The Association of Business Executives Advanced Diploma

INTERNATIONAL BUSINESS CASE STUDY

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THE COMPASS GROUP

afternoon 4 December 2007

This is an open-book examination and you may consult any previously prepared written material or texts during the examination. Only answers that are written during the examination in the answerbook supplied by the examination centre will be marked.

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ABE 2007

D/500/3717

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Notes:
As in real life, anomalies may be found in this Case Study. Please simply state your assumptions where necessary when answering questions. The ABE is not in a position to answer queries on Case data. Candidates are tested on their overall understanding of the Case and its key issues, not on minor details. There are no catch questions or hidden agendas. After the publication of the Case Study subsequent developments may occur. The examination is based on the published Case Study and students who do not mention such developments will not be penalised. However, students may consider such developments in their answers if they wish.

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Pursuit of Int'l

Edited by Foxit Reader Copyright(C) by Foxit Corporation,2005-2010 For Evaluation Only. THE COMPASS GROUP

(IHR)

Compass Group is the worlds leading foodservice company, specialising in providing food, vending and related services on clients premises in over 90 countries. This involves developing and delivering original food and service solutions in the workplace, schools and colleges, hospitals, at scope leisure, and in remote environments. In 2006, the company operated over a wide geographic and of the business market sector coverage in more than 90 countries, employing over 400,000 people. process Compasss Strategy The essence of the companys strategy is stated to be about building value for shareholders, whilst delivering this value is enshrined in four commitments to all its stakeholders:
s/holdervalue analysis or profit max. & s/holder vs stakeholder

to ensure maximization of the return on investments. shareholder expectation never to forget the importance of keeping the customer satisfied. core competencies--- competitive advantage to deliver on the companys expertise with an unrivalled consistency. to continue to place the best people in the business, in the companys business. resources & competencies Mission To deliver great service and results through its people to achieve leadership in the chosen foodservice markets through the constant pursuit of superior levels of service, efficiency and quality. The total dedication of its staff to the achievement of excellence is regarded as the major factor in its success. competitive advantage & competence In turn this leads Compass towards its vision of being the highest quality and most profitable owner and operator of the worlds top foodservice & hospitality businesses, based on strategic focus in five key areas:
Elements of Strategy--- CSF--- where things must go right

Customer and Client Satisfaction strategy needs integration---Provision of a standard of service that is second to none. Putting the customer and client first, develop a close working relationship and listen carefully and respond quickly to changing needs.
due to customer demands Market Leadership Improved quality, cost effectiveness through dedicated teams experienced in the particular demands of specific market sectors drawing on the power of a unique portfolio of world-leading foodservice brands. strategy by experience

Preferred Employer aiming for sustainable competitive advantage Success comes from the contribution to overall performance made by its people and through provision of exceptional opportunities for them to develop their careers and their full potential. shrm Operational Excellence value chain analysis Use and application of superior systems, processes, equipment and standards. Significant investment in information technology and a discerning approach to purchasing, in striving to adopt best practice throughout its business. Financial Performance Continuous growth in earnings per share and the achievement of superior returns on invested capital are seen as major Group objectives. Commitment to building volume and net profit growth in order to maximise returns for shareholders.

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GLOBAL LOCAL DILEMMA BUS. FACE

scope--- portfolio analysis Brands & Services Compass Group provides a high quality portfolio of foodservice brands in seven clearly defined market sectors through distinct, client-facing operating companies. The range includes local, national and international brands to meet the demands of different customer groups but all are linked by their consistent quality and service. A combination of owned brands such as World Marche, Profiles and Steamplicity sit alongside franchised brands such as Caffe Ritazza, Upper Crust and Harry Ramsdens to complete the range. The brands operate across all sectors of the market and are offered in fully flexible formats to suit different requirements.

Edited by Foxit Reader Copyright(C) by Foxit Corporation,2005-2010 pursuit of internationalisation For Evaluation Only.

The company develops innovative new concepts, so that customers have choices that meet their lifestyle needs and provide well-balanced nutritional options. The most recent of these in healthcare is Steamplicity, which uses a simple valve mechanism to steam cook prepared fresh ingredients within minutes to meet individual patient orders improving nutritional content, choice, service and reducing costs.

Sectors Business & Industry Providing quality food for employees is an essential part of keeping them happy and motivated. Eurest is the world leader in food and services management to customers at their place of work providing innovative and high quality solutions. Fine Dining Food is at the heart of what we do, often working with some of the worlds most renowned chefs such as Albert Roux and Wolfgang Puck to provide clients with the finest possible executive dining facilities for boardrooms, hospitality suites and at major social events. Defence, Offshore & Remote Site ESS is the worlds largest provider of integrated support services to the defence, offshore and remote site sectors in over fifty countries, often in difficult and hostile conditions. The full spectrum of services encompasses design and build of camp structures to operational support in catering, housekeeping, technical services and logistics. ESS has established best in class partnerships with a number of complementary businesses in order to offer clients a full turnkey service from initial design through to operation. Education At a time when there is a growing recognition of the need to promote the importance of nutrition and healthier eating amongst young people, we are constantly striving to find new ways to ensure that we are playing our part in building tomorrows healthy people. Scolarest and Chartwells are the most highly regarded operators in this sector. Healthcare The healthcare foodservice market is one of the most demanding and sophisticated in which we operate. Professionalism, the highest standards of food safety and hygiene and a detailed understanding of the nutritional needs of those we care for have enabled us to become the world leader in this market through Medirest and Morrison. As a result of our unique understanding of the demands of the healthcare sector, our clients are now asking us to take on a broader range of specialist services through our sister company, Crothall.

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Vending Vending is an integral part of the food and beverage operation for most modern organisations. Through Canteen Vending and Selecta we are the biggest route vending company in the world, providing high quality and innovative services to clients across the USA and Europe. The Groups operations are managed across four geographic divisions North America, United Kingdom, Continental Europe and Rest of the World each with a Chief Executive, and with each country having its own Managing Director. Compass in the Community Compass in the Community was established in 1996 to recognise and reward the best community-based initiatives across the world that tackle social exclusion, improve employability and promote sustainability and diversity. In 2004, the worldwide Compass in the Community Gold Award went to Eurest Turkey, which established a pioneering infrastructure for distributing products to needy communities in Eastern Turkey. The Silver Award went to Eurest Czech Republic for its project in partnership with the archdiocese charity in Prague which supports a group of thirty orphans in a centre in Honavar, south-west India. Similar community-based projects operated from and/or in the UK, North America and South Africa. Recent History Compass Group was established in 1941 and has since grown both organically and through acquisitions. In 2001, the Group announced the sale of its Meridien Hotels, following previous announcements on the sale of Posthouse Hotels, London Signature and Heritage Hotels, previously part of the Forte Hotels Division. Two years later, the Travelodge hotels were sold off. During 2001, the group had stepped up its strategy of growth through acquisition. Whilst this appeared strategically sound and helped to bolster Compasss position as the worlds leading caterer, it affected the strong cash flow of the business while putting pressure on margins and returns. A slight concern centred on its ability to keep hitting its 6 per cent growth target. According to one analyst, the return to an organic growth strategy helped to put Compass back on track: Given the economic and political climate, this was no mean achievement, although it does reflect the huge breadth of the business, both by geography and by market sector. So while the war in Iraq hit its airport catering arm, this was offset by its position as the biggest military caterer. And while business contracts declined as companies laid off staff, this was balanced by the gathering pace of outsourcing by schools and hospitals. (Richard Miles, Return to organic growth sends Compass in right direction, Tempus December 03, 2003) Recent Acquisitions: 2004 In discussions to acquire the Keith Prowse corporate hospitality business for at least 10m. Mitropa, the operator of concessions in German stations and motorway service areas, for 12m. Creative Host Services, the US airport concessions company, for 22m. 2003 Millies Cookies, the Bury-based operator of 100 cookie outlets, for 24m.

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2002 60% stake in Italian catering company, Onama, for 80m 30 Sep 2002. Gruppo Events, the provider of catering services at Somerset House in London, for up to 6.6m. Bon Appetit Management, the US foodservice company based in California, for 114m. Castle Independent school meals business, which included 2,500 staff across the UK, from Castle View for undisclosed terms. London-based contract caterer, Woodin & Johns, for undisclosed terms, in order to expand its City dining branch, Restaurant Associates. 2001 Three catering companies from the parent of Swissair Restorama, Rail Gourmet and parts of Gourmet Nova, for 41m 24 Dec 2001. Seiyo Food Systems, the Japanese contract catering company, for 193m. Manpower Kantineservice, the Norwegian staff restaurant company, for undisclosed terms. Crothall Services, the US provider of ancillary healthcare services, for 120m, which will help it win hospital management contracts in North America. Vendepac, the supplier of vending machines, from TM Group, for 84m. Milburns, the supplier of catering services at a number of historic sites. 75% stake in HSG, the German catering company with an option to buy the remaining 25%. Remaining 67% of Selecta Group, the European vending machine operator, for 374m. Morrison Management Specialists, the US contract caterer, for 383m. Recent Disposals: 2006 Select Service Partner travel concessions business for 1.8bn, with Macquarie Bank getting the Moto motorway service stations division and EQT Partners getting the airport and railway concessions. 2002 220 Travelodge hotels and 368 Little Chef restaurants to private equity group, Permira, for 712m 19 Dec 2002

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2001 Le Meridien chain of hotels to Nomura International, for 1.9bn 28 May 2001. 48 Heritage country hotels to a joint venture between Macdonald Hotels and Bank of Scotland for 235m, while 79 Posthouse hotels were sold to Bass for 810m. Chain of seven Wheelers fish restaurants and a number of wine bars, in order to raise about 8m. Two London hotels the Strand Palace and Regent Palace to London & Regional Properties, for 105m. The CompassGranada Merger/Demerger In July 2000, Compass completed an 18bn merger with UK media group, Granada, to create two temporary divisions Granada Media and Compass Hospitality. The latter comprised the merged foodservice businesses, roadside restaurants, motorway service areas, and the former Forte hotel estate. Rationale and Structuring of the transaction (adapted from: James Davis and Nicholas Holmes, Freshfields Bruckhaus Deringer http://www.practicallaw.com/7-101-2857) This merger formed part of a series of complex transactions to create a hospitality group, comprising Compasss existing catering business and Granadas hospitality division (including both catering and the Forte hotel chain) and an independent media group, based on Granadas existing media division. The proposals set out two main stages: Merger process. The initial stage comprised the transfer of Granadas existing debt to Granadas hospitality business which, following the merger, became the hospitality business of Granada Compass. The final step of the proposals was the requirement for a mandatory exchange of ordinary shares following the demerger. Immediately following the demerger, the Granada Compass group will represent purely media businesses, but it will be listed at two levels. Demerger. The demerger from Granada was completed in February 2001. The hospitality business comprised Compass itself, Granadas hospitality assets and Granadas existing indebtedness. The former Compass and Granada shareholders held shares in two separate companies, one an expanded hospitality business run by the Compass management and the other a focused pure media company, run by the Granada management Some Recent Problem Areas In 2005, Compass was subject to US investigations into alleged bribery at the United Nations. The investigations involved Compass subsidiary, Eurest Support Services (ESS), a company that supplied UN peacekeepers and allegedly used leaked details of UN tenders to win contracts. The House of Representatives international relations committee released a report alleging that ESS worked on more than one contract with IHC services, a firm that allegedly leaked UN tender details to other companies. The committee report suggested that the scope of its investigation into the matter had extended beyond a contract that ESS secured in Liberia and called for further investigation into Compass, ESS and IHC. ESS was suspended as a registered UN vendor in October 2005 (Nicholas Neveling, Probe into Compass UN corruption widens, Accountancy Age, 09 Dec 2005).

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In March 2006, Monaco-based catering company, ES-KO International one of ESSs competitors for UN peacekeeping contracts lodged a claim for $369 million (213 million) against the company in a New York district court. The claim was the second to be served on Compass by a rival in connection with the UN contracts scandal. Less than a month previously, Supreme Foodservice filed a claim for $125 million, alleging that ESS had engaged in fraud and bribery to win contracts to feed UN peacekeepers in countries such as Liberia and Eritrea. (Dominic Walsh, Compass chief could face lawsuit, The Times March 30, 2006) In October 2006, Compass settled the lawsuits and stated that the settlements had been reached purely because of its interest in avoiding a prolonged legal battle it did not admit liability. Compass stated that the company needed to learn the lessons and had put in place the systems and controls to ensure it could not be repeated. On 21st October, the company announced that it had instructed Freshfields and Ernst & Young to conduct an investigation into the relationships between ESS, IHC and the UN. In November, Compass sacked the head of its UK division and two other employees as both the internal and the US investigations continued. At about the time the lawsuits were emerging, Compass stated that its UK school meals business had suffered from criticism of unhealthy school dinners following a high profile TV series by celebrity chef, Jamie Oliver. The company was criticised for some of its products, leading it to review the menu choices it offered and replacing some of the less healthy items with a greater variety of fresh produce. However, Compass believed that the transition towards healthier eating in schools was still hampered by resistance to change on the part of schoolchildren used to a diet of highly processed foods. One report commented that the attention has also shifted to the other influences on childrens choice of diet. Consumer organisations had criticised the UKs communications regulator for rejecting a blanket ban on food advertising aimed at children for products containing large amounts of fat, salt or sugar. The Jamie Oliver programmes, in addition to looking at provisions in schools, identified [the lack of] awareness of good diet at home as being a key factor leading to problems. (Business Respect, Issue Number 92, 29 Mar 2006).

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APPENDIX 1 Note on the US Foodservice Market, 2004 (Source: Adapted from Christiane Weinberger, Planet Retail 16 March, 2005, http://www.planetretail.net/Home/PressReleases/PressRelease.aspx?PressReleaseID=27665) US foodservice sales increased 4.4% to USD440 billion in 2004, up from 3.4% the previous year. The accelerated growth demonstrates a slow recovery of the US economy, prompting consumers to spend more on eating out. Further growth is expected in 2005, with foodservice sales forecast to expand by 4.9% to reach USD462 billion. Selected Key findings Contract catering undergoing increased consolidation driven by European players as well as diversification towards support services Business & industry catering still struggling The sector continues to be dominated by large nationwide brands such as McDonalds and Burger King, although the overall market is fragmented, with the top 10 fast food companies accounting for 15.4% of all foodservice sales in the US. US: Top 10 Foodservice Market Shares, 20032004 Rank Company 2003 Systemwide Market Sales Share (USD mn) (%) 23,644 5.6 16,150 3.8 7,900 1.9 6,904 1.6 6,545 1.6 4,759 1.1 3,763 0.9 4,073 1.0 3,003 0.7 2,772 0.7 79,513 18.9 2004 f Systemwide Market Sales Share (USD mn) (%) 24,605 5.6 16,709 3.8 7,954 1.8 7,270 1.7 6,807 1.5 5,159 1.2 3,701 0.8 4,669 1.1 3,081 0.7 2,855 0.6 82,810 18.8

1 2 3 4 5 6 7 8 9 10

McDonalds Yum! Brands Burger King Wendys Aramark Subway Sodexho Compass Dominos Arbys Total (top 10)

Notes: f = forecast. Source: National Restaurant Association; Planet Retail www.planetretail.net Consolidation drives market share in the catering segment The US catering industry continues to see increased consolidation, with major acquisitions by key players: Sodexho, Compass and Aramark, two of which are European. These companies have increased their market share to 27.3% in 2004 from 20.2% in 2000. Industry consolidation responds to the need for more diversified, so-called multi-service packages. The latter encompasses in addition to standard catering services a variety of speciality services such as retail stores and facilities management including maintenance, landscaping, administrative support, security, staffing, laundry and cleaning services.

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Not only has multi-service proved successful with existing clients that may upgrade from a traditional food-focused catering contract to a multi-service contract, it also facilitates new contract gains, given a generally more price sensitive potential clientele seeking to satisfy their outsourcing needs through a single provider. Business & industry catering still struggling This business segment has suffered more than any other from the current downturn in the economy. Cost-cutting measures implemented by key customers and the removal of many employee benefits, such as subsidised catering, have led to diminished orders and lower revenue. At companies where there have been redundancies or plant closures, there have also been fewer people to serve. The healthcare and education markets are a lot less cyclical than their business & industry counterparts and are less influenced by downturns in the economy. A generally ageing population in the US is also contributing to positive sales development in the healthcare and nursing home sector. Indeed, it is increasingly the case that hospitals are relying on foodservice operations (such as cafeterias, cafs, snack bars, restaurants and kiosks) for much-needed revenue.

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APPENDIX 2 Interview with Michael J. Bailey, Group Chief Executive Officer Compass Group, regarding the interim results 19 May 2004 (Source: Adapted from Cantos) GROUP RESULTS Q. Youve delivered 7 per cent like-for-like sales growth. Thats ahead of the targets you set at the prelims in December. Whats driving that growth? And is it really sustainable? A. Im very pleased with the results. We did say 6 per cent earlier in the year. Weve now increased that to 7 per cent. Its primarily coming from new contract wins. Were having a very good sales year. In fact, it often happens during difficult economic times that you actually see an uptick in activity. And again, we have seen that on this occasion. Q. Where are the countries and what are the sectors where youre really seeing this growth? A. Well, the sectors which are driving the fastest growth, where the double-digit growth is coming from, are Education, Healthcare and our Remote Site, Military and Defence business. Geographically weve had excellent growth in North America yet again. And we had good growth in Japan, Australia, China, Spain in particular. Theyre the key countries. Q. If this growth is coming from new contract wins, what does that mean for throughput? A. Throughput is predominantly driven by the number of customers in the restaurant. And clearly in recent years in certain markets particularly Business and Industry weve had less people employed and as such less people using the restaurants. Healthcare and Education throughput has been positive. We are seeing the odd sign of improvement, particularly where our clients are spending more on catering but its still fairly early stages at this moment. Its certainly nothing we could call a trend. Recent economic data suggests theres been a growth in employment and weve seen that in certain areas. And if that continues, we will see positive throughput return to the business. Q. If throughput turns from negative to positive, what kind of impact is that going to have on your sales numbers? A. Well, historically if you look back at stronger economic times, Compass has grown at the 8 per cent 9 per cent level. In the last year or two, weve been 6 per cent 7 per cent. I would normally expect to see 2 per cent positive swing when times are good versus the 1 per cent negative swing on throughput that we have at the moment. Q. Given that your margin has grown by less this year compared to last, does that mean that youre generating sales at the expense of margin? A. No, I dont think so. Our contract pricing has remained pretty stable during the course of the year. I think the difference between this year and last year is that last year we had the tail end of the Granada synergies in the UK, which helped us. We did say at that time that, going forward, success looked like holding the UK margin but weve passed the baton to Continental Europe and North America to grow at faster margins. And weve put specialist purchasing teams in place some time back to help us do that. Im pleased to see that come through. Weve got a 30 basis point improvement in North America and Continental Europe/Rest of the World and we think we can continue to grow that looking forward.

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UK MARGINS AND TOPLINE OPPORTUNITY Q. Have you downgraded your targets for margin in the UK? A. No. Weve consistently said that success, looking forward, is maintenance of that margin, which I believe we can do. Is there any further growth in the UK margin? Sure. Were not super efficient. We can drive out cost over time. Q. The margin in the UK business is very high. So are you really telling me that thats sustainable in the mid- to long-term? A. Absolutely. We are an economy of scale business and the bigger that we get, the more we grow, the more were able to drive down the cost of food. Q. Your biggest market in the UK is Business and Industry, but thats quite mature. Thats, to a great extent, outsourced. So wheres the opportunity? A. There is still good growth in Business and Industry. Not only on throughput as employment comes back but also many of the regional players that are out there quite frankly struggle to compete with the likes of Compass. But we are seeing a number of new markets emerging in the UK. Weve still got Education and Healthcare that are very lowly penetrated by contractors at this moment in time. Theres still more to go for in the Remote Site, Military and Defence market. Weve got other retail markets opening up, like this month weve announced the contract at London Zoo. Very good pieces of business like Sporting Arenas, where theres an awful lot to go for. And, again, theyre very big contracts and the barriers to entry are actually quite high in those particular contracts, which, if anything, certainly favour somebody like Compass. Q. In the UK, youve talked about taking business from your competitors. Surely that will put pressure on margins? A. Well, most of the business that weve secured this year in fact, 80 per cent of it has come from self-operators, new sites, and small regional players that quite frankly struggle to compete with the likes of us. Q. Weve talked about Healthcare, Education, Defence, Remote and Offshore Site businesses as being fast-growth businesses. Are they also lower margin businesses and will they pull your margins down? A. No. For the most part, the margin in those sectors is broadly similar to that that were securing in other sectors. In fact, in the Remote Site and Military market, the margins can actually be higher. NORTH AMERICA Q. North America has performed really well for you but the B&I market there is also becoming mature as well, isnt it? A. Well, America is the most mature market in the world and in Business and Industry the statistics are around 75 per cent to 80 per cent contracted. But I think the important factor is that the 25 per cent that remains is actually $7.5bn. Its a $30bn market opportunity. So, there is, without doubt, room for continued growth in the business and industry market in the USA.

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Q. And looking at the Education and Healthcare sectors in the USA, are you happy that they will continue to deliver double-digit growth? A. They are well under contracted. Education is about 40 per cent contracted thats closer to 60 per cent on college and university and around the 20 per cent mark in the K through 12 public school system (from primary through to school leaving age). Healthcare is around 3334 per cent contracted. They are still huge markets with lots of opportunity to grow and certainly will continue to show good growth for many years to come. Q. You said that Group throughput has remained negative. Whats happening in the US with throughput? A. Not a broadly dissimilar story, actually. Business and Industry and Vending are negative. Healthcare and Education are positive. Overall its still in negative territory but only just. There is the odd green shoot that is encouraging. As Ive said already, its too soon to call a trend but nonetheless its going in the right direction. Q. In North America, margins have increased. Where do you see them going over time? Is that sustainable? A. Well, our margin in North America is around 5 per cent. Thats under half what we achieve in the UK. Some of the difference between the UK and the US is structural. The average size of a contract in America is three to four times the size of the UK. And the reality is the bigger the contract, the smaller the margin. But notwithstanding that, we believe that there are huge purchasing opportunities over the next several years and that we can continue to grow that margin by 2030 basis points a year, well into the future. Can the 5 per cent go to 12 per cent? No, I dont think so. But can the 5 per cent go to 8 per cent or 9 per cent in the fullness of time? I think it probably can. CONTINENTAL EUROPE AND REST OF WORLD Q. Europe and the Rest of the World has the lowest level of outsourcing. So what are you doing to capitalize on the growth potential in these markets? A. Youre absolutely right. It does have the lowest level of outsourcing by a significant margin. I think what were doing there is really what weve already done. We have acquired several large businesses in recent years but what that has done is given us a presence in 98 countries. Our top two competitors in the world combined are not in 98 countries. Were there, weve been there in many cases, for a number of years and we have the people on the ground. Most of our countries are run by country nationals, which I think is very important. And I think were very well placed to capitalise on many of the markets that youre talking about, particularly in terms of Asia and Latin America.

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Q. Have you been investing in Japan? And whats happening in Japan? A. We have. Were the number three player in Japan. We acquired Seiyo Foods two and a half years ago. We have spent the last couple of years really straightening the business up. It had a lossmaking public restaurant business that we divested, called Casa. We had a 25 per cent stake in Yoshinoya, a fast food, beef bowl operation, that weve since divested. The company had a number of cross shareholdings in its clients, which is not uncommon in Japan. Weve divested those. And were now very focused on the contract business. We have two halves to the business. The contract business is growing very well, double-digit growth. The retail business has been toiling, primarily as a result of deflation in the economy. Over the last year, weve been renegotiating our leases at many of these operations, and for the most part either jettisoning those contracts or getting a lower cost base from which to move forward. The profits in Japan when we acquired the business were breakeven. Last year, they were a little over 1 per cent. This year, theyll be north of 3 per cent and I think we can get it up to 5 per cent, which is a fairly normal margin in Japan in our industry, over the course of the next 24 months. Q. And how are you viewing the rest of Asia, outside of Japan? A. Well, Asia is a booming area. China, in particular, were focusing on. Again, weve been there for nine years and it does take a long time to understand somewhere like China. Just recently, weve entered into a joint venture, or in fact weve created a joint venture company between ourselves and the Shanghai Railway network, which has been endorsed by the Minister of Railways in the government. We own 51 per cent of that business. Its putting food on the trains between Shanghai and Beijing. Its been going about six weeks now. Were off to a very good start but the opportunity there to put food on the platforms, like we do in London, and more on the trains, as we do in Europe, is absolutely enormous. Q. Margins have gone up in Europe and the rest of the world. Whats been driving that? A. Weve achieved a 30 basis point improvement in the margin in Continental Europe/Rest of the World and pretty well half of it has come from margin improvements in Japan and Onama the Italian business that we acquired a few years ago. And the other half has come from purchasing improvements as were driving in the UK purchasing model into parts of Europe. We havent started really on Asia or Latin America yet, but in Europe were seeing some really good progress from the team that weve put in place to attack this opportunity. ORGANIC GROWTH AND M&A Q. Organic growth has been the strategy to date. Will that change? A. No. We are very focused on organic growth. As I said a little earlier, weve put in place a great platform from which to leverage off in 98 countries. And I think now is the time to do just that. We do have a very solid, stable management team, which is extremely experienced. You see that coming through in the organic growth, not just this year but over several years. And their incentive programmes, which are about driving organic growth and return on capital, I think give us exactly the focus we need at this time.

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Q. And in the year to date, youve spent 43m on infill acquisitions. Is that level of spend something were going to see continuing going forward? A. Last year we spent a little over 200m215m, if my memory serves me correctly. We will do better than that this year. Well undershoot that by about 30 per cent. My best guess is at the moment well be around the 150m mark for the current year. Q. If acquisition spend is slowing like that, what happens to the extra cash? A. Well, this year its not an issue. This year we are paying out three dividends. Were speeding up the payment of the dividend and that will use about another 60m of cash this year. Weve also got a step change in the tax rate. Well go from 12 per cent to 18 per cent cash tax rate this year and that will incur a similar number. So, this year there wont be that much free cash with those two factors. Next years a different story. Next year, we will throw off a serious amount of cash. Well have a normalised tax rate and well only have two dividends. But, to be honest, its a little bit premature at this stage to start guessing what we may do with it then. Well do what makes most sense to drive shareholder value. TARGETS AND OUTLOOK Q. Turning to performance targets. What are your targets for the year-end? A. I think weve been pretty clear about our targets to the financial community. Last December, at the results announcement, I stood up and said that this year we would look to achieve at least 6 per cent like-for-like organic sales growth; a 2030 basis point improvement in the margin; wed like to see more cash this year than last year, notwithstanding the fact that we have a step change in the tax rate from 12 per cent to 18 per cent; and that we would shoot for a 4050 basis point improvement in return on capital. I still feel confident well achieve those. Q. What gives you that confidence? A. The visibility that we have over the top line in Compass is extremely good. Ive said that many times before. And Im very comfortable that we have sufficient new business to achieve the 7 per cent growth that Im talking about. As far as the margin is concerned, at the half-year youve seen a 30 basis point improvement in North America and Continental Europe/Rest of the World. That is evidence of the fact that we are getting there on the purchasing initiatives. Free cash flow is critical to our strategy. Again, at the half-year, you see a solid improvement a 15 per cent improvement in the cash flow. We will achieve our target going forward. That in turn will drive 4050 basis points in ROCE. But as I look round the business, I feel really good about where we are. Were in the right market, with the right people, the right business model, in what is an exciting 250bn a year market opportunity and we are the true world leader in our sector.

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APPENDIX 3 FINANCIAL DATA COMPASS GROUP PLC FIVE YEAR SUMMARY m 2001 Excluding exceptional items and goodwill amortisation Turnover Total operating profit Profit on ordinary activities before taxation Profit on ordinary activities after taxation Basic earnings per ordinary share (pence) After exceptional items and goodwill amortisation Turnover Total operating profit Profit on ordinary activities before taxation Profit on ordinary activities after taxation Basic earnings per ordinary share (pence)1 Net dividends per share (pence)1 Closing share price at 30 Sept (pence)
1

2002

2003

2004

2005

8,716 676 583 456 19.8

10,617 805 654 479 20.5

11,286 797 661 492 20.8

11,772 775 645 493 21.1

12,704 711 581 447 19.1

8,716 347 254 162 5.7 469.75

10,617 533 382 244 6.60 7.10 265.00

11,286 521 358 215 10.00 8.40 347.00

11,772 500 370 218 8.30 9.30 220.50

12,704 302 171 37 8.3 9.8 206.25

Earnings per share and dividends per share have been restated as if the post demerger capital structure of Compass Group PLC had existed throughout the 5-year period.

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COMPASS GROUP PLC Divisional, Sector and Geographical Performances (excluding Fuel) Divisional (m) Turnover (m) North America United Kingdom Continental Europe and Rest of the World Total excluding fuel Fuel Total Turnover Total operating profit (m) North America United Kingdom Continental Europe and rest of the world Associates Total Operating profit 207 205 297 2 711 190 294 287 4 775 3,937 2,812 5,443 12,192 512 12,704 3,531 2,626 5,119 11,276 496 11,772 2005 2004

Sector Business & Industry Defence, Offshore Healthcare Education Sports and Leisure Vending Travel Concessions

% of Turnover 2005 36 8 13 11 10 8 14

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Country/Region North America United Kingdom France Japan Germany Spain Italy Australia Switzerland The Netherlands Other Europe Rest of the World

% of Turnover 2005 32 23 8 4 4 3 3 2 2 2 8 9

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COMPASS GROUP PLC US DOLLAR* CONSOLIDATED BALANCE SHEET $m as at 30 September 2005 2005 Fixed assets Intangible assets Tangible assets Investments 7,024 3,145 90 10,259 Current assets Stocks Debtors: amounts falling due within 1 year Amounts falling due after more than 1 year Cash at bank and in hand 466 2,995 489 563 4,513 Creditors: amounts falling due within 1 year Net current liabilities Total assets less current liabilities Creditors: amounts falling due after more than 1 year Provisions for liabilities and charges Equity minority interests Net assets Capital and reserves: Called up share capital Share premium account Capital redemption reserve Merger reserve Profit and loss reserve Less: own shares Total equity shareholders funds 382 166 16 7,381 (3,900) (2) 4,043 382 165 16 7,381 (3,549) (2) 4,393 (5,310) (797) 9,462 (4,586) (704) (129) 4,043 494 2,775 508 471 4,248 (5,083) (835) 9,887 (4,717) (681) (96) 4,393 7,474 3,195 53 10,722 2004

* The exchange rates used to translate the above figures are those ruling at the 2005 balance sheet date (1 = $1.77).

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