MICHAEL BAILEY, COMPASS GROUP CHIEF EXECUTIVE: With only 38 per cent of the food service market contracted out, global catering giant sees huge opportunities for further expansion here, writes Ciaran Brennan

Ireland may currently be making just a small contribution to the overall profits of global contract catering company Compass, but its managing director Mr Michael Bailey sees this changing in the future.

"Ireland is quite a bit less contracted than many other countries we're in. If you take North America, for example, about 74 per cent of the business and industry food service market is contracted out and if you come to Ireland, that's about 38 per cent. If you get to sectors like healthcare and education, 95 per cent still do it themselves and only 5 per cent contract out. There are lots of opportunities. It's been a wonderful growth market over the past five to 10 years with the amount of business and companies coming here, so we see that combination of lots of new companies coming in, good growth and an under-contracted market as a huge opportunity," says Mr Bailey.

A number of deals announced here by Compass and its subsidiaries in the past number of months would seem to underscore Mr Bailey's comments and confirm the company is aggressively targeting this market.

At the beginning of the year, Compass Catering Services Ireland took over Clonskeagh-based Management Catering Services, a company with a portfolio of 35 contracts primarily in the business and industry sector. This was followed in March by a €25 million deal between Compass subsidiary Eurest and Musgrave Foodservices for Musgrave to supply Eurest's 160 catering units in Ireland with a full range of food products, while last month Eurest signed a deal worth €25 million with O'Brien's Sandwich Bars, whereby O'Brien's will open sandwich outlets at 15 Eurest operations over the next five years.

Mr Bailey is excited about the potential of the O'Brien's arrangement. "It's the principle of branding," he says. "The O'Brien's deal is taking a high-street product into a non-high street location. That's where we have been very successful as an organisation in both Europe and the US in taking quick-service restaurant brands like Burger King or Sbarro's and putting them into a hospital cafeteria or a business and industry (B&I) location. They have the impact of increasing participation. More customers use the cafeteria when they have main known brands there. They might not buy the brand when they go in, but they will come in."

Such branding also helps the economics of the business in these locations where the canteens are often subsidised.

"If we put those products in the cafeteria and stick to the brand standards, then we can charge a high-street price in a non-commercial location and change the economics of the subsidy," he says.

"In our North American business most of the cafeterias we operate are on a profit and loss account; there is no subsidy, we live out of the cash register. They're big sites, highly branded and more high-street pricing than cheaper pricing and as a result of that we don't need any subsidies."

Branding deals help differentiate the company from its competitors, he says, adding that in many cases the company actually prefers to own the brand.

"We are more the masters of our own destiny with it; we don't pay a franchise fee if we own it. We've got a number of brands we own throughout the world."

But he says the company has no plans to buy O'Brien's or a similar franchise operation here. While he says he could never rule out further acquisitions, he says Compass will now concentrate on bedding down this year's contracts and will seek to grow its €150 million a year in turnover here.

Compass is in a strong position to make acquisitions, in Ireland and elsewhere, following its merger two years ago with Granada and the offloading of the Forte hotels group last year, which netted the company £3 billion sterling (€4.8 billion). Around half of that has now been spent buying companies in countries or sectors in which the firm has had no presence up until now, says Mr Bailey.

At the time, some shareholders were critical of the merger with Granada. But Mr Bailey says the company's performance since the merger - which also saw it merge Sutcliffe Catering, which it acquired in 2000 through Compass Catering Ireland with Eurest - has justified the move.

"From our point of view, it was very important for a number of reasons. We were in many ways criticised for it by our shareholders and the analyst community, but with the benefit of time, I think the benefits are now being seen - we have divested the hotel business and strengthened the balance sheet. We also made ourselves the clear market leader in the UK, created a very solid business with the bringing together of Eurest and Sutcliffe and really stopped the creation, not forever, but at least for a good few years, of a third global contract foodservice company."

The market is currently dominated by Compass and French-based food contract service company Sodexho. If Compass had not acquired Sutcliffe, there was a real possibility that significant smaller players such as Aramark or Elior would have stepped in, he says.

"Our rationale in doing that deal was to make ourselves number one in the UK, grow strong business in Ireland, strengthen the balance sheet and obviously give ourselves more clout on the purchasing side of the market. We buy a lot of food and in this business and economies of scale count - the bigger you are, the more you buy and the better you can do it."

That scale - Compass has climbed from a company with revenues of £250 million sterling in 1993 to just under £10 billion sterling and profits before interest and tax of £650 million sterling today - has also enabled the company to overcome setbacks in individual countries such as the foot-and-mouth epidemic that hit Britain and Ireland last year and problems with BSE, and also weather the general economic downturn globally, he says.

"Things like foot-and-mouth and BSE did cause us some problems," he says.

"It hurt us in terms of food cost inflation, but again when you've got a business our size, that's spread. BSE hurt us in England and France, but had no impact whatsoever in North America or the rest of the world. So while it was there, it was relatively small in our terms and we could overcome it."

The effects of foot-and-mouth, in particular restrictions on traffic movements, did not impact as much in Ireland, where the company's public food service business is very small, unlike the UK where it has 400 Little Chef restaurants and 40 motor services sites.

Because of the company's decision in the 1990s to spread geographically and by sector, the company has been relatively unaffected by the economic downturn, according to Mr Bailey.

"We went through the recession in the early 1990s and you learn fairly quickly that to have all your eggs in one basket like the UK is not a good thing, and we decided at that stage to start embarking overseas to the extent we're now in 98 countries. That allows you to weather the storms in each economy. The US is struggling a bit at the moment, but the UK and most of Europe is doing well.

"We also try to get a balance in each sector. When business and industry is having a tough time, some of the other sectors we trade in are not. We're in healthcare and education. In an economic downturn, you don't get hospitals or schools doing anything different."

Each Compass group company is independently-managed with its own culture and values, but enjoys the benefits of Compass's purchasing power, financial investment and support, says Mr Bailey.

"We believe in running a company on a country basis and a sector basis we don't run it in a sectorised manner in Ireland at the moment simply because of its size - but you get that specialisation where people understand their market, what makes the quality standards and the margins tick. It works as long as you've got the right infrastructure and the right people."