substantial as in the UK. The health care market will continue to grow in light of the aging baby boom generation. Moreover, this market requires additional competencies besides low-cost operation. This provides for greater opportunities for differentiation. The more Compass develops these competencies in the U.S., the better they can translate these to the UK market. This makes the strategies in the two markets complementary.

Compass also needs to shift its purchasing requirements slightly, to hedge against rising fuel prices. They need to take advantage of the depth of potential suppliers in the U.S., to ensure that the suppliers are well-situated in each area of the country. The benefit will be that they reduce the risk of high fuel prices, while maintaining supplier diversity. Corresponding to this shift to more local suppliers will be a greater ability to offer organic foods and fresh produce. These products offer higher margins, and the baby boomers not only have the wealth to pay for them, but the desire to consume them. This will ultimately help to improve margins in the U.S., as well as give them a competitive edge when attempting to secure nursing home contracts. At present, nursing homes have strong power over their suppliers, but the baby boom is spurring growth in that industry to meet escalating demand. This will force nursing homes to compete - something they do not have to do now - and will weaken their power over suppliers.

The European market is fairly undeveloped. Compass' operations there do not seem to have any particular focus, especially not in their core industries. Compass has decided in favor of a presence in these markets, but it remains unclear what role these markets will play in the company's strategic objectives. Compass should move to take advantage of the opportunities in this market. They should do so incrementally, however, since this market does not appear to have the same degree of lucrative growth potential as some of the other opportunities they are currently presented with. The one weak spot is vending machines, and this unit can be sold off (Wearden, 2007).

In Asia, there are two significant strategies that should be undertaken. Asian markets in general have a rapidly expanding middle class. Compass has worked to establish a presence in China and should move aggressively to expand on that foothold. The Beijing-Shanghai train line is one of the busiest and most prestigious in the country as evidenced by the fact this line was made the first bullet train in China (Lu, 2007), and the exposure they will receive on that line will open up other opportunities on China's eastern seaboard. Given China's demographics and wealth distribution, the best opportunities appear to be in transportation, B&I and higher education.

Having developed good relations with the Chinese government, Compass is in a strong position to develop all of these markets.

The other key strategy for Asia would be to expand in Japan. They currently operate in the B&I sector with Seiyo, and can expand into the Vending sector easily. Japan has one of the world's highest densities of vending machines (Japan Guide, 2008). What is a dying industry elsewhere is booming in Japan. To enter this market will likely require an acquisition, but with a strong extant presence in the form of Seiyo, this does not represent a significant risk. Moreover, the other businesses in Japan show room for growth, due to low market penetration of institutional food providers.

A corporate-wide strategy would be to address weaknesses in governance and public relations. Compass' public relations issue in the UK took them by surprise, when it probably should not have. The company had a tendering problem that cost them a place as a UN vendor and subjected them to lawsuits from competitors. This scandal resulted from poor governance. The chances of…[continue]

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