The Economist - USA (2020-06-27)

The EconomistJune 27th 2020 Business 55

I

f some workers, after months spent at

home, reluctantly concede that they are

missing their colleagues, few will admit

any longing for the office canteen. Compa-

nies that cook up meals for workers, pupils

and hospital patients have been hit by co-

vid-19 just as hard as restaurants (usually)

open to the public. As employees trickle

back to cafeterias, their prospects look no

less mixed than those of other eateries.

What purveyors of catered grub lack in

customer enthusiasm they make up for in

size. The four big food-outsourcing firms—

Compass Group in Britain, America’s Ara-

mark and Sodexo and Elior in France—to-

gether serve up perhaps 14bn meals a year.

Of the nearly $300bn spent on feeding

workforces, student bodies and the like,

roughly half is outsourced, and half of that

goes to the multinationals. Growth was

steady if not spectacular before covid-19,

helped by acquisitions of local rivals.

Lockdowns have brought short-term

pain and long-term uncertainty. Beyond

offices, food outlets everywhere from

schools to stadiums and conference cen-

tres are shut. A few usually reliable earners

have dried up: hospital catering has slowed

as beds were freed up for covid patients and

visits banned. Even some prisoners, liter-

ally captive consumers, have been let out

because of the pandemic. Compass, the

biggest of the big four, said in May that half

its 600,000 staff were on furlough.

Investors are also worried about what

happens next, which is why the caterers’

share prices have not rebounded with the

rest of the stockmarket. Home-working

has nibbled at growth and looks likely to

continue doing so after the pandemic. In

factories social distancing means a smaller

workforce toiling for longer shifts, so fewer

mouths to feed. University students, who

along with pupils consume a quarter of ca-

tered meals, may also stay away from cam-

puses as online courses gain steam.

Because of high fixed costs, losing a few

diners can eat into margins (see chart). Op-

erating profits are already wafer-thin:

around 36 cents per meal, or roughly $100

per site per day, in the case of Compass. Ris-

ing expenses, such as hiring more staff to

enforce stricter cleaning protocols, will not

help. Passing the costs on to clients is tricky

in a recession. A slower economy will

weigh on consumers; overpriced stadium

hot dogs are an easy luxury to forgo in a

downturn even once live sports return.

The caterers hope arecession might

helpthemsecurenewclients.Firmsthat

currentlyoperatetheirownkitchenscould

cutcostsbymaybea fifthbyoutsourcingto

theprofessionals,whoareatpainstoex-

plainthatkeepingkitchensuptocompli-

catednewhygienestandardsisbestleftto

them.Thelastrecession,in2008-09,sawa

smalluptickincontracts.

Still,manyemployersmayinsteadcon-

cludethatthoseemployeesstillturningup

toworkcanbesatiatedwithbulkdeliveries

fromfoodappslikeUberEats.Theyhad

beentryingtoeatthecaterers’luncheven

beforethepandemic. 7

PARIS

Lean times for catering groups

Dining...

Crash diet

Thingruel

Catering-servicesrevenues

Selectedfirms,yearendingMarch2020,$bn

Source:Bloomberg *YearendingFebruary

Elior

(France)

Aramark

(UnitedStates)

Sodexo*

(France)

Compass

(Britain)

0 10 20 30

Ofwhich: Operatingprofit

A

mid economic gloom, a small solace

for wine investors. Last year’s excellent

vintage of Bordeaux reds is selling for

15-30% less than the crop of 2018. Top labels

retail for $350-500 a bottle and the second

tier for $100-175, prices last seen in 2016.

The bargains will not sustain tipplers

through lockdowns. Bordeaux estates sell

wine two years before bottling it, via a sys-

tem called en primeur. They set prices based

on scores from critics, who taste wines as

they mature in oak barrels, and are paid up

front by middlemen. These négociantsthen

sell wines to wholesalers and importers,

who supply shops and restaurants.

The modern version of this network

evolved 70 years ago, when wineries need-

ed money and patient buyers snapped up

cheap claret. By the 1990s leading estates

had cash aplenty. But the system turned

into an investment vehicle. Investors who

bought wine en primeureach year between

2000 and 2008, and sold each vintage after

two years, made a return of 19% on average,

according to Liv-ex, a trading platform.

Since then en primeurhas seen booms

and busts (see chart). The great years of

2009 and 2010 were sold just as Chinese

consumers embraced fine wine, sending

prices up. When China banned lavish gifts

in 2012 investors were stuck with wine they

literally could not give away. Western

drinkers’ taste shifted from Bordeaux’s Ca-

bernet Sauvignon and Merlot blends to rar-

er Pinot Noirs from Burgundy.

Although Bordeaux is abundant—the

biggest names make up to 200,000 bottles

a year of their top wine—inattentive farm-

ing and inconsistent weather have limited

the stock of truly great wines. Until now.

Mid-range estates have raised quality by in-

vesting in modern wineries and row-by-

row vine monitoring. Climate change has

helped grapes ripen. From 1980 to 2010 Bor-

deaux enjoyed two or three blockbuster

vintages per decade. Critics’ scores put four

of the past five years at or near this level.

Since 2015 en primeurprices have gone

up by 24% with each good crop. But a run of

fine vintages also created a glut in négo-

ciants’ cellars which they have struggled to

offload at a reasonable mark-up. Between

2011 and 2018 they went from 239 days of in-

ventory on average to 313 days; their net

debt as a share of equity rose from 58% to

92%. “When intermediaries make a low

margin, they’re not interested in distribut-

ing your wine,” says Stéphanie de Boüard-

Rivoal of the Angélus estate.

So the case for a price cut by the estates

was strong, and bolstered further by a new

25% American tariff on European wine. Ex-

cept that discounting the 2019s would have

left négociantsand investors who ponied

up last year feeling bitter. Covid-19 provid-

ed the perfect pretext. Saskia de Rothschild

of Lafite Rothschild, the priciest big pro-

ducer, speaks of “a good opportunity to re-

shuffle the cards”. Having reset the system,

most estates have also cut the amount they

offer en primeur, to avert another glut. Just

as well, for 2020 is shaping up to be yet an-

other fine vintage in Bordeaux.  7

A handy pretext to discount Bordeaux

...and wining

Claret correction

Be fearful when others are greedy

Bordeauxwine*enprimeurfutures

Source:Liv-ex *RedsintheLiv-exBordeaux 500 index

150

100

50

0

300

200

100

0

2000 19151005

Release price at London

merchants, € per bottle

Resale value on delivery

of €100 investment

Vintage year