Compass Group's financial crisis and strategic challenges, 2001-2005

Compass Group Marketing Strategy Case Study

The time period of 2001 through 2005 was a turbulent one for Compass Group. Besides battling a global recession, the company was also implicated in ethically questionable activity including accusations of bribery at the United Nations to promote its Eurest Support Services (ESS) and win contracts illegally. In addition, there had been relatively flat demand in its largest markets including the U.S. with the business and industry catering segments struggling. The full implications of these challenges are seen in a financial analysis of Compass Group, which are shown in the Appendix. Table 1, Compass Group PLC Ratio Analysis, Table 2 Compass Group PLC Income Statement Analysis, and Table 3, Compass Group PLC Balance Sheet Analysis quantify the challenging strategic obstacles Compass Group faces today. The financial analyses are also insightful to ascertain the opportunities and threats facing Compass in both the UK and in their North American served markets. Based on insights gained from this analysis and from the review of the company's history between 2001 to 2005 a series of strategies are made for each of the four regions the company competes in.

Compass Group's Turbulent Flight: 2001-2005

Amongst the many costly and potentially damaging distractions Compass Group faces is the lack of a strategic plan that synchronized their many businesses (Paton, 2005, 31), resulting in gradual deterioration in their net capital expenditures that seriously eroded their ability to stay competitive in their core businesses. This is seen in the analysis of their balance sheet in Figure 2 in the appendix. As a result of this there is also a gradual deterioration of their financial strength and corresponding ability to invest in new markets, as net Capital Expenditures are flat-lining while depreciation continues to increase as a proportion of their total capital investment. It is imperative to keep the financial context of Compass Group in the forefront of their strategy and performance during this period in their history. First, they begin this period in their history with a negative equity position (-5.29 Net Current Assets % of Total Assets in Table 1) which signals the company literally is running out of cash to continue operations. 2002 gets worse, with this percentage plunging to -18.28. Meanwhile, Inventory Turnover is at the blistering pace of 56.05 in 2001, moving up to 56.32 in 2002, then achieving 53.11 in 2003. Using both the liquidity indicator of Net Current Assets % of Total Assets and Inventory Turns shows that Compass Group has more fundamentals problems than ethics violations, slowing growth in core markets, consolidation of the U.S. grocery retail market or the concern over unionization and higher labour rates globally; the company has a serious supply chain challenge as well. When corporate-wide inventory turns are in aggregate more than one per week (56.05) and growing (58.05) this signals massive inefficiencies and potentials for cost reductions in supply chain, inventory management, and logistics functions. It also signals that one or more of their core business units is functioning inefficiently and taking a disproportionate amount of resources to function. This is also exemplified in the confusion over branding (Lawn, 2001, 27, 28) and the efforts to unify them; it is evident that certain brands and businesses are taking a disproportionately higher amount of financial support and attention from senior management to the point of being a distraction than others.

As of this period, Compass Group has seven divisions and despite the glowing reviews of performance in each one with positive turnover (Garner, 2004, 22) and growth by Compass senior management, this in fact not the case. The eight divisions are in fact forcing the supply chain into a fragmented, inordinately expensive response to catering relative to travel concessions, Business & Industry, Defence, offshore and remote, Education, Healthcare, Sports & Leisure, and Vending. Critical to many of the business models in each of these sectors are earning and retaining contracts. When one of the managers' responsible Eurest Support Services (ESS) is caught bribing the UN to win more contracts the stability of several sectors' business models is threatened by fines and penalties, in addition to a loss of credibility (Gander, 2005, et.al). In fact the bribery activity by one subsidiary of Compass Group just provide evidence of how fundamentally chaotic the operations of the divisions had become, and how each began to become disconnected from the broader strategic direction of Compass Group (Mason, 2003, 14). The bribery incident with the UN is a symptom of another more fundamental flaw of the company and that is the lack of synchronization of strategies across the divisions. The UN contract value (Bill, 2005, 14) of £35M and the resulting ban from the UN (Bill, 2005a, 7) are significant for the company's reputation globally and further distracts them from the more systemic challenges they face in their core business. With the U.S. Congress launching a probe (Elan, 2006, et.al.) in all operations of Compass in the U.S. (Elan, 2005, et.al.) it is no surprise when shareholders ask for prompt action and voice agreement with the division being disbanded who sponsored the bribe in the first place (Compass Group PLC, 2004). As this period in the company's history ends, the urgency of getting the company more sychronised and into a more consistent direction becomes obvious (Afiya, 2005, 5) and (Frewin, 2005, 16). What is insidious during this time is the fact that heir supply chain and logistics costs are escalating while depreciation and net capital expenditures are flat-lining while cash flow drops. Compass Group must get beyond the many distractions to get a strategy together for first addressing their most potentially fatal flaw and that is the lack of supply chain and logistics efficiency compounded by conflicting demands from their divisions on this critical set of processes in their organization. The bribery case is evidence of a how inefficient the organization has become; lower prices and the ability to outbid competitors needs to be organically created through exceptional process performance, and this is clearly not happening during this period of time during the company's history.

Strategy Recommendations

In the North American, UK, Continental Europe and Rest of World (RoW) regions, there are specific strategies Compass can pursue to nurture and sustain customer retention yet also achieve organic growth. First and foremost the inefficiencies of the supply chain, sourcing, procurement and logistics need to be addressed through cost reduction strategies and thorough business process analysis to determine why, with 56 inventory turns a year, Compass Group is still delivering only a 1.59% Return on Assets (ROA) and very low liquidity. What is needed is a thorough evaluation of these centralized functions first, and second, a thorough cost reduction strategy to alleviate the liquidity drain on the company. These two steps, at the strategic level, are essential for the company to gain control over their viability. In conjunction with these measures, Compass Group must get in control over the logistics of their sectors as this could also be contributing to the exceptionally low levels of liquidity and financial strength of the company. After these steps are completed there needs to be a thorough knowledge management strategy put into place to capture the lessons learned

Teare, Rayner. 2002, 354-360). From this knowledgebase, best practices at the process level can be turned into a transferable competitive advantage that Compass can capitalize on for years to come. These steps of first determining where the wasted resources are in their supply chain and internal processes, making the appropriate reductions in overlapping processes and if necessary staff, and then capturing this knowledge is necessary for Compass to be able to execute on the following strategies by region.

Beginning with the North America market, the greatest potential is in the Defense, Offshore and Remote business, followed by Travel Concessions, then Sports & Leisure and healthcare. The catalyst of the growth strategy within the North American market must get centered back on contract catering and support services first by streamlining the supporting supply chain, procurement and sourcing strategies supporting this area of North American operations. The development of Contract Catering needs to be spearheaded with aggressive development of additional Defence Offshore and Remote contacts will working diligently to sustain and grow customer retention in this critical vertical. Likewise in the Sports & Leisure and Healthcare markets, there is significant growth potential in each of these sectors as well. First streamlining the underlying systems and processes that support these key sectors is critical, followed by targeted nurturing and business development strategies to gain the greatest potential increase in customer retention. The travel concession business, clearly unprofitable in Europe, needs to be evaluated in North America given its turnover in the past.

In the UK, the majority of customer retention is within the Defense Offshore & Remote sector, followed by the Business & Industry sector, the relatively low contributions of Travel Concessions make this business both in the UK and within Europe as a candidate for selling off. Intuitively speaking the inherent logistics in managing travel concessions make this an expensive business to sustain and grow, and given the supply chain inefficiencies uncovered through financial analysis, this specific business needs to be evaluated for selling off. What is most critical as a strategy for Compass in the UK is to strengthen its contract business in the vending, Defence, Offshore and Remote sectors is critical. Compass needs to consider making more competitive terms in their contracts, specifically concentrating on Service Level Agreements (SLAs) and the development of more transparency and visibility into their service and support processes for these critical customers. Organic growth needs to be driven through the offering of new services and the electronic enablement of its supply chain, again underscoring the need for creating a more efficient and cost-effective supply chain, procurement, sourcing and logistics function. All of these factors need to be taken into account to make Compass more agile, responsive and accountable to their most critical customer bases in the UK, to ensure they continue to earn their business.

In Continental Europe where Compass is facing significant challenges in its core businesses including Defence, offshore & Remote which has been troubled with a lack of new contracts and Business & Industry also having negative to flat growth, the priority needs to be on creating new contracts in Sports & Leisure and Healthcare. Travel Concessions has delivered a high turnover yet is a difficult business to operate given logistical challenges throughout Europe and is potentially one of the sectors taking an inordinately high level of financial resources to run. Sports and Leisure is the sector delivering the greatest turnover, yet it is by nature a cyclical and often unstable market. Additional business development strategies and programs need to be put into place to nurture and grow existing customer sales in this sector while looking at customer reference-based strategies for increasing new or organic growth.

In the Rest of the World (RoW) geography segment, healthcare is the sector with the highest turnover followed by Business & Industry with Defence, Offshore & Remote and Education having positive turnover as well. Travel Concessions in this geographic has been a costly business to operate, delivering negative turnover. This illustrates the point made earlier of Travel Concessions being an inordinate drain on the financial and operational sources of the organization. The strategy in the RoW geography needs to first build a vertical marketing organization that can penetrate the healthcare markets of specific nations and gain new business rapidly, as this sector is growing rapidly. Second, the Business & Industry sector needs to have a more concentrated focus on multicultural sales and business development teams to understand unmet needs and tailor contracts to fit the unique requirements of these markets. Third, the development of Defence, Offshore & Remote needs to be completed using reference accounts from North America and the UK, two geographies where Compass has a strong presence in. The use of customer referenceability is going to be powerful strategy in the RoW sector due to the credibility and expertise that will connote for Compass in gaining new accounts. There is also the need for defining SLAs that are applicable to the needs of new and existing customers in this geography.

While the strategies for Compass across all four regions vary significantly, there is are the critical strategic needs of getting a more efficient supply chain, procurement, purchasing and logistics system in place, alleviating duplicated processes and most likely, duplicated departments in the process. If executed well this could trim expenses and streamline processes far enough to ensure their viability without bond-based debt for the future. As Contract Catering and Support Services is a core functional area, Compass needs to invest more heavily in this area, looking restruct5ing this business to make it more agile and able of competing globally. Today given the financial analysis completed it is a reasonable assumption that Contract Catering and Support Services can be made significantly more efficient. Second, Compass needs to sell the European Travel Concessions business as it is not delivering an acceptable level of turnover in the period of this analysis. Over and above all these recommendations there is the urgent need for the strategic plan of the company to encompass all sectors strategies to alleviate the maverick behavior that led to the bribery at the UN. In addition, the company needs to create the role of Chief Governance Officer and initiate a governance, risk and compliance strategic plan that has an audit of ethics training for everyone in the organization. Ethics needs to be turned from a weakness to a strength as any more of these lapses could irreparably harm the core business model of the company, its contract business.

Appendices:

Table 1: Compass Group PLC Ratio Analysis

Profitability Ratios

ROA % (Net)

ROE % (Net)

ROI % (Operating)

EBITDA Margin %

Calculated Tax Rate %

Liquidity Indicators

Current Ratio

Net Current Assets % TA

Debt Management

LT Debt to Equity

Total Debt to Equity

Asset Management

Total Asset Turnover

Receivables Turnover

Inventory Turnover

Accounts Payable Turnover

Property Plant & Equip Turnover

Cash & Equivalents Turnover

Per Share

Cash Flow per Share

Book Value per Share

Table 2: Compass Group PLC Income Statement Analysis

Total Revenue

Selling General & Admin

Depreciation & Amortization

Other Operating Expense

Total Indirect Operating Costs

Operating Income

Interest Income

Gains on Sale of Assets

Other Non-Operating Income

Total Non-Operating Income

Earnings Before Tax

Taxation

Minority Interests

Equity Earnings

Discontinued Operations

Net Income

Average Shares Basic

EPS Net Basic

Average Shares Diluted

EPS Net Diluted

Shares Outstanding

Table 3: Compass Group PLC Balance Sheet Analysis

Cash & Equivalents

Short-Term Investments

Cash & Equivs & ST Investments

Receivables (ST)

Related Parties (ST Asset)

Inventories

Current Tax Assets

Other Current Assets

Total Current Assets

Gross Property Plant & Equip

Accumulated Depreciation

Net Property Plant & Equip

Receivables (LT)

Long-Term Investments

Intangible Assets

Deferred LT Assets

Other Assets

Total Assets

Accounts Payable & Accrued Exps

Accounts Payable

Current Debt

Current Lease Obligations

Other Current Liabilities

Total Current Liabilities

LT Debt & Leases

Pensions & OPEB

Deferred LT Liabilities

Minority Interests

Other Liabilities

Total Liabilities

Common Share Capital

Additional Paid-in Capital

Retained Earnings

Other Equity

Total Equity

Total Liabilities & Equity