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Morning Briefing Strap Line
Fri 6th Sep 2013 - Friday Opinion
Subjects: Two beer camps, accelerating growth, reinventing brands and the health agenda
Authors: Martyn Cornell, Jason Katz, Kevin Todd and Paul Chase

A tale of two beer festivals: GBBF versus LCBF by Martyn Cornell

If I had wanted confirmation that the “non-macro” British beer scene is now split into two separate camps, serving different constituencies, with remarkably little cross-over between them, considering that both sides are dedicated to the pursuit of terrific beer, two events a couple of weeks back could not have made it clearer.

In West London, the Campaign for Real Ale’s annual Great British Beer Festival at Olympia delivered the products of around 350 different cask ale brewers to some 50,000 people over five days. Meanwhile, over (almost symbolically) on the other side of the city in East London, at the Oval Space in Bethnal Green, the first London Craft Beer Festival, on for three days in a considerably smaller venue, served beers from just 20 brewers, (only four of whom were also at GBBF), most or all of it dispensed from pressurised containers that would have kegophobe Camra members fobbing with fury.

The most remarkable contrast between the two events was not the rather different attitudes to the idea of how “good beer” could be dispensed, however, but the very different sets of people attending each festival. The GBBF crowds were a wide selection of the sort of drinkers you might find in any pub in a middle-class area, minus the families though mostly male and skewed, it appeared to me, towards the over-40s – indeed, I’d say the number able to get to Olympia using their Boris bus pass (ahem – like me) was considerably greater than in the pub population at large.

The LCBF crowd, in contrast, was in parts almost a parody of hipsterdom: man buns and “ironic” short-back-and-sides with beards, plenty of checked shirts and Converse All-Stars, and with the hipster “ironic band T-shirt” (where you display on your chest the image of a beat combo popular with teenyboppers in the late 1980s) replaced with the “ironic beer T-shirt” (Tusker lager – I must dig out my Foster’s Special Bitter T-shirt from 1994 …). There were far more women as a proportion of the audience at the LCBF, and the age range was considerably narrower (and younger) than Olympia: I was older than 95% or so of everybody else at the Bethnal Green event by a good 20 years, and (unlike Olympia), while there were plenty of beards, I was wearing one of the very, very few showing any signs of grey.

What else was there to convince me I wasn’t in Olympia anymore, Toto? The seating looked like it had been nicked from a pub in Shoreditch: worn padded leather sofas and ex-cinema swingdowns. The food, in utter contrast to the meat pies and curries available at the GBBF, included roast shoulder of goat in a coffee and black cardamom sauce (recommended beer: porter), and cured breast of wood pigeon with blue cheese rarebit (recommended beer: IPA). The music included Craig Charles DJing (not while I was there, alas) and an “alternative indie-electro-pop band from France” (the festival programme’s description) called We Were Evergreen.

The pricings were rather different, too: at the GBBF a ticket costs £10 (less for Camra members) and the beers work out at around £1 to £1.20 or so for a third of a pint (my preferred glass size for beer festivals now – if a particular beer’s rubbish you waste less, and I can also drink more individual beers without falling down). At the LCBF, tickets were £35, but that included 15 vouchers for a third of a beer at a time. However, as far as I could work out, each voucher was specifically for one particular brewer’s beer, so if you wanted, say, two different beers from a single brewer, you had to go and buy another voucher – and if you couldn’t drink through all five pints’ worth of vouchers, the average cost of your beer escalated dramatically. Something to work on for next time, LCBF organisers, I think.

I wonder how many people, like me, went to both the GBBF and the LCBF – and how many Camra members went to LCBF? My take on the GBBF is coloured by the fact that, as a member of the British Guild of Beer Writers for 25 years, and Camra for 36 years, and as a journalist covering the hospitality business, I know a fair number of people likely to be at the first-day trade session, so a large part of my time there this year was spent chatting to people I hadn’t see for some time. The beers are almost a sidebar to the conviviality.
Martyn Cornell is managing editor of Propel Info

Accelerating growth plans by Jason Kataz

With my business King’s Park Capital we wanted to set up a truly differentiated private equity company. We focus on the leisure sector, and pubs and restaurants are clearly a very large area of that, but our interests range from hotels and travel to health clubs and more. We have a particular interest in the lower to mid-market and that means we look to invest between £2 million and £25 million in any one investment. It’s a very interesting space and I think for companies at that point in their growth curve it can clearly help transform them. We like to think that being sector experts we know what we are talking about – it makes it easier when clients meet us because they don’t have to explain what a tied lease is or what the supply chain is or anything like that. We plan to make 2.5 times our equity if we put £3 million in we look to realise £7 million or more. What we set out our stall to do is to help companies accelerate their own growth plans – we are not arrogant enough to think we can actually manage businesses. It’s all about picking the right management team. There are far more people looking for capital than there is capital available. We literally meet hundreds of them. In five years we have invested in seven businesses. There are a lot of things we look for when investing in the leisure sector but we see five key attributes and then three other factors. They are:

Key attributes:

1.  Management
The first is management. It is absolutely the key judgement we make when looking at investment – it is the key success factor every time. Effectively it is picking the right people to support. We like to see strength and depth in a team rather than one star. Clearly at the lower end of the market that is often not possible as it is often the founder who does everything and it’s about helping him build his team over time. We like to see companies with a clear division of responsibility, rather than three founders who all say they all do a bit of this and a bit of that. In those cases it is quite hard to know who should be doing what. We love to back people who have experience, who come out of Mitchells & Butlers or Whitbread and say now it’s my turn to make money. We like people who come to us with realistic business plans. You want to know that people have given real thought to the business and they have thought about things like if they open ten units, one may not work. This is more realistic than saying it will all be fantastic. 

And finally, the way private equity works and why it works well is if you get into bed with a management team it is about aligning interests and incentivising them. So we can sit together and say we have one shared objective – and that is to grow as fast as possible and then at some stage sell the business for as much money as possible.

2.  Differentiated product
Having a differentiated product is critical. There is a lot of me-too product in the leisure sector and it is a very congested market and it is very competitive. Whether it is Mexican or chicken or burger, we can see a lot of the same concepts coming to visit us and often there’s not much difference between them. That isn’t to say some of these aren’t going to be winners, it’s just that’s it’s very hard to work out which one it will be. Differentiation can come in the form of locations, design, product offering, atmosphere, customer service, playing with the price point – clearly it’s a combination of factors but it is important to be different.

3.  Barriers to entry
It’s harder to have barriers to entry with restaurants and that is the reality. People are always complaining that others copied their menus or ideas. It is easier with pubs because if you have the right location then that is an incredibly good start. But it’s an important thing to focus on.

4.  Growth prospects
Most importantly we invest capital to stimulate growth. We are in a world of flat to declining leisure spend so what we say is we need to find businesses that are capable of growing their market share in a benign market. This is much easier in the lower-mid market because, frankly, if you have five restaurants and you want to double them to ten then it doesn’t matter much what is happening in the market if you can grab some share. But if you are Pret A Manger or you are PizzaExpress then it’s much more difficult because you are the market.

We see three ways of funding growth:

1) We can find a great concept and help them roll out.

2) We can find a great management team and help with the buy and build.

3) We can find under-managed and under-invested assets, and again, back the right team to put that right. We see this happening time and time again in the pub industry as there are a lot of badly managed ones, which offers a great opportunity for the right people and for us. 

You do also need to be aware of the rapidly evolving consumer trends, such as an ageing demographic, healthy lifestyle, consumer desire for value-for-money, people being time-poor, and what’s happening with social media and online. 

5.  Attractive financial metrics:
At the end of the day we invest capital because we want to make good returns and clearly it is largely about the numbers. 

There are four points to note here:

1) Top-line growth is very important. It is very important that you are actually growing volume and not just driving price.

2) High gross margins – always a great thing to see when you are looking to invest and it just provides a buffer when things go wrong and when competition gets higher.

3) Attractive capital model – this is most important for private equity. Return on capital is obviously different, and the expectations are different, if you are investing in a freehold where we look for around 20% or if you are looking at a leasehold model where you are looking at around 40%. Return on capital is probably the most important single metric to private equity. Put simply it’s EBITDA over what the unit cost you to operate. 

4) Consistency of capital model. We meet lots of people who have five units but they don’t all operate as well as each other. It can be better to open units slower and get them right, and then it will be much easier to attract capital. 

Additional factors

1.  Valuation
When you get through all of that you obviously need to pitch things at the right price. 

Again, valuation is an art, it is not a science. Our approach is to pay fair value to what exists today. I’m not going to pay for where it will be in three years’ time. That’s obviously more difficult to do. What I would say to owners and operators is that one key question you need to ask yourselves is that at the moment you may own 100% of your business and you can perhaps open one unit a year. If private equity investment helps you to accelerate and open three or four units a year, in five years’ time you might only own 50% of the business, but it’s likely to be worth a lot more than 100% on the slower track. If it isn’t, then don’t consider private equity investment.

In some examples it is just a no-brainer and it’s a land grab – and if you accelerate that trend then a smaller share of a bigger pie would be much more attractive. 

2.  Appropriate leverage
Appropriate leverage is worth thinking about. Yes, getting money from banks is cheaper than from people like ourselves but appropriate leverage is fantastic and too much leverage is bad.

3.  The importance of timing
From an investment perspective we look to find businesses where they have proven their concept.

Generally we like to see at least three units in operation to get an idea of its consistency of capital model.

We also look at things that might affect timing. Is the smoking ban about to come in next year? Is frozen yoghurt a sustainable trend? There are a number of different things like this that we look at that makes timing important. 

We look at a business with the aim of adding private equity investment for four or five years with the aim of creating value and then selling the business. 
Jason Katz is founder of private equity company Kings Park Capital

Progress on our Russian journey by Kevin Todd

We now have our prototype second-generation Il Patio restaurant up and trading. It feels good finally to have a product that we can touch and feel that gives us confidence in our forward journey.

Initial reaction is positive from all areas. The existing guests are delighted with the improvements, it is beginning to attract new guests and, importantly, the operators from around our trading regions that have come to visit the store are impressed and want to have one for themselves! So with positive trading and strong support, it feels like we are making progress on our evolution journey. We have worked closely on this project with Sue and Paul Salisbury of “Lovely Pubs” Warwickshire fame. Their design company in the UK, Sarum Design, has been super and we are delighted with their input so far.

There is still much to do and improve – it’s only the prototype after all. As we work on the brand positioning and the offer detailing we are learning all the time of the further improvements we want to make. Our plan now is to open another site to refine our learnings and also, importantly, to cost engineer the offer so that it is more affordable for scale roll-out.

The prototype development for our second core brand – Planet Sushi – is ready to start construction now, which means that soon we will have prototypes open for our two core concepts.

As we all know, brand evolution is much more than about design. Equally important is to develop the service, the product and the atmosphere – and we have programmes in development to tackle all of these areas holistically.

For Rosinter to really begin to get positive sales growth momentum we know upgrading the image of our restaurants is a critical factor. Our guests tell us they like the product and service but need design evolution – either because the restaurants are becoming worn, or often just because they are looking for a change of image after many years. In a growth market like Russia with a constant development of new and modern restaurants, there is an expectation of evolution and change. Like choosing a new dress or a new car, our customers simply want something new or different, regardless of whether the existing one is still suitable to use.

Our other great focus is on service leadership and trying to reinstate within Rosinter the legendary service that it was once renowned for. I read recently a fascinating book by George Cohon, who led the introduction of McDonald’s into Russia (‘To Russia with Fries’). When challenged (by the Russians themselves) on how he would successfully create a hospitality culture in McDonald’s restaurants in Russia he stated, ‘Who usually wins golds at the Olympics? – they train hard, they work hard, they run faster, they jump higher. They do all these things better than anyone in the world and you’re telling me you can’t teach them to make hamburgers and smile at customers?’ This puts the challenge into perspective!

I was sent a video link recently of a flash mob dance in Moscow of Putting on the Ritz – anyone who can learn this can be taught how to create great service for our guests!

We faced similar challenges in the UK – how to get a young and transient part-time workforce, more often than not working in our restaurants as a temporary job rather than as a career goal, to really engage with the guests rather than to mechanically perform a series of functional steps associated with table service. We have talked for a long time about ‘restaurant eyes’ – the ability of the manager or server to have a clear vision of each guest’s happiness level and what their next stage requirements are in their meal experience. The challenge is the same in Russia – compounded perhaps by the fact that restaurant dining is not (yet!) such a routine experience for our younger staff so they do not have so much personal experience of what restaurant service is like from a guest’s perspective. We need to work on creating pockets of excellence so that we can demonstrate, both in actions and results, what legendary service looks like – then spread the word server by server across our system. So as we regularly seem to say, there’s a lot going on! 

On a daily basis we are now preparing for the peak season, which, in this market, starts on September 1 when the children return to school. The holiday period tends to be a low demand period as our customers go out of town – either to their country dachas (an important part of Russian culture for a large number of Russians) or for their main summer holiday. 
Kevin Todd is chief executive of Rosinter, Russia’s largest restaurant company

Staying ahead on health issues by Paul Chase

I read David McHattie’s article ‘Staying ahead on health issues’ (last week’s Propel Opinion) with great interest. Not least because it was the first article that I have read from the leader of a major trade organisation addressing the intention from, as he put it, “certain quarters to constrain and control consumer choice” in the name of public health. David is certainly right in identifying as a threat the demands from the health lobby for ever-more restrictive regulation on menu labelling showing fat, sugar, salt and calorie content; banning salt from the table; supersize controls and all-you-can-eat bans. And I understand the common sense of wanting to kick the ball in front of us by portraying the pub, and good pub food, as providing healthy eating options.

The issues of diet, exercise and health are not just puritanical madness. But if we uncritically accept much of the shoddy science surrounding the moral panics over obesity epidemics and lifestyle diseases, then we will end up in the same position in relation to food that we occupy in relation to alcohol. Conceding that “we all need to drink less” when in fact we don’t, puts us in a position where all we have to offer is a voluntary deal to achieve a false health goal, as the lesser of two evils when compared with coercive legislation like minimum pricing. My point is we have to challenge the definition of the problem, not just the definition of the solution.

The key transition in our perception of the next steps forward in public health has been the rise of epidemiology. Abdel Omran, an American epidemiologist, offered a history of humanity in three ages: ‘pestilence and famine’ (life expectancy 20 to 40 years); ‘receding pandemics’ (life expectancy 30 to 50 years); and ‘degenerative and man-made diseases’ (life expectancy more than 50 years). The ‘receding pandemics’ of infectious diseases receded for three main reasons: sanitation, vaccination and medication (antibiotics). But modern medicine has seemed powerless when dealing with the so-called man-made diseases of cancers, strokes, diabetes and dementia.

As a result the new public health movement (NPHM) has seized upon healthy lifestyles as offering a way forward. But do they? Deaths from cancers and heart disease occur overwhelmingly amongst those aged 65 and older. These are the diseases of old age. In 1900 very few people were dying of these diseases; but in 1900 average life expectancy at birth was 47 years for men and 50 years for women. Today people survive on average about 80 years. In 1900, 163 babies out of every 1,000 live births never made it to their first birthday; today only seven babies out of every 1,000 fail to survive their first year. Put simply, people in the UK weren’t dying from cancers and heart disease because they never made it to old age – something else carried them off first!

It is doubtful that changes to lifestyle are going to lead to ever-increasing longevity. By way of an analogy: Usain Bolt can run 100 metres in 9.58 seconds – achieving a maximum speed of 27 MPH. Maybe someone will come along who will knock a hundredth of a second or a tenth of a second off this record. But no one will ever run 100 metres in 5.58 seconds achieving a top speed of 50 MPH! We are at, or very nearly at, the maximum speed it is possible for a human being to run. Likewise, I believe that the big increases in human longevity are behind us. The scope for substantial postponement of death from the major causes of premature mortality by preventive measures is limited. For example, a 10% reduction in the level of serum cholesterol in the general population is estimated to lead to an increase in life expectancy at birth of between 2.5 and five months. But to achieve this by reforming the nation’s diet is virtually impossible! The only diet proven to significantly reduce serum cholesterol is a strict, vegan diet. Any takers?

The issues of diet and health are by no means as scientifically settled as people are often led to believe. So I think that with food, just as with alcohol, we have to very carefully examine the science and evolve a different narrative. And this narrative should inform our discussions with government – particularly now that the health lobby has vacated its place at the ‘responsibility deal’ table.

On a practical level the trade and its representative bodies can indeed get political mileage out of the fact that the pub is the home of social drinking, and that food-led pubs are at the forefront of providing dietary information to consumers, and producing cutting edge dining concepts that embody the desire for fresh, local produce with a short, verifiable progeny. But let’s not concede too much ground in relation to the politics of food. There’s a difference between playing the ball in front of us and appeasing public health dogmatists for whom no concession will ever be enough.
Paul Chase is a director of CPL Training and a leading commentator on on-trade health and alcohol policy

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