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Fri 15th Mar 2013 - Friday Opinion
Subjects: Sector profitability, existential threat, neglected public relations tools and going back to the floor
Authors: Paul Charity, Paul Charity, Ann Elliott and Peter Marks

Profit conversion in the sector by Paul Charity

Businesses in our sector largely work to the same democratic principle. As Eataly investor Joe Bastianich says, “You buy things in, you fix them up and you sell them at a profit’. Everything is subordinate to this prime principle – the quality with which you execute the three stages of the Bastianich process will reflect in the profits your company achieves. Right?

Last year we tasked our researcher with gathering together the turnover and profit figures for the sector’s 200 largest companies across multi-site pub, restaurant and foodservice segments. We then worked out the profit these companies achieved as a percentage of turnover and listed them in descending order. The top 50 companies in our list converted at a rate of 8.6% or above with a full 40 of these converting at least 10% of turnover to pre-tax profit.

What was surprising was the mix of companies achieving high profit conversion rates, coming from a surprisingly large range of areas. Very large quoted companies sit alongside small and nimble operators with their own distinct market position. The obvious lesson, though, is that are a wide range of business models that produce high quality returns for their owners. 

No surprise that regional family brewers feature in our top 50 profit convertors – vertical integration has stood the test of time and no fewer than nine brewers with managed or tenanted estates make the list.

Traditional but unfashionable wet-let businesses executing their model skillfully rank well in the list. Amber Taverns, which operates managed pubs that serve little food, achieves a top 30 placing with its focused business model offering superior community pubs in unfashionable locations, denuded otherwise of investment. Likewise, Be At One’s purposeful wet-led offer, centred on cocktails, notches up handsome profit conversion. The tide comes a long way in and goes a long way out in the tempestuous nightclub sector. But the success of Aaron Mellor’s Tokyo Industries in profit terms, with a Top 20 placing, shows just how lucrative the large-scale nightclub can be. Leeds-based Arc Inspirations, which achieves a top ten placing, shows that it’s not necessary to have a south east presence to perform spectacularly well. Its high quality bars and restaurants, with well-chosen locations, earn the company a place very close to the top of our profit conversion index.

Relative youth of companies is no bar to terrific profit conversion. A host of fast casual concepts in expansion mode, such as Cote, Patisserie Holdings and Underdog Group achieve impressive placings with profit conversion above the 10% mark alongside more established operators such as Wagamama and Prezzo.

No surprise, perhaps, that Whitbread, Domino’s UK and McDonald’s, each with their own very distinct and successful market positions, appear in the top 15 in our ranking. Domino’s, with its capital-lite, franchisee-driven growth strategy, can lay claim to the most impressive profit convertor of all of the quoted companies although Whitbread, remarkably, is very close behind.

There are some companies in our list that some might find surprising. Take Hard Rock Café, for example. Its £10m of merchandise sales per annum mean it converts to profit at a whole six percentage points higher than Domino’s UK. High-end restaurants also do well. Caprice Holdings achieves a lofty position in our list as did Rex Associates, with £200,000-a-week of takings at The Wolseley, before it went into investment mode.

Our list is not unmitigated good news – there are plenty of companies who lost money last year or achieved wafer-thin profit conversion percentages. Nevertheless, the list proves that, despite the endless onslaught of external regulatory cost pressure and an ever more competitive landscape, it’s perfectly possible to achieve margins that would make a supermarket boss green with envy, unless he happens to own Giraffe, perhaps.
Paul Charity is managing director of Propel Info. The Spring edition of the Propel Turnover and Profits Bluebook is now available. Contact jo.charity@propelinfo.com to buy a copy.

Existential threat by Paul Charity

The rise of digital platforms has created new and powerful ways of doing business. It’s the dream of any new start-up to create as disruptive a business model as possible. The growth of online has produced a new armoury for disruption in a surprisingly large number of business fields. Vast swathes of retail feels the existential threat arising from these new arrivals – who knows for sure which, of many well-known retailers, can survive this on-slaught of competition from low-cost and fleet-footed online operators?

Our sector can count its blessings. It inhabits an area of life likely to be immune from on-line pressure on one key sense. I predict with confidence that consumers will continue to eat three times each and every day – and that they will increasingly choose out-of-home experiences because they deliver value, variety and va va voom. Breaking bread is a social experience that can’t be replicated digitally.

Tesco took the entire sector by surprise this week by buying Giraffe. Luke Johnson described the move as a “game-changer” with the UK’s largest retailer “parking its tanks on the industry’s lawn”. In buying Giraffe, Tesco exposed its own existential angst. The supermarket chain revealed that it, too, feels the pressure of sales moving online. This threatens to weaken, over time, the magnetic pull of Tesco as a one-stop retailing solution for consumers. It has noticed the threat from the experience-rich mega shopping centres such as Westfield, which have skillfully combined a shopping and dining offer that wows consumers.

A series of left-field acquisitions show Tesco feels it needs to create its own rich and varied experience for customers, with food and drink as one of the key battlefields. The purchase of Harris + Hoole and Giraffe show the direction of travel now. In buying an artisan coffee shop chain and a family-friendly world food offer it mimics McDonald’s, who invested in Pret A Manger, and Coca-Cola, which now owns smoothie maker Innocent, in buying in ready-made solutions to meet evolving consumer demand. One suspects these two acquisitions may be followed by others as Tesco seeks to create its own universe of integrated food, drink and shopping, exerting a powerful magnetic pull on time-strapped and experience-hungry consumers. 

How worried should the sector be by Tesco’s naked aggression? Well, there’s potential for damage here. One wonders whether Tesco is, in fact, being ambitious enough. You only have to consider the enormous success of Eataly across a range of international markets to understand the possibilities engendered by creating a layered experiential shopping and eating offer. Joe Bastianich refers to his New York branch of Eataly, the fourth most popular tourist destination in the entire city, as a modern re-creation of the traditional Italian piazza, a place where urbanites fulfill a range of era-impervious personal needs. (Wholefoods is, of course, only a scaled down version of Eataly.) In fact, from a sector perspective, one is thankful that Tesco hasn’t bought Red Hot World Buffet and adopted its Nottingham Cornerhouse iteration and scaled up further if it’s the creation of an unmatched consumer experience that we need to be most fearful of.

However, it’s interesting to see how the sector is already responding to existential threat. There’s no grand strategic plan involved in the industry evolution evidenced in my nearest town – Horsham in West Sussex. But in a few shorts years, restaurant operators have clustered on the town’s East Street. Early pioneer PizzaExpress has been joined by Strada, Wagamama, Giraffe, Cote, Bill’s and Ask. Spirit Pub Company has upped its game with a conversion to its Taylor Walker brand. Independents have joined the party. A former Punch pub has been converted to Wabi, run by a former Nobu chef, an artisan bakery called Artisan has opened and Restaurant Tristram sits in the middle of the branded strip with a Michelin starred chef behind the stoves. The net effect provides my family with enormous and exciting choice, sufficient, in fact, to draw spend from us each and every week. A Giraffe located at the giant Tesco on the outskirts of town will not be enough to counter Horsham’s rich pub and restaurant scene. Nevertheless and as always, Tesco will need to be watched closely.
Paul Charity is managing director of Propel Info

Five overlooked PR tools by Ann Eliott

We all know the last few years have been tough, not just in our sector but across the economy. Many operators are really looking to find that extra bang for their buck, saving on their marketing budgets and pushing PR to secure further editorial coverage. With this in mind, here’s five tips for operators wanting to maximise their spend.

1. Twitter
You’re probably thinking “Twitter?! I’m on Twitter 24/7!” Just a thought – do you use Twitter to discuss potential PR with a journalist?  Not only is Twitter a great way to have a guaranteed audience from a journalist without having to go past the dreaded gatekeeper, it’s also brilliant for maintaining relationships.

A successful feature pitch is fantastic, but keeping the momentum is even more crucial to getting coverage. Tweet your media contacts about the football team they support or their favourite TV show. Be yourself (and human) rather than an annoyance that only tweets (or calls) them every now and then looking for a bit of exposure.

2. Bloggers
I won’t bore you with the typical social stats. We all know there’s billions of people on Facebook and hundreds of millions on Twitter - these figures mean that anyone can secure an audience if they want to. Five years ago, the word blogger inspired visions of a lonely individual locked in a basement, typing away for hours for an audience of one. Now, with the advent of social media, established bloggers (and particularly food bloggers) hit the thousands in page views. Use this to your advantage and invite key bloggers to launch events. Embrace them for positive coverage hits. After all, you never know where a blogger, who gets noticed, will end up.

3. Picture desks
It’d be a cliché to say a picture tells a thousand words, but to say a picture can offer as many coverage opportunities as a press release isn’t always an exaggeration. All nationals, and plenty of regional publications, have dedicated picture desks, and some even devote double page spreads to the photos of the day. Better still, all run a slideshow of the day’s news in pictures online. If you’ve got a great picture of an event, or a nice shot of an exciting new dish, ping this out to picture editors. Alternatively, if you’ve got something big on your hands, do a photocall to picture desks in advance: you may well back up your photo with sizeable editorial.

4. Journalisted
Here’s a scenario: you’ve made the decision to invite certain publications to review your site but you’re still not sure which of their food writers is the right one to target. Go onto journalisted.com, which keeps a detailed archive of the articles a journalist posts on all nationals, and even some regional, titles: perfect when you’re trying to find which journalists/ reviewers will be receptive to an invitation. This will certainly ‘improve your aim’ when targeting journalists that don’t have a lot of time on their hands.

5. A personal touch
Emails have revolutionised the way everyone works, but unfortunately this has made journalists more contactable than ever. Everyone loves the personal touch though - send out an eye-catching voucher inviting journalists to review your site. You can send along personalised press packs, and imagery of your sites, with it. Rather than having a dry email get lost in a Food Editor’s inbox, ensure they have a physical invitation on their desk that they won’t forget.

Better still; follow this up with a phone call a week later. If they can’t take you up on your invitation, they can always send along a colleague instead.
Ann Elliott is chief executive of Elliott Marketing and PR

Going back to the floor by Peter Marks

Just over 12 months ago I took the reins of the UK’s largest nightclub operator, The Luminar Group. I was part of a consortium that bought the assets of the former Luminar Leisure PLC that went into administration in October 2011. I was well aware the 64-strong estate, now 56, was in desperate need of a makeover. Not only had many of the clubs we inherited been uninvested in for years, but so had the employees. Those at the coal face had been struggling to deliver a great night out with very little support from the centre, partly due to cash starvation. You rarely go bust overnight so many of the issues were deep and ingrained.

Drastic change was required in terms of both culture, focus and investment and this had to be led from the top. The new Luminar no longer had the constraints of being a plc, so with those shackles removed we could get stuck in and look forward to a great future and preserve over 3,000 jobs.

It was at the start of this new adventure that I was approached by Studio Lambert, the makers of Undercover Boss. They had wanted to film a nightclub company for years as its was bang on target audience, but unsurprisingly had been knocked back. At first, I was extremely reticent and wondered why on earth would I put myself through that and leave myself open to abuse. But I also thought this isn’t about me, but a great opportunity to prove to my colleagues throughout Luminar, from the cleaning team to the boardroom, that culturally this new business was a world apart from the old order.

It was also an opportunity to tell our customers and investors that Luminar was still in business and our clubs were about to change, for the better. So after much deliberation, talking to others such as Vanessa Gold of Ann Summers fame and my fellow investors and board members, I gave Studio Lambert the green light.

The programme makers were the first to go undercover and look for stories, personalities and create a believable cover story for me, so that my true identity would be concealed throughout filming.

I remember being picked up from my home on a Bank Holiday weekend Sunday morning, they did some filming at my family home and then I was bundled into the car Hollywood action movie style. It was only at this point that I learnt about my alias and where we were going. Each day, for eight days, we followed the same routine and ended up shooting 1,460 minutes of footage for a 46 minute programme.

I have taken some criticism for doing the show, but I don’t have any regrets. Every business leader should go back to the floor on a regular basis. It’s hard but so worthwhile. I learnt so much from the experience that the positives absolutely outweigh the negatives. I wasn’t the star of the show but my fantastic, dedicated team dealing with the everyday issues presented when running a late night venue were the heroes of the piece.

Doorman Shaun who works at Arena in Exeter is a great example. Every business should have a Shaun; someone who is uncomplaining, dedicated, hard-working and does the jobs no-one else wants to. I was fortunate enough to realise that Luminar is blessed by teams of people who fit the Shaun mould. Oscar in The Hippodrome Kingston was also a fantastic character who, like Shaun, had gone about his business uncomplainingly because he cared so much about his club. What I did learn was that much of the behind the scenes equipment was not fit for purpose, ranging from bottle bins to glass washers and general bar equipment, making a difficult job much harder. So often, refurbishments don’t refresh the back of house areas and equipment. So, we were able to invest in all these things and are now reaping the rewards in terms of employee retention and financial performance. When I go to clubs I now look behind the bars, in the cellar and ask if we have the right equipment to do the job.

Everyone remembers my time scrubbing the toilets after a big club night – it’s an experience I’ll certainly never forget! I teamed up with Linda from Oceana, Swansea. She had been at the club for eight years and worked ridiculous hours in the most unpleasant of jobs to be able to earn enough to feed her family. What a star and boy did she teach me several lessons – the biggest being to not underinvest on quality cleaning equipment and materials! After my experience, we put in place new cleaning contracts and operate regular toilet checks throughout an evening. Bad toilets reduce your chances of better customers, so it’s a vital investment. During busy sessions we also have an attendant on hand where possible.

There were so many heroes during my week undercover but Mel the Medic really stood out from the crowd. Unfortunately, we operate in a late night market that has to deal with young people who sometimes have consumed too much alcohol. Even though our customers on average only buy two drinks per session, we are usually their last stop for the night and left to pick up the pieces. Mel supports our customers at the end of the night and makes sure that young ladies, often abandoned by their friends, get safely in a taxi. He also makes sure that an ambulance is a last resort when a taxi is all that’s required! Subsequently, his work has seen our relations with the Ambulance Service and Police vastly improve. Mel is now training other employees in our estate to become medics.

I could go on, but suffice to say that my week as Undercover Boss was the most humbling experience of my career and one of the most important. I received over 1,000 emails and 400 texts all, bar eight, giving their support. Importantly, feedback from our employees and our investors was very positive; they knew things had changed and for the better. And, more importantly, I now get recognised by the door staff!
Peter Marks is chief executive of Luminar

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