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Fri 2nd Nov 2012 - Friday Opinion
Subjects: Expansion and the banks, VAT and the coffee market
Authors: Kevin Charity, Peter Linacre and Martin Thorpe

If at first you don’t succeed then try harder by Kevin Charity

The subject of bank debt is a little boring. But for those of us trying to grow our businesses it’s our life blood – and when it’s not available, it’s a trigger for extreme frustration. A while ago, my company needed to extend its debt facility. I placed a phone call to my bank manager to tell him about a first class opportunity we had spotted, expecting, probably naively, a positive response once I had explained everything. How wrong could I have been?

We had found an 18th Century, 31-bedroom coaching inn (essentially a high street hotel with a pub). It was in tip-top condition, trading a little over a £1m per annum and with a strong reputation. Our own company accounts were in good order and covering existing debt repayment comfortably. Our gearing was low and our track record was there. Why wouldn’t our bank want to lend on this new venture?

The flaw in the plan was that even though the coaching inn we had found was trading well and had a very healthy turnover it simply was not converting any of it to profit. We had also, at the time, just started a £1.3 refurbishment on another coaching inn that would be closed for eight months.

The bank’s position was that as this possible new venture was not making a profit there wouldn’t be any debt cover for a while. Put together with the £1.3m refurbishment we were just entering the bank believed - are you ready for it - we would be “stretching ourselves”. I know this is how banks think and for admittedly good reasons. But it’s hard to except this and I have never met any other business owner amongst my peers who would also readily give in at this point. That’s the whole point of what we do - we see a different balance of risk and reward and, inevitably, we do stretch ourselves; it’s in our nature.

For us the opportunity was very clear - buy the new site at a considerable discount due to its under performance in the profit department, sort the costs out quickly and get it converting into profit. And then, as bonus upside, we could see how revenues could be pushed higher under our management. Within a year the value of the asset would be considerably higher. Why wouldn’t we want to push ourselves?

Together with my two fellow directors and, to be fair, ideas put forward by the property agent, we hatched a simple plan. We would explain to the vendors that we wished to buy their hotel, but we didn’t want to pay for it! (Well, not just yet anyway). Very cheeky, I know, but if you don’t ask, you don’t get. The owners examined our track record – and agreed. We bought the company that owned the hotel on Day One, with a promise to pay the freehold price within three years. The owners placed a charge on the hotel – and knew the worst that could happen is that the hotel is returned further down the track in an improved condition. There were numerous tax benefits on each side – my company saved around £50,000 by buying a company rather than a property, for example.

And here’s the bit that restores your faith in people. Not only did the vendors listen but they came up with a few tweaks which made the deal even better. It just so happened to be a great plan for them as well. They did not want to continue operating the coaching inn; their business was debt free and they were therefore unsure what to do with any proceeds from a sale. The deal would give them a small but decent return on their money for a while and they would be released from the burden of the day-to-day operation. There was lots of paper work, crossing the T’s and dotting the I’s, as would be expected, but it almost felt like a hand-shake deal - it was one of the most relaxed transactions we have ever dealt with. 

We are now just over a year on and the big question is: Did it work? Yes. Within three months the costs were sorted and the turnover was converting at 20 per cent. Revenues increased over a 12-month period and are currently 25 per cent higher on a like-for-like basis. Our bank, seeing the outcome, has been very happy to do a deal for new debt funding to buy the freehold. The vendors waited a little while for their money but are completely happy - and we have ended up with a great asset that we are very proud of.

And the lesson? The current financial environment does not always have to stifle growth. In fact, it can often present interesting and more creative opportunities. Ours is just one example. But every day I can see new and unusual partnerships, ventures and creativity appearing, which perhaps would not be explored in better, more stable times. My company is currently exploring a similar deal to the one I’ve outlined above. Let’s raise a glass to risk-taking!
Kevin Charity is managing director and co-founder of the Bulldog Hotel Group

Tax and the Treasury by Peter Linacre

When I was a third year soon-to-be Economics graduate in the late 1970s, I applied far and wide for a job. With a degree in Monetary Economics I inevitably made my way to the application for HM Treasury. Some representatives from HM Treasury - recent graduates from my alma mater – came to see me and, with great enthusiasm, explained what a job at The Treasury entailed. ‘All those exercises you did in micro-economics, the opportunity cost of any policy decision, marginal revenue productivity, elasticities of demand.....’ My mind turned off and I went into the music industry, not for long but that’s another story! I felt persuaded that HM Treasury was clearly in the safe hands of economists who would spend hour upon hour modelling the merest twitch in tax rates and subsidies, calculating their effect on those damn supply and demand curves!

My instinct over the subsequent 30 years is that all those economists must have left and that this branch of economics is not what HM Treasury bothers itself with. Why is this important to a humble publican?

HM Treasury would appear to have been taken over by accountants – that’s why. In answer to a query about the excise duty accelerator in early 2012 a Treasury minister retorted – ‘Well, they will have to come and tell us where we will replace the £115m the increased duty will raise’. A true accountant’s riposte! Those same accountants might also have noticed that the fuel duty accelerator has led to a huge fall in demand and a reduction in duty raised as well. Well done, guys. Of course accountants don’t study economics.

Then we come to VAT. Surely someone, somewhere in HM Treasury has been set the task of examining the impact that different VAT rates might have on demand, employment and tax levels. Maybe they could look across the channel and even have a close look on Monsieur Jacques Borel’s presentations. What is so sickening is that our tax policy has become so bloated, confused, inconsistent and – what’s worse – bad at raising income. The old tenets of a good tax - that it should be simple, fair and efficient - has been lost on recent governments. The tax system merely becomes a sledgehammer to crack whatever nuts are available – and the pub sector is just one nut. They already tax it – and more importantly know how to tax it – so they keep on taxing it even though the marginal rate of revenue increase falls and the opportunity cost to the economy soars in terms of lost employment and investment. It feels like a second year applied economics essay circa 1976!

But VAT is THE big issue for the pub and leisure sector. We are penalised for no good reason other than the fact that supermarkets shout loudest and coffee shops are still below the parapet. That’s no good reason and we should shout as loud as we can until the iniquity is stopped. HM Treasury should be on the side of good economics and good taxation – it seems to be on the side of neither of these.
Peter Linacre is chief executive of New Pub Company

The coffee opportunity by Martin Thorpe

It’s no secret that pub operators have struggled over the past few years, particularly those that are wet-led. Sales of alcoholic drink are down across the board, as consumers seek to reduce the amount they spend on leisure activities. However, a rise in spend on coffee represents a new market opportunity for many operators.

Out-of-home coffee has bucked the recession trend with year-on-year rises. In the past 12 months alone, sales of black and white coffee have risen by 2.5 per cent while speciality coffee sales have shown even more significant growth with a seven per cent increase. However, at present, pub operators only have a relatively small share of this market. There is a huge opportunity here for operators looking to drive profits and fill the gap left by the downturn in wet sales.

In fact, the out-of-home coffee market has grown at an unprecedented rate in the past decade, with the number of speciality coffee shops growing by 70 per cent since 2001 to reach 15,000 outlets in the UK. With two in every three coffees currently purchased from a specialist outlet what can the pub trade do to gain a bigger share?

The reality is that consumer expectations – and tastes - are far more sophisticated when it comes to coffee and people would rather go without than compromise on quality.

In the region of 99 million ‘lost’ coffee sales in the out-of-home market can be attributed to poor quality. This really underlines the importance of having a hot beverage offering that includes a full range of speciality coffees that are on a par with high street coffee shops. If you can satisfy expectations for quality coffee, an increased price point is justified and ultimately you stand to achieve greater margin

Consumers see coffee as a treat they deserve and, in these tougher financial times, they expect to receive the coffee they want, in the way they want it. This could mean that they may prefer, and therefore expect, a skinny milk cappuccino or a double-shot latte. We’re also seeing consumers wanting a different size cup at different times of the day. Do you offer a large, medium and small option? If not, could you practically implement that change? Another consumer demand is speed – customers expect their access to coffee be instant, but also of a barista quality. To gain a bigger proportion of the market operators need to be able to offer consumers the same coffee experience they would get in a speciality outlet. Quality, convenience and customisation are key.

It all boils down to having the right range for the right occasion, choosing products that guarantee speed and perhaps most importantly, delivering an all-round quality experience, from the aroma and visual appeal – using latte art for example - through to the taste. 

And let’s not forget about service. Speed of service, consistency of service and quality of service are just as important as your hot beverage offering. How right you get your service will be dependent on how well you pick your coffee machine. Consider what your volume will be, and the training required for whichever machine you choose. 

Any finally, try to change the way you look at coffee. Consider coffee as part of your everyday offering and not just as a sideline. We find that many operators aren’t picking up the coffee sales because consumers simply don’t know they sell coffee. Advertise your coffee offering, and make coffee part of any regular deals you offer. Also ensure that your staff are aware of the full coffee menu so that they can offer a decaffeinated alternative to the customer who doesn’t want to be awake all night or syrup coffees, that command a higher price point, to consumers who are full and have turned down dessert but perhaps still want to end their meal with something sweet.

Gone are the days when coffee was confined to an after-dinner beverage. It is now the most popular hot beverage consumed out of home with a 33 per cent share of the out-of-home hot beverages market. All things considered, it stands to reason that coffee presents a valuable opportunity for pub and bar operators to deliver a strong and sustainable contribution to profits whatever the time of day.
Martin Thorpe is head of beverage solutions at Nestle Professional

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