managed-services companies

Managed ' -services

Companies The New Scorecard for

On-site Food Service

by Dennis Reynolds

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! n the June 1997 issue of Cornell

Quarterly I described the four leading managed-services companies operating in the on-site food- service market. 1 That article addressed basic issues such as on-site food-service segmentation and market-segment saturation. Further- more, I focused on branding as a key competitive strategy that the major companies use---each in distinctive ways--to differentiate themselves from one another. The article concluded with some predic- tions for the future of on-site food-

1 Dennis Reynolds, "Managed-services Companies: The On-site Food-service Segment, Cornell Hotel and Restaurant Administration Quarterly, Vol. 37, No. 3 (June 1997), pp. 88-95.

Dennis Reynolds is a Cornell University Ph.D. candidate studying at the School of Hotel Administration ~der 17@cornell. educe.

© 1999, Cornell University

S4 HOTEL AND RESTAURANT ADMINISTRATION QUARTERLY

service operations and for the industry leaders. The overall picture was one of rampant competition conducted by warring behemoths.

As predicted, the industry has become more like its commercial- restaurant sibling in terms of complexity of operations. The similarity is seen particularly in the wide- spread use of multibranding, which spans well beyond just one or two concepts in a given location. While I predicted that the use of various forms of technology and investment in human resources (such as management development beginning at the unit level) would increase, I underestimated the resources that the leaders would allocate to those efforts. For example, a quick look at the top managed-services companies' web pages illustrates how savvy organizations are recruiting new management talent via the internet while touting their diverse services. Management development--including training to better manage a diverse workforce--is evolving into a specialized science, and is being financed at a level not seen up until now. Moreover, the leaders have become even larger, most notably during the last two years, creating a more homogeneous competitive environment than I expected.

While organic growth has been impressive, growth through acquisition has made keeping track of which managed-services parent owns which company extremely challenging. Perhaps the biggest surprise is that the big four have become the big three. As a result of the merger of Sodexho USA and Marriott Managed Services, to form Sodexho Marriott Services (an allied subsidiary of Sodexho Alliance), three firms now dominate the business: ARAMAR.K, Compass Group, and Sodexho Alliance.

Those changes encouraged me to take another snapshot of the managed-services landscape to get

a handle on what has happened and what is likely to come next. In this article I describe some of the major changes in the numerous segments and recent changes experienced by the leaders. I conclude with some thoughts of what the future holds for the industry and the companies that dominate it.

Industry Overview Despite cautious projections for the past two years, the food-service industry has witnessed respectable growth. In 1998, for instance, the industry enjoyed real gains of 2.8 percent over 1997 and sales nearing $352 billion. Projections for 1999 are positive, with forecasted real growth ranging from 1.9 to 2.6 percent. If the projections are realized, 1999 will be the eighth con- secutive year of growth. 2

Sales in the on-site arena also increased during 1998 and are expected to continue upward in 1999, reaching in excess of $80 billion. Growth in each of the on-site seg- men t s -wh ich include food outlets in business and industry, schools, universities, and colleges; hospitals, skilled-nursing centers, and elder- care centers; correctional facilities; recreational facilities; and child-care centers--was positive, with an aver- age growth in 1998 of I percent. The recreation segment actually bested the overall food-service industry's growth, with an increase of around 4 percent. Those rates of growth are expected to repeat in 1999)

While seemingly modest, the increase in on-site food-service sales is impressive, given the downsizing that many client-based organizations are experiencing-- most notably in the health-care segment but also in mainstream

2jacqueline Dulen and Margaret Sheridan, "Outlook '99: Encore, Encore," Restaurants & Institutions, January 1, 1999, pp. 51-66.

~Dulen and Sheridan, p. 51.

i t ie three !e~:~,iim! matu~ge ~.~'~

June 1999 • 65

Exhibit 1 Estimated market penetration by managed-services companies

Operated by managed- Market segment services companies

Business and industry 85 to 90%*

Colleges and universities 60 to 65%*

Hospitals 40 to 45%

Recreation 35 to 40%

Nursing homes, extended care 20 to 25%*

Schools 15 to 20%*

Retirement centers 10 to 15%

Corrections 10 to 15%*

Child care 5 to 10%

*An increase since 1997.

corporate America. 4 In the face of downsizing, operators have been able to increase sales primarily through increased capture rates, as well as higher aver- age checks. Even though the number of people in a building is typically smaller (in the case of a corporate headquarters or a hospital, for example), the number of people patronizing the food-service operation is greater.

The increased capture rates and check averages are largely the result of the leading managed-services

companies' innovative practices, such as multibranding, elaborate mer- chandising and marketing, and de- tailed market research. The leaders are also integrating advanced inventory-management systems, management development, and cross-utilization of labor, producing impressive cost reductions. Those activities constitute a redefinition of contract food service.

While the consensus is that managed-services companies now operate about half of the on-site food-service operations, there is no agreement on what the market penetration is by segment. Interviews with executives from the three giants and several clients in each segment, as well as studies by research firms such as Chicago-based Technomic, suggest that penetration has increased during the last two years in business and industry, colleges and universities, nursing homes, schools, and corrections (see Exhibit 1).

4 Downsizing in corporate America is regularly addressed in the popular business press. Consoli- dation in the health-care industry began more than 10 years ago. See, for example: Peggy Leatt, G. Ross Baker, Paul K. Halverson, and Catharine Aird,"Downsizing, Reengineering, and Restruc turing: Long-term Implications for Healthcare Organizations," Frontiers qf Health Services Ma, - agement, Summer 1997, pp. 3-I 7.

Operators in each on-site segment have experienced fierce competition and at the same time have had to adjust to segment- specific trends, as discussed below.

B u s i n e s s a n d i n d u s t r y . Key changes in the B&I segment include responsiveness to consumers' re- quests, redesigned eateries, expanded menu offerings, and increased hours of operation. Food service in offices and factories began largely as a means to increase productivity--and was a cost center on the company's income statement. Today, firms' food operations are a perquisite for employees that no longer need to be subsidized by the employers. Menus, eatery design, and service styles, particularly in corporate cafeterias, now rival those found in avant-garde food courts in trendy U.S. malls.

For example, the ARAMAP.K- managed outlet at Goldman Sachs, in the Wall Street area of New York City, is a multi-station market-style eatery. There is no traditional back- of-the-house area; instead, everything is prepared in the marketplace, and most items are cooked to order. The specialty-coffee area, which bears the internal brand name of Java City, is so popular that it pur- portedly contributed to the demise of two neighboring coffee shops. 5

A good example of paying atten- tion to demographic profiles and meeting customer needs in the business-and-industry segment is the Sodexho Marriott account at World Bank in Washington, D.C., which includes multiple food stations offer- ing five ethnic cuisines. The diversity meets the needs of a largely international clientele that typically buys 3,500 meals every weekday in the main eatery.

Presentation and response to demographic realities are only part of

Sjanice Matsumoto, "N ontraditional Noncommercials," Restaura,ts & hlstitutio*lS, January 15, 1999, pp. 45 58.

. I',IIR~F,[I, HOTEL AND RESTAURANT ADMINISTRATION QUARTERLY

these operators' success. Today's business-and-industry food service is adept at emphasizing ambience and providing a contrast to the business environs in which employees-- the food-service customers--spend most of their waking time. Opera- tors and corporate executives realize that the eatery should have its own color scheme and atmosphere (as compared to the work environment). That is a vast departure from just a decade ago, when simply of- fering food was the primary objec- tive. Business-and-industry operations are now more akin to theme restaurants than cafeterias.

Eurest, the business-and-industry division of Compass Group's North American division, has worked with Amway Corporation to provide just such a departure from the food service of yesterday to 6,500 employees at Amway's corporate headquarters. The main eatery features antique furnishings and a homey feel. The marketplace has retail stations with baked goods, grilled items, and soups and stews, as welt as more traditional areas, such as a deli. The eatery looks nothing like the sur- rounding office complex; it more closely resembles a theme restaurant featuring comfort food.Judging from the healthy participation rates and check averages, the operation is a success.

Other notable departures from traditional business-and-industry food-service practices are hours of operation and menu design. Until recently, the typical employee caf- eteria was open only for lunch (some also offered limited breakfast items for a few hours in the morn- ing). The menu was almost always a static cycle menu punctuated with occasional specials. That is no longer the norm. Today many eateries offer service for multiple day parts, with menus that vary often and not according to a cycle. Customers can no longer equate Mondays to spa-

ghetti. Instead, most operators use an extension of the marketplace design, providing a wide variety of options.

Business-and-industry operators are looking at the business today from the perspective of demand rather than supply. For example, increasing sales by extending hours makes good sense when one considers the possible gains in revenue. Moreover, tapping demand by extending hours--when implemented correctly--increases the productive use of the space and the food- service staff. 6

Educa t ion . Today's education subsegments, including both elementary- and high-school food service and college and university food service, have also changed dramatically in recent years. In schools, reductions in federal reim- bursement have spawned fresh approaches to the business. Today the emphasis is on reducing costs and increasing participation. That is a challenging task, given the typically tired facilities and short lunch peri- ods. A slow rise in enrollment is helping many operators grow, yet every operator is aware of the need to increase customer participation above the current mark of 50 percent.

Managed-services companies are achieving operational gains from economies in centralized production methods. Those gains are made possible in large part by contracting with entire school districts. Also, managed-services operators typically seek add-on business from child day-care centers, adult day-care centers, preschools, and private schools that can be served without adding substantial fixed costs, com- monly through central production

~' For more on productivity analysis and enhancement, see: Dennis Reynolds, "Productivity Analysis in the On-si te Food-service Segment," Cornell Hotel and Restaurant Administration Quarterly, Vol. 39, No. 3 (June 1998), pp. 22-31.

systems or by using production kitchens located in nearby larger operations.

The most recent change lies in the management philosophy of school food service; operators today view the business as a restaurant or dining enterprise. They take a business approach that focuses on market demand (requiring specialized knowledge of the customer) and that uses such practices as branding to increase participation.

The challenges in college and university food service are similar to those in the business-and-industry segment. Students leave for college as seasoned consumers, unwilling to accept mediocre food service. As a result, the dorm food experienced by many baby boomers, including the stereotypical "mystery meat cas- serole," has disappeared along with the drab college canteen. Today most eateries are arranged in food-court fashion, and many offer such at- tributes as exhibition cooking. Some even boast full-service dining areas.

In the last few years operators have realized that students like to eat at nontraditional times, such as late evening, which can stretch to 2:00 AM. Tapping that demand means using labor creatively and integrating self- service where appropriate.

Those operators who have up- graded their eateries to feature diverse menu offerings (e.g., an assortment of ethnic cuisines and vegetarian choices) can be confident that the rate of students' participation in residence-hall board plans will at least keep pace with college enrollment. Moreover, add-on sales can be realized through upscale caf4s and kiosks that are not part of the board plan.

Heal th care. Each of the health- care subsegments (hospitals, skilled- nursing centers, and elder-care centers) offers new challenges to operators. Hospital food service probably presents the most complex

June 1999 • 81

environment, owing to the increase in out-patient services, reduced length-of-stay for inpatients, and the unprecedented consolidation and downsizing that has typified health care in the 1990s. 7 Most managed- services companies have responded by diversifying into other services, such as housekeeping and facilities maintenance.

There is, however, an underdevel- oped market in health-care food service, as evidenced by the success many operators have achieved by upgrading service and integrating national brands. Indeed, many operators have found that upgrading service to patients, despite a small increase in the patients' cost, con- tributes to their overall satisfaction with the institution. Furthermore, approaching employee and public food service in a manner more similar to that now found in business and industry can result in dramatically increased revenues and enhanced customer satisfaction.

The strategic approach that focuses on the end user is also the impetus for multisite and multi- service contracts. Client-based organizations in all areas o f health care are beginning to understand that the skills offered by managed-services companies can improve the overall quality of care and increase value to both patients and employees. Along with such gains in quality come cost savings through integrated, standardized systems.

According to a survey conducted by Modern Healthcare, food service remains the department that hospitals most frequently contract out. ~ The trend is even more pronounced in skilled-nursing and elder-care centers; the survey reported a dra- matic increase in contracting in that subsegment in 1997. Surprisingly,

v Leatt et al., pp. 3-17. 8 Christine Ngeo,"A Different View of

Outsourcing," Modern Healthcare, August 31, 1998, pp. 43-50.

the principal reason for contracting for food service in health care is not cost but quality of food and service.

The changes in health-care food service have progressed far beyond the focus on labor-cost reduction that was prevalent as recently as five years ago. Now many health-care organizations are considering revenue enhancement along with cost reductions. Revenue can typically be enhanced through traditional methods such as retail food outlets and by adding billable services such as nutrition services. Cost reductions are realized through employee cross-training and consolidation of food production. Used collectively, those revenue enhancements and operational efficiencies can produce food-service operations that reflect the complexity of today's health- care business.

R e c r e a t i o n . Growth in the recreation segment, in terms of sales and penetration by managed- services companies, was greater than in any other on-site segment last year. However, because of the typical start-up investment that coin- cides with long-term contracts, this segment provides opportunities only for the largest managed-services firms. Nonetheless, since the area is relatively young, food-service operators with the requisite resources have abundant opportunity for revenue enhancement.

The epicurean demands of sports fans and outdoor enthusiasts have continued to evolve, and operators have come to understand that they need to complement their basic offerings, such as hot dogs, with less- traditional items, such as sushi and protein shakes. We are also witness- ing the beginning of price sensitiv- ity; no longer are customers willing to spend six dollars for a draft beer and four dollars for a low-quality burger while enjoying a game at a major-league stadium. That means the recent emphasis on menu en-

hancement needs to be combined with menu engineering that bal- ances price and demand. This is a particularly challenging task given that many sports-stadium owners expect variable-rate payments of, for example, up to 40 cents of every food-and-concession dollar col- lected. That amount is usually in addition to the food-service operator's sizable investment to ob- tain the concession contract. Similar challenges are being faced in national parks and recreation centers.

The other opportunity in this segment is the trend toward super- deluxe skyboxes. Operators are real- izing fantastic profits from packages that include gourmet meals replete with fine wines and spirits. This market provides an opportunity for new products and more differentia- tion in food and service offerings.

Chi ld care. Child-care centers have become a niche business, an outgrowth of single-parent and dual-income families that require full-time child care. The number of companies that operate child-care centers has multiplied in the last few years; most are focusing on regional growth. Owing to the need to focus on their core business, many operators are contracting for support services such as food service. That is a boon for managed-services operators, particularly those that already have significant penetration in the education segment.

While unit growth in child-care centers--and the associated need for food service--has not grown in the last few years as much as some expected, most operations are still self- operated, providing opportunities for food-service providers. The current trend is the introduction of prepackaged meals that can be easily reheated without special equipment. Food-service operators that can deliver such items along with a variety of snacks on a daily basis can do well in this segment. Obviously, the

e8 tillRltil, l~ HOTELAND RESTAURANT ADMINISTRATION QUARTERLY

opportunity is greatest for those managed-services companies with centralized production and distribu- tion capabilities.

Correc t ions . During the last seven years the prison population in the United States has grown by almost 500,000, a 61-percent expansion. During the next five years federal prison populations are expected to increase 7 percent, and state systems project a 13-percent increase? The growth in the inmate population and the trend toward privatization of correctional facilities has resulted in a rich market for on-site food-service providers,

There are, however, many operational challenges. One is a result of overcrowding; the facilities, including food-production areas, were not designed to serve the current number of inmates. Another is the wid- ening dichotomy of age groups; most facilities are seeing a growing number of both quite young and fairly old inmates, creating challenges in designing menus and meeting nutritional requirements. Focused on costs, most administrators expect that privatizing will reduce overall operating expenses. The operational challenges, however, inhibit many operators' ability to meet the administrators' financial expectations while meeting quality expectations.

Some of the strategies that have proved successful involve central food-service production and providing multiple services with cross-functional employee teams. ARAMARK, for example, which provides services in the United States for some 95,000 inmates in 150 institutions in 29 states, incorporates production systems that correspond to the design of the client-based organization's facilities, When possible, production is off-site; the food

9 "How Prison Food Service Is Performing," Food Service Director, October 15, 1998, pp. 85-88.

Exhibit 2

US$billions I $7

$6

$5

$4

$3

Total = $6.99 Total = $6.92

LS. food-service pperations

-'ood-service ~perations outside le United States

]evenue from any bther services, .nywhere

$2

$1

ARAMARK Compass Group SodexhoAlliance

* Revenues for Sodexho Marriott Services, of which Sodexho Alliance holds a 48.4-percent stake, totaled US$4.3 billion in 1998.

is either transported in a ready-to- serve state or is reheated on-site. The company also offers extensive facilities-maintenance services and has cross-trained labor and management to produce considerable cost savings for the correctional facility.

The Leader Board Paralleling the trends in each segment, the major players in the on- site industry continue to grow, orga- nize, and specialize to meet the demands of their clients and customers. While smaller regional players make the most of their adaptabil- ity and closeness to their customers for marketing purposes, AP,.AMAP.K,

Compass Group, and Sodexho Alli- ance use the economies that accompany their nmltibillion-dollar annual

revenues to offer expanding services, programs, and systems. The result is a landscape in which clients have broad and diverse choices. The big three offer various competitive ad- vantages, including quality enhancement and cost efficiencies.

Perhaps most telling of the depth and breadth of the big three is their combined annual sales (see Exhibit 2). AaAMAP, K, Compass Group, and Sodexho Alliance reported over $20 billion in combined revenue for 1998. While that figure includes more than just food services, the magnitude is still impressive.

Despite their similarities, such as global penetration and a propensity to grow both through acquisitions and organically, each of the big three operates in distinctive fashion. For

June 1999 • 69

offer ood-

,,er L e clients quali|'¢

enha gernen! and cost

el'i:i i,encies, while smaller

"LI" . . . . i ' , p al!ers offer adapt-

, , . j t'esponsiveness,,

example, Compass Group, which maintained its position in 1998 as the largest managed-services company in terms of global sales, offers only food-related services. ARAMARK and Sodexho Alliance, on the other hand, have diversified into other managed-services areas, such as facilities maintenance and housekeeping. A closer look at each company reveals other differences.l°

/t~tMARK. While each of the big three maintains sizable corporate offices worldwide, ARAMARK is the only parent managed-services company based in the United States. It is also the only company that is pri- vately held. Moreover, it is majority- owned by some 1,500 of its managers. The company currently employs about 150,000 people, including 40,000 outside the United States.

As shown in Exhibit 2, most of ARAMARK'S business is in the United States; only about 15 percent of its revenues come from foreign shores. Interestingly, almost all of AKaMARK'S non-U.S, business is in food service. As stated in its 1998 10-K, the company considers itselfa substantial provider of food service in Belgium, Canada, Germany, and Spain. While those are its largest current international markets, the company also has a presence in the Czech Republic, Hungary, Japan, Korea, Mexico, and the United Kingdom.

Its domestic business lines cover the full range of on-site segments and extend into nonfood business lines such as housekeeping and facilities maintenance. ARAMARK also operates one of the nation's largest uniform companies, specializing in the hospitality and health-care markets. Moreover, it has established an impressive profit center with its child-care programs.

ARAMARK has not changed con- siderably in the last two years, except in size. Unlike the other two leaders,

") For a record of these firms' previous strengths and strategies, see: Reynolds, 1997.

the company has traditionally focused more on organic growth than growth through large-scale acquisitions. In fact, it didn't make any large acquisitions (greater than $100 million) between 1986 and the beginning of 1999.

In early 1999 it acquired Restaura (a subsidiary of Viad), a food-service provider recognized for its business- and-industry accounts in Atlanta, Detroit, Philadelphia, Phoenix, and St. Louis. While the purchase price accompanying Restaura's 150 contracts, which represent some 400 accounts, has not been released, the acquisition should help ARAMARK increase its already substantial business-services group. On the basis of Restaura's reported food- service contract sales of about $180 million in 1997, the purchase should boost ARAMARK'S corporate food- service revenue by about 18 percent. The acquisition may mark the beginning of a new strategy for A R A M A R K , whereby the firm may see acquisitions of regional players as an approach to rapid growth. More- over, cash does not appear to be an issue, given the company's minimal debt service. Such a move could signal that other organizational changes are pending as well.

ARAMARK is positioned well in the United States, although it faces some hurdles. First, the company has a solid reputation for supporting its people, from dishwashers to district managers to division presidents. This is the result of a corporate culture that is focused on enriching every- one involved in the company while focusing on delivering high-quality service. (A simple example of that focus on human resources is the firm's continually evolving and ex- plicitly stated compensation program to reward performance.) The challenge is to maintain that H R focus while growing to an unprecedented size. Second, rumors that the company may go public continue to sur- face, although ARAMARK'S chairman

711 I i\ ~,I ! !, HOTEL AND RESTAURANT ADMINISTRATION QUARTERLY

and chief executive officer, Joseph Neubauer, vehemently denies the rumors. 11 While such a move would provide the company with considerable cash, it could undermine the employee-owner pride of its managers. In any event, such rumors themselves tend to create uncertainty in employees and clients. Third, the firm must continue to increase U.S. market share while expanding its international business. International expansion may prove to be the most difficult of the three hurdles, given the limited size of its management base outside of the United States.

Compass Group. With sales of almost $7 billion, Compass Group is the largest managed-services provider in terms of fiscal 1998 revenues calculated in U.S. dollars (edg- ing out Sodexho Alliance by some $65 million).

Of the big three, Compass Group is also the most traditional company, for lack of a better term, in its business approach and in the organizational structure of its global operations. For example, it has a long- established stance of not diversifying its managed services beyond on-site food service. That means the company's revenues are derived wholly from food-service activities (again, refer back to Exhibit 2).

In addition, the company has impressively standardized its segment services (for example, health care, business and industry), regardless of the country in which those services are delivered. Hence the North American division has a similar corporate and support structure to either its United Kingdom division or its continental-Europe division (which comprises the balance of its international operations).

Compass Group is not traditional, however, in the way it approaches its

~ Phyllis Berman and John Gorham, "Joe Neubauer Vows He'll Keep ARAMAP, K Pri- vate---He's Convinced It's the Best Way to Keep Employees on Their Toes," Forbes, December 1, 1997, pp. 165-168.

brand-name strategy. Rather than attempt to build brand equity in the Compass Group name, the company has created so-called specialist companies for each segment. Each of the specialist companies operates relatively autonomously and has its own corporate structure (see Exhibit 3). Most of the specialist companies reflect the names of companies that were at one time acquired by Compass Group--companies that the parent has developed and grown. Therefore, each has an independent corporate culture that is similar, but not identical, to that of the parent.

An interesting result of that strategy is that a business-and-industry client, for example, would think of her food-service operation as being managed by Eurest, not by Compass. Moreover, a client at a neighboring elementary school would not know that his food services were provided by the same company that serviced the business-and-industry account; he would consider Chartwells to be his provider. Compass Group does not tie its specialist companies together through a common logo or even a similar logo design--unlike, for example, the way that Choice Hotels bundles its highly segmented brand-name lodging products.

Of course, the organization does not ignore the potential economies that can be gained under the reach of the parent company. For example, the same corporation-developed brands and franchised brands can be found in the various specialist companies. It would not be surprising to find an Upper Crust pizza outlet (one of the company's internal brands) next to a Taco Bell kiosk in both a Eurest and a Chartwells account.

Compass Group has also effec- tively used its global reach to secure

Exhibit 3 Compass Group's market-segment specialization Market sector Specialist company

Business and industry Eurest* Education Chartwells Fine dining Roux Fine Dining and Flik Health care Bateman Retail and leisure Select Service Partner Sports and events Letheby and Christopher Travel Select Service Partner Vending Canteen Vending Services

*includes offshore and remote-site contracts.

June 1999 • 71

...... i17!

some major contracts in the last few years. In 1998 Compass landed a global contract with Philips Elec- tronics, initially serving 110,000 Philips employees at 118 sites in Belgium, France, Germany, the Netherlands, Spain, the United Kingdom, and the United States. In the same year the North American division inked a deal with Microsoft for a countrywide contract encom- passing 23,000 employees at 26 sites.

Compass Group must now manage its growth carefully and deci- sively. While the megacontracts cer- tainly help the bottom line, Compass must still fight to keep its smaller contracts. It must also defend against losing any part of its recent large- scale contracts. (At some point most clients will play one contractor against another and use the threat of partial or entire contract non- renewal as a means to secure better terms.)

Sodexho Alliance. Sodexho Alliance, based in France, is currently a close second to Compass in terms of its 1998 annual revenue. As of the close of fiscal 1998, the company maintained 18,700 units with more than 250,000 employees in 66 countries. Its core businesses are food and other management services such as housekeeping and facilities maintenance (about 93 percent of its global revenue), remote-site management (4 percent), service vouchers and cards (2 percent), and river and harbor cruises (1 percent). The firm also recently celebrated its inclusion in Fortune magazine's list of the world's most admired companies. ~2

One of Sodexho's approaches to acquisition is unusual. Although it incorporates traditional acquisition activities, it also has a strategy of financially "aligning" with other managed-services organizations. That strategy is reflected in its name,

12jeremy Khan,"The World's Most Admired Companies," Fortune, October 26, 1998, pp. 206-214.

changed from Sodexho S.A. in 1997. The organization's alliance philosophy is that even when it wholly acquires an existing company, it will "respect and maintain the commitment, hearts, and minds of the acquired company's people." While arguably a key marketing position, the approach appears to be genuine, given the company's reten- tion rate of accounts of its acquired and allied offspring.

Recent alliances include Gardner Merchant in the United Kingdom and Partena in Sweden. The most noteworthy alliance produced the publicly traded U.S. company Sodexho Marriott Services. The new offspring is the result of the March 1998 merger between the former Marriott Management Ser- vices, a division of Marriott Interna- tional, and Sodexho USA, a subsidiary of Sodexho Alliance.

The company's strategy appears to be effective. In fiscal 1997 the organization realized organic growth of 7 percent and growth through acquisitions of 1 percent; for 1998 the numbers were 9 percent and 32 percent (the newly formed Sodexho Marriott Services accounted for about 90 percent of its growth through acquisitions). Furthermore, the creation of Sodexho Marriott Services has positioned the parent company as the largest provider of managed services in the United States, a position it already enjoys elsewhere, including Europe.

The company's structure of alliances complicates a comparison of the big three (see Exhibit 2). For example, Sodexho Marriott Services recorded sales of $4.3 billion in 1998 (calculated as if Marriott Man- aged Services and Sodexho USA had been together before March). However, since Sodexho Alliance owns only 48.4 percent of Sodexho Marriott, U.S. revenues for the parent totaled only $2.12 billion (ad- justed to reflect exchange rates).

72 i i!li ~,i,~ ! HOTEL AND RESTAURANT ADMINISTRATION QUARTERLY

The trick for Sodexho Alliance now is to manage the consolidation of its many alliances and acquisitions. It is already projecting considerable savings from consolidation at the upper-management and equiva- lent functional levels. A related challenge involves managing the burden of debt. Not surprisingly, the new acquisitions and alliances have created considerable debt service for the firm, making any future large- scale acquisitions unlikely.

What's Next? The on-site food-service industry is becoming more refined. It is also becoming more similar to its traditional commercial sibling. The fol- lowing trends are apparent and should manifest themselves in the near future.

Self-operated units. Single-site self-operated units in every on-site segment will come under increasing pressure to enhance revenue and contain costs. Even small corporate systems, such as health-care organizations with a handful of facilities in a region, will be hard pressed not to contract for food service.

Companies with multiple corporate offices or factories throughout the country, as well as national health-care systems (already common in elder care), will wrestle with deciding whether to develop an infrastructure for food service or to align with a food-service company. The risk of the former is that if they cannot recruit the necessary talent, they will not be able to harness the economies of expansion. The risk of joining forces with a food-service company is that the client-based organization may lose control over some facets of the service.

Regional companies. P,.egional managed-services companies with a small number of accounts will continue to exploit their "dose-to-the- customer" advantage. They will also work to develop their operational economies, such as those associated

with purchasing. To respond to their limited customer base, however, they will need to become more versatile in their operating structures. If they are to remain competitive, they will also need to invest heavily in new technologies, such as production systems and communication net- works, and in market research.

Finally, they will need to devote extraordinary resources to management development. With limited equity in physical assets, their advantage will lie in hiring, developing, and retaining their people. That is not an easy proposition;just consider the resources that the big three have consistently dedicated to the human-resources function in recent years. 13

The big three. Probably the most pervasive theme in on-site food service, at least in the short term, is the growing presence of the big three throughout the industry's segments. Given their penetration and infrastructure, the big three could already be said to have a stronghold for creating the quasi- monopolistic situation that has emerged in other industries (e.g., financial services' dominance by five main players).

Consider how contracts are won today. To secure lengthy, large-scale contracts, the big three are more willing than ever to offer capital investments as part of the package. That strategy greatly appeals to clients and prevents smaller players from competing. The approach has

~3 For example, ARAMARK, Compass Group, and Sodexho Alliance offer training and development programs that include virtually every level of management. These companies also offer an impressive series of stand-alone management- development modules that target everything from performance-appraisal skills to mitigating sexual harassment in the workplace. Those packages feature more than just a few overheads and a handout--many include elaborate role- plays and videos. (To underscore the quality of the videos, consider that two recent training videos produced for Compass Group North America received awards in early 1999 from The Communicator, an organization that recognizes excellence in corporate video programs.)

proved worthwhile, particularly in the education segment; in the last three years, virtually every large school-district (those with more than 25,000 students) and large university food-service contract that was put out to bid was awarded to one of the big three. 14

The big three's global penetration is also a major barrier for the smaller players. Undoubtedly, the oligop- olistic presence of the big three is felt by every competing firm in nearly every country on the planet. When a multinational client such as Philips Electronics seeks to standard- ize its employee food service around the world, how can a small company that serves only the western United States, for instance, compete against the global reach of the big three? (That was part of the allure of Com- pass Group for Philips. Compass already had sizable operations in each country where Philips was located.)

The common challenge for AP, AMaP, K, Compass Group, and Sodexho Alliance rests in managing their unprecedented global growth. Each company has already experienced difficulties in adapting the deep-rooted corporate cultures of its acquired siblings to that of the parent. That issue, of course, is not limited to the on-site segment.

What has changed in recent years is the way clients perceive and evalu- ate their managed-services partner on a daily basis. Many clients now frequently ask the food-service provider, "What have you done for me lately?" Although clients expect the cost savings and quality enhancement that accompany a partnership with a leading managed-services provider, the business is still at its core a restaurant business, and the adage that you're only as good as your last meal still holds true.

14 Paul King,"Latest AP.AMARK Buy Poses Threat of Shrinking Competition," Nation's Restaurant News,January 11,1999, p. 18.

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