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Fri 25th May 2012 - Friday Opinion and Chicago NRA Diary

Friday Opinion:

Subject: M&B’s new broom, US franchising, minimum pricing and fostering entrepreneurs
Author: Paul Charity, Paul Chase, Luke Johnson

The new broom sweeps away by Paul Charity: Last November Mitchells & Butlers executive chairman Bob Ivell offered his considered view on life at the UK’s largest licensed retailer. For Ivell, the company was a bit of a curate’s egg. There was no doubting, according to Ivell, that it’s a very good company, but change was required to make it a great company. He indicated two key internal problems - the company hadn’t sufficiently shuffled off its Bass heritage and hence is a little too old-fashioned and is dogged by bureaucracy that clogs up the internal systems. The new executive chairman also noted that the competitive landscape had changed since the three or four years after the sale of Scottish & Newcastle Retail to Spirit when M&B had grown like-for-like sales quickly. “On reflection, there was quite a period when it didn’t have a major competitor – Spirit was in disarray,” he told analysts. It was an unusual presentation in that City analysts do not normally get so much detailed internal stuff on how systems within a company need to change. Ivell was at pains to list the many and varied ways in which M&B’s Birmingham headquarters had turned into what he described as the “Command and Control” centre. Pub managers, Ivell reported, could receive as many as 120 e-mails in two hours from the centre. “It’s like a big funnel at the top and it’s been clogging up the system,” he reported. He had one telling anecdote about the annual company-wide week-long trip to Celtic Manor where a series of awards and conferences are held for the company’s divisions. For the first time the entire M&B board had decamped to the Celtic Manor on the basis that it’s a golden opportunity to spend a lot of time with the people who actually run the company’s pubs. ”It’s the first time the board had ever attended and talked to the troops. It didn’t happen in the old days – a reflection of the culture of the business,” said Ivell. Technology within the company was also a “little old and antiquated”. He gave the example of Wi-Fi – the company did not have a single pub offering free Wi-Fi, which put it at a disadvantage to the coffee chains. Six months on and Ivell has certainly had an impact. The internal structure has been turned inside out with pub sites freed up to place customers back at the centre of things and headquarters acting much more in a support role. What’s clear, from Ivell’s updated overview last week, is that there were quite a number of things that had started to creak at the managed behemoth. One example is that sites had been limited to one maintenance call a week. It’s a little reminiscent of the final years at Spirit under private equity ownership when hitting profits targets were placed ahead of things like repairing toilets. It’s the sort of stuff that starts to become visible in the sales figures eventually. There’s now a sense too that the former chairman John Lovering’s six brand strategy - to grow Crown Carveries, Toby Carvery, Harvester, Vintage, Premium Country Dining and Sizzling Pub Company exponentially – has been quietly dissolved by a new pragmatism. Two of the brands - Crown Carveries and Sizzling Pub Company – trade in the most competitive part of the market where there has been vicious discounting in an arena of already low margins. Rapid further expansion seems unlikely now. There was also a strong hint that too many wet-led community pubs had been forced into the Sizzling box – Ivell openly derided earlier moves to advertise Sizzling on television. But the new thinking that emerged around expanding Toby and Harvester into leisure and retail parks is working well, albeit with adaptations. And this strategy has over-flowed into other brands worth expanding such as Browns, which was sitting in the company freezer but is now thought suitable for roll-out into novel locations like shopping centres. What emerged last week is that M&B is moving closer to Marston’s new build philosophy. It’s clearly still struggling with performance of bottom-end Ha! Ha! Bar & Grill sites it bought in a package and would much prefer to pick new sites individually rather than return to the package acquisition market with its inevitable mix of good and less good. 
Paul Charity is managing director of Propel Info


The power of US Foodservice franchising by Paul Charity: A trip to the US drums home one fundamental - the dynamic power of the franchise model in US foodservice. A list of the top 200 franchises by system sales finds no fewer than 41 foodservice players in the top 100. Of the top five, four belong to the quick-service camp. In descending order they are: McDonald’s at number one ($77.2bn of worldwide sales), KFC at number three ($19.4bn of worldwide sales), Subway at number four ($15.2bn of worldwide sales), Burger King at number five ($14.8bn of worldwide sales). Also in the top ten are Pizza Hut at number eight (with $10.2bn of sales) and Wendy’s at number nine (with $9.1bn of sales). Of these McDonald’s has been particularly successful in recent years. In 2005, its system-wide revenue was $52.95 billion – in the most recent year it was $77.38 billion – 46 per cent higher. In six years, McDonald’s added more revenue to its system than KFC produces in a whole year. The sales increase over seven years came despite much by way of incremental store sales – unit growth over the period was a modest 6.4 per cent. The steady sales growth shows that it is absolutely possible to keep on capturing market share if menu innovation is strong enough and marketing muscle is applied judiciously. The points of focus are obvious – coffee, juice, salads, day-part expansion and premium products. But it’s also no coincidence that Burger King is moving quickly to ape McDonald’s menu innovations and, just as important, its business model. Burger King is moving quickly to turn over more sites to franchisees, not least because it devolves the capital cost of updating stores. Overall, foodservice market growth in the US is lagging inflation but the franchise model allows new brands to grow at an often astonishing rate. It’s not gone unnoticed by private equity either. Take, for example, Smashburger, which was founded in mid-2007 with a $15m investment by Consumer Capital Partners. By the end of last year, it had grown to a £75m annual turnover company. The chain, which offers better burgers plus chicken dishes, has grown thanks to the franchise route, with some very experienced McDonald’s franchisees among the operators who have taken 60 per cent of sites. Franchisees are expected to make an investment of between $400,000 and $450,000 in new sites, with average unit volume above $1m. It’s a powerful route to growth, with the original backer earning directly from managed sites (operating around 40 per cent of the total estate) whilst earning well from selling franchises and charging royalties on turnover (typically four to five per cent of turnover). In 2011, Smashburger doubled the number of sites in a single year to 93 in total. Smashburger is expected to break into the top 200 franchise systems within two years. Is there a downside to the franchising route? Of course. I signed a Non Disclosure Agreement with one franchisor whilst in Chicago and duly received the full franchisee information pack. A 120-page document sets out the extraordinarily tightly defined obligations of the respective parties and a number of lawsuits, settled and pending, that have arisen from both sides when obligations have not been met. The franchisor/franchisee relationship, as I’ve argued before, is a little like the tenanted pub company/licensee relationship in the UK – good when turnover and profits are strong on both sides, fraught when the opposite prevails. Franchisor/franchisee disputes can and have arisen in areas such as store refit, menu development, national advertising campaigns and royalty fees. Nevertheless, one senses that the franchise route is an avenue ripe for development in the UK and it’s perhaps surprising there’s not been more local activity in this area.
Paul Charity is managing director of Propel Info

It’s back to the future with minimum pricing by Paul Chase: Picture the scene: it is the evening of the 23 December 1874, and a distinguished-looking, bearded gentleman, with the improbable name of Dr. Diocletian Lewis, is delivering a sermon to the Christian ladies of the Baptist congregation of Hillsboro, Ohio. It’s a speech he’s made many times before, and it’s entitled “The Duty of Christian Women in the Cause of Temperance.” During his fiery address he exhorted the ladies to visit their local saloons and implore the owners to stop selling alcohol. Upon refusal they should commence a prayer vigil and hymn singing, until the recalcitrant saloon-keeper repents and shuts his doors! Thus began the “Women’s Crusade” that led to the formation of the Women’s Christian Temperance Union. The initial three-month Crusade closed all the saloons in 912 communities in 31 states across America. The movement it began was instrumental in delivering Prohibition just 45 years later. So what’s the relevance of this story for today? Temperance was and is a middle-class moral reform movement. Whether its advocates wear dog-collars or stethoscopes, the basic idea is that the way to uplift the poor is to help them manage their poverty by removing the temptation to spend their money unwisely. So, what should we make of the decision of Haringey Council in North London to limit the number of fast-food outlets; or of the government to introduce minimum unit pricing for alcohol? Haringey Council has discovered that there are up to six times more outlets in poorer areas, with life expectancy nine years less than in the wealthier parts of the borough. They will also ban takeaways within 400 metres of schools. Meanwhile Alex Salmond and the Righteous Brothers have announced a 50 pence minimum price for alcohol – who can doubt that Mr Cameron will follow suit? And doctors calling for a 20 per cent ‘fat tax’ claim it will reduce heart attack deaths by 2,700 per year. The common thread of all these measures is the same: that the way to improve social mobility and end health inequalities is to morally reform the consumption patterns of the poor – who stubbornly refuse to succumb to persuasion - by the use of coercive reform. And “coercive” is the key word here. If middle-class foodies like Jamie Oliver - who pretends to be working class, with his dropped H’s and quaint glottal stops, and incessant use of the word “mate” – if his attempts to persuade the kids and their parents to give up the chips fail, then legislative repentance is the only alternative! We must all have our choices limited because some people can’t make the ‘right’ choices. There is a hard core of activist medics and political meddlers who no longer believe that persuading or educating the public delivers the right ‘outcomes’, and who are bent on coercive reform. With escalating treatment costs in the NHS the way forward is seen as prevention. But you can’t trust the public to ‘do the right thing’. So expect a return to 1940’s paternalism, infantilising adult decision-making by introducing sin taxes to nudge us all in the right direction. If we are to tackle health inequalities and “uplift the poor”, the way to do it is not by limiting their choices with price hikes and kebab-free zones, but by widening opportunities and creating jobs. This industry has a fantastic record in doing just that. Instead of meddling with outdated market interventions and moralistic measures government needs to end the duty-escalator, reduce VAT on pub food to 5 per cent, cut red-tape and let us get on with creating jobs and adding value. Instead the government has created a ‘Behaviour Change Unit’. How scary is that? A Ministry for the Suppression of Vice and the Promotion of Virtue cannot be far behind!
Paul Chase is director and head of UK Compliance at CPL Training


How to foster entrepreneurs by Luke Johnson: Last week one of London’s most successful restaurateurs described to me how he started in the catering trade. Like so many, it is a tale of chance. He trained to become a teacher, but hated it, and so fell into bartending – and from there graduated to waiting tables, and then managing a restaurant. Now he has half a dozen, and his business is booming. The most fascinating chapter of every business biography is what I call the “formative phase”: the moment when an entrepreneur decides which industry to enter and gets the early breaks. So often it is pure serendipity – there is no grand plan, no career map. It is more of a haphazard stumble, and then a dawning sense of opportunity that is seized upon by those destined to become entrepreneurs. A formal education for so many professions means an ordered sequence of steps. I accept that this is entirely necessary for many walks of life. But for entrepreneurship there is no syllabus, no degree. It is a journey in self-education. The reason academics understand entrepreneurs so poorly is that they lead lives so removed from those of most professors. There is an almost complete disconnect between the intellectual class and business founders. This alienation is a double tragedy. First, it means we don’t know enough about the psychology and character of wealth creators, which makes it harder to frame policy so as to foster more of them. Second, many of our brightest minds shun the world of start-ups, believing that they are more suited to the serenity of the university campus than the hustle of the market place. I am sure this perception is false – the history of Silicon Valley is crowded with the vital contributions of highly qualified staffers migrating from institutions such as Stanford University and MIT. Moreover, this rule doesn’t apply in certain cases. When I was governor of the University of the Arts London, I learnt that hundreds of their faculty staff were self-employed, and so were more empathetic to graduates who wanted to own fashion houses, say, or digital design studios. Entrepreneurial instincts can be cultivated even in scholarly surroundings – the two should not be mutually exclusive. But my sense is that too many of our higher educational establishments often fail to spot entrepreneurial talent. And if they do notice them, they have almost nothing to offer. Perhaps colleges are simply unsuited to guide such independent, unconventional minds. I recall that my medical tutor was baffled by my pursuit of various early enterprises, although I think he sees the point nowadays. I firmly believe there are more entrepreneurs out there, stuck in mainstream jobs, who, if pushed, encouraged and advised, could build new businesses. They might be lawyers, architects, civil servants or doctors. These professions all matter greatly, but every field of endeavour could always benefit from more invention – and carrying out such pioneering stuff is incredibly hard within large organisations. Better that innovators work outside the hierarchies and partner with them when it makes sense. It might be argued that training teachers, doctors, dentists and nurses is nothing to do with capitalism, since almost all toil within the public sector, at least in Britain. But education and healthcare will be transformed in the coming years. Traditional classrooms and hospitals are not productive enough, and private sector technology and input can help this process. We need more entrepreneurs in medicine and learning. Directions are taken and prejudices formed in our student years and 20s. Grab people young and unleash those enterprising spirits early, and they are likely to have more impact. All universities should be persuading entrepreneur alumni to mentor undergraduates. They should seek angel investors among their donors to back student ideas. Tutors should be encouraged to create spinout companies. And why not found incubators to nurture early-stage businesses? Entrepreneurs will always carve their own paths. An ability to identify a fortuitous opening is not something that can be easily taught within a prescribed structure. But surroundings that allow those stirrings and initiatives to flourish can help. Educationalists should be alive to the possibilities.
Luke Johnson runs Risk Capital Partners, a private equity firm. This article first appeared in The Financial Times 

Chicago NRA Diary by Paul Charity

The Chicago Chop House ordeal: You’ll perhaps have read mention in this Newsletter of how nine members of the Association of Licensed Multiple Retailers had dinner in the Chicago Chop House and left $2,500 poorer thanks to a policy of withholding menus and concerted hard-sell. Hats off to Christian Arden, of Matterhorn Capital and Chicago Rib Shack, though, who had the courage to argue his corner at every turn. Having ordered Wagu steak and finding it impossible to cut through, he sent it back to the kitchen and escaped with a bill of a mere $29. His complaints caused our hitherto turbo-charming waiter to break out into a visible sweat. And when a stretch limousine pulled up outside the restaurant by happenstance after our meal, Arden even forked out for the entire group to be driven back to its hotel. What a guy! Subsequently, a member of our party from a well-known regional family brewer has made his views of the Chicago Chop House known on Trip Advisor with the following well-chosen words: “Authentic gangster look with criminal prices. The food was good but beware extremely high prices for unwary tourists.”

Ted Docherty does it in style: Talking of limos, our party had heard Tailor Made Dining boss Ted Docherty (five excellent sites and growing) was in Chicago for the NRA show – and hoped to bump into him. Lo and behold he was on the same British Airways flight out and we watched enviously as the Thames Valley steak maestro headed off into Chicago in his own stretch limo – while we waited patiently for our minibus to arrive.

Hard rocking at the Hard Rock Hotel: The Hard Rock Hotel in downtown Chicago, our base for four nights in Chicago, doesn’t offer too much by way of rock star excess. But guests are offered a choice of twenty complimentary Fender guitars - including “legendary Strats and classic Telecasters and even a few bass guitars for those who live at the low end” - to take to their rooms for rock-out sessions. What about the noise? Guests get headphones to avoid disturbing neighbouring bedrooms.

Steelite International’s heady cocktail: One of the most popular events at the NRA show is the cocktail party thrown by UK-based Steelite International at the stylish Drake Hotel – “open every night since the repeal of Prohibition” according to its website rhetoric. The Steelite cocktail party started with a handful of guests many moons ago but now attracts hundreds of movers and shakers. Managing director Kevin Oakes reports that the US market is a major UK export success story with many tens of millions of sales.

Hitting the circuit in Chicago: Determined to make our Study Tour as exhaustive as possible, our party headed to Chicago’s prime drinking circuit, located in the Rush and Division areas of the city. A tour of multiple bars found an interesting drinking scene but fewer drinkers than you’d come across on a wet Wednesday night in Cleckheaton. Pick of the bars was Shenanigan’s House of Beer with its beer cart at the door, waitresses who come up and say hello to you when you arrive – and its own basketball hoop for those who like a little exercise while they’re out having a beer.

Coca-Cola’s secret weapon takes centre stage: There’s still a real buzz surrounding Coca-Cola’s revolutionary Freestyle dispense machine. Designed by Italian design gurus Pinafarina, the Freestyle offers virtually endless self-serve flavour variants. Long queues formed at the NRA show to try the machine, which is currently being rolled out across the Burger King estate. Meanwhile, later on our trip, the owner of the six-strong Chicago-based Go Roma quick-service Italian chain tells our party the Freestyle has only moderate success at his venues – boosting sales by a mere 15 per cent.

Wow Bao fails to provide the wow factor: A briefing from market expert Kevin Higar, from research firm Technomic, reports that a foodservice trend has been to offer customers heightened flavour experiences even at low-end price points. One example he provides is Wow Bao, which offers individual dumplings for $1.59 with a choice of six fillings, including Thai curry chicken and BBQ pork. A visit to a Wow Bao site on North Michigan Avenue provided a sampling opportunity. And the verdict? UK dumpling chain Ping Pong doesn’t need to worry too much.

Ann Elliott grants Bill Clinton an audience: Former President Bill Clinton offered the keynote address at the NRA show on the Sunday afternoon. He’s an advocate of healthy eating after a heart attack in 2004. But he was keen to make it clear he was a friend of the restaurant industry: “I don’t want to come here and make you mad, because, you know, Hillary’s got a traveling job, and so I spend an inordinate amount of time in restaurants.” His address was delayed by over an hour thanks to thunderstorms that meant his plane had to diverted to Gary, Indiana. His NRA address was sold out but indefatigable doyenne of sector marketing Ann Elliott showed that determination can overcome most obstacles. Her patient queueing was rewarded with a much-prized seat for the Clinton address – the only member of our group to hear Clinton in person.

A trade body with plenty of poke: The National Restaurant Association has all top 50 restaurants chains as members (and plenty of others as well of course). It organises the annual blockbuster show (1,800 exhibitors) and has endless educational programmes plus the ServSafe certification programme, which provides members with training in areas such as food handling and alcohol dispense. A ServSafe executive tells Diary that this programme alone provides the NRA with $40m of annual revenue. This level of income is the key reason, of course, why the US restaurant industry has so much lobbying muscle. 

Budweiser’s dispense innovation: Budweiser took a stand at the NRA exhibition to showcase its new dispense system. The system has a T-bar but polycarbonate glasses are placed on the bottom of the unit which punches a hole in the glass, fills it and re-seals it, all in a couple of seconds. Alas, one member of our party, keen to test his polycarbonate glass, soon discovered it was leaking quite badly. Teething troubles, no doubt.

The last word goes to Gary McManus: Northampton pub king Gary McManus was the surprise package of the ALMR study tour to Chicago. The McManus Pub Company boss kept the ALMR study tour motoring with endless good humour, a formidable appetite for late-night socialising and a gift for befriending (and charming) the locals. He also won the prize for delivering the two best jokes of the trip. One involves a contract killer and is definitely best told by Gary - ask him to tell it next time you see him.

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