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Morning Briefing Strap Line
Fri 8th Nov 2013 - Friday Opinion
Subjects: Stock market excitement, the Next big thing, missed tricks with female customers, and an academic view of the craft beer debate
Authors: Paul Charity, Martyn Cornell, Ann Elliott and Francis Patton/Guy Lincoln

Could the UK see a Chipotle-style public markets boost by Paul Charity

McDonald’s is indisputably the world’s leading restaurant company by sales, a global phenomenon. What is perhaps less well understood is its claim to be the best spotter of emerging restaurant brands. In the UK, McDonald’s took a 33% stake in Pret A Manger back in 2001, disposing of the 33% holding in 2008, when Pret was sold to the private equity firm Bridgepoint for £345m. It was never revealed how much McDonald’s paid for its 33% stake, but suffice to say it booked a healthy profit for its seven-year investment.

Far and away more impressive as a pick of brand star potential was McDonald’s investment in Chipotle Mexican Grill. The Chipotle brand is widely regarded as the most important game-changer on the American restaurant scene in the past two decades. But McDonald’s got involved at a very early stage, in 1998, when the company operated just 14 locations in the Denver, Colorado area. The length of McDonald’s involvement at Chipotle was not dissimilar to its Pret A Manger investment. By 2005, McDonald’s had helped Chipotle grow to 460 sites and had invested around $360m. The time had come to spin Chipotle off. An Initial Public Offering in January 2006 saw McDonald’s bank around $1.5bn for its 90% stake in the company, the kind of return that would put a smile on the face of the most ambitious of private equity bosses.

By any measure, McDonald’s had ridden its Chipotle winner fairly hard – and earned a wonderful return for its shareholders. The subsequent history of Chipotle in the public markets had led some commentators to suggest McDonald’s left the stage far too early. Chipotle shares have soared by more than 1,300% since its IPO and have climbed by 44% this year. Its shares change hands at giddy 44 times its price-to-earnings ratio, twice that of the still-hugely-respectable 22 times that McDonald’s commands. Chipotle’s remarkable returns have positioned it as a hyper-growth stock, putting it in the same category as certain tech stocks, with the result that investors and lenders now have a considerable appetite for the broader sector, looking for the next game-changing fast-casual offer that will rip away chunks of the enormous eating and drinking-out market. Chiptole’s share price success is based on its impressive fundamentals. “It turns out that Chipotle is probably the best restaurant brand created in 20 or 15 years, with the best growth and profit metrics in the industry,” says one analyst. Each new Chipotle unit produces annual sales of $2.1m, which throws off Ebitda of circa $574,000, while average opening costs are $800,000. The return on investment for each site comes to around 72% – in the normal course of events, operators tend to be delighted by a ROI north of 30%.

So far, Chipotle is largely a US success story and is broadly unproven abroad. It currently operates around 1,500 site in 44 states but only has units in three other countries. Its six London sites still seem to be finding their way, and the UK operation has required a couple of cash injections from its US parent. Nevertheless, the success of Chipotle has paved the way for other successful IPOs in the US. The sandwich chain Potbelly Sandwich Works, with its 300 US locations, has seen its shares double in value in its early days as investors bet on the company’s chance of seizing a much larger share of the sandwich market, big enough to match the privately owned Subway, which has grown to 38,000 units around the globe. 

Back in the UK, perhaps we will not have too long to wait before an explosive sector growth story creates the same kind of investor enthusiasm when it is launched on the public markets. There is talk of Patisserie Valerie taking the IPO route next year. Earlier this week, owner Luke Johnson told me that the brand had achieved its targeted £12m of operating profit this year. And yesterday, at our Propel Multi Club Conference, Johnson reported that he thought the brand had potential to expand to almost 300 more sites, presumably even without the possibilities thrown up by its nascent concession trial in Next outlets. Yesterday, also at our conference, Peter Hansen, founder of Sapient Corporate Finance, predicted a rash of restaurant sector IPOs in the coming few years. “The best restaurant groups will list on the equity markets,” he forecast. Interesting times ahead.
Paul Charity is managing director of Propel Info

The Next big thing for coffee shop operators by Martyn Cornell

The news that Patisserie Valerie is to experiment with concessions in stores run by Next, the chain that, as we speak, may have overtaken Marks & Spencer to become Britain’s biggest clothing retailer, is fascinating on so many levels.

This is not especially, in one sense, a new move by Next, which already has some 28 branded coffee concessions from Costa and another four Starbucks concessions in its British stores (and, in Belfast, an in-store outlet run by the local operator Ground Coffee). But it already spoke to the increasing ubiquity of the coffee shop experience in British life that a giant retailer such as Next should feel it has to offer the opportunity to customers to buy a flat white at the same time as they are shopping for their tighty whities, and via a coffee offer with a strong and credible brand name behind it as well.

However, the fact that Next is turning to the more upmarket, almost-destination Patisserie Valerie for the coffee concessions at three of its shopping centre stores, the Gallagher Retail Park in Cheltenham the Manchester Fort shopping park and the Trafford Retail Park in Manchester, suggests that the very biggest high street coffee shop names may not be enough of an attraction any more, even to customers of a company that is one of the very biggest high street names itself. It may be that Next feels Costa and Starbucks are almost too ubiquitous: and it is certainly true that Costa and Starbucks are both likely to be found within any and every shopping centre, so adding one or the other to a Next shopping mall store hardly makes it special.

The move also says that operators like Patisserie Valerie are seeing the attractions of the “cuckoo strategy” in trying to get a foothold in Britain’s increasingly growing shopping centre market. The high street, according to many analyses, is transmuting, as the internet puts “comparison” retailers, those whose prices can be compared online, under growing pressure. The result is that high street retail outlets are closing, or being forced away to an out-of-town shopping centre where the vastly greater mass of retailers crammed together in one multi-floor site, with enormous car parking, pulls into its orbit far more shoppers than any high street could. The closure of high street retail stores is not too much of a threat to high street restaurants and pubs, generally destinations in their own right, but it is a threat to high street coffee shop retailers, which are much more likely to have “impulse” customers, and will thus suffer from a lower high street footfall.

Moving to where the customers are going – the shopping centres – has its own dangers for coffee shops, however. You may be exposing yourself to huge numbers of shoppers, but leases are expensive, and often onerous, fit-outs are expensive: it’s a big risk, especially when your brand may not be that well known. So why not pop your egg into the corner of someone else’s shopping centre nest? The two Next shopping centre concessions allow Patisserie Valerie the opportunity to test the shopping centre air without risking too much, and also give it valuable exposure, raising brand awareness when those shopping centre shoppers make a trip to an ordinary high street with a Patisserie Valerie on it.

But back to the increasingly ubiquitous coffee offer. There are now a growing number of places where the consumer almost expects to be able to get a decent fresh-brewed cup of coffee by right: not just station platforms and supermarkets, department stores and airports, but garden centres – there is at least one company, Massarella Catering Group, that specialises in running garden centre coffee shops, under its Garden Cafe brand – and, now, clothes shops. Massarella, again, runs Cafe Maxx in TK Maxx stores, for example. But there are dangers in offering people an “own-brand” as your in-store coffee shop. Many may view it as substandard, compared to the brands that they know. If you want to bet on a trend, put your money on even more concessionary tie-ups between big retailers and well-known coffee shop specialists.

On the other hand, there is always the possibility of a retailer starting its own coffee shop chain, as Tesco, effectively, has done with Harris and Hoole, a deliberately “independent-looking” riposte to rivals such as Sainsbury, with its Starbucks concessions, and Waitrose, with Costa. You don’t even have to be as big as Tesco: in Hong Kong and Taiwan, the local franchisee for the French fashion chain Agnès b runs French-style cafes, both in-store and as stand-alones, under the Agnès b name. Being French, of course, they offer a good selection of wines alongside the coffees and croques monsieur, and they even have a particularly fine line-up of artisanal French microbrewery beers. Alas, it may be some time before we see THAT in Patisserie Valerie.
Martyn Cornell is managing editor of Propel Info

What women want by Ann Elliott

Yesterday I had the privilege of speaking to the Propel Multi-Club Conference about the importance (for operators) of appealing to female customers. Gender is the most powerful force in how a person views the world. If operators aren’t communicating with women in a way women find appealing, then they are not maximising the commercial potential from this audience.

Research has identified that women make or influence 85% of all household purchasing decisions and that well over 50% of traditionally male products are bought by women.

Women also comprise more than half of social media users, making up 58% of Facebook users and 62% of Twitter users. More than half – 54% – of women use social networking sites regularly. Women are using technology to inform their choice of brands: our industry is not immune to this.

The message is clear. Women will determine if their family is going to go out to eat, and where they go when they do. So how does an operator communicate with, and appeal to, women?

To start with, I would consider the codes laid out in the excellent book Inside Her Pretty Little Head, by Jane Cunningham and Philippa Roberts. They all raise some interesting questions:

1.  The altruism code
Women are naturally altruistic, nurturing and “others focused”. So is it clear what your brand stands for? How aligned is your team with your values and do they demonstrate these in their dealings with customers? How well do your brands’ ethics and values align with those of your female customer base?

2.  The aesthetic code
Women are interested in beauty and fashion. So how aesthetically pleasing is your brand? What does it look like across the whole of the customer journey? What is the lighting like? The smell of the place? The decoration? The table layout? The loos? The externals?

3.  The ordering code
Women take on many varied responsibilities and multi-task. What does your brand do to make life easier for women? Can they book their meal online if they want? Can they book stuff for their children to do? Are the directions clear?

4.  The connecting code
Women are relationship-driven to survive. So how does your brand get involved in its community? How does it give its customers a sense of belonging? How does it encourage women to have a relationship with you, your people and your brand?

In truth, it is easy to find out what women want. But you really do have to listen.

From our own agency’s research into the needs of women, we know that women want menus which take account of their needs (and, importantly, the needs of others in their party) and, importantly, they want to be able to bespoke what they order and have it their way.

In terms of food and drink they also want:

● Healthy childrens’ food
● New and emerging flavours
● Small tasty portions ( for them and their parents)
● Gluten free carb free options
● Healthy options that aren’t just about salad
● Superfoods
● Calories on menus
● Samplers and tasting flights
● Soft drink variants
● Wine and cocktail choices

Not surprisingly, in terms of environment they want:

● Great toilets ( not just good) including great make up lighting
● Good lighting in the restaurant 
● Great lighting in the car park and clear signage to the restaurant

Most importantly though, in terms of hospitality, they need:

● Friendly welcoming staff who acknowledge customers the moment they walk in
● Emotional intelligence (my words) from those who serve them
● An experience not just a meal

Implementing these sorts of initiatives will not alienate men. They will influence women, though, and those women in turn bring their families, parents, partners, husbands and friends. What you have to do to attract a female audience will not deter men – in fact, quite the reverse.

This is not a feminist discussion, but a straight-down-the-line commercial argument. Women are far from a niche market: they have wallets and, for many businesses, women as decision-makers and customers hold the key to your future success. Pay attention to what they have to say.
Ann Elliott is chief executive of the leading sector marketing and public relations agency Elliotts –

A view from academia on the craft ale debate by Guy Lincoln and Francis Patton

Sometime over the next three months a tiny corner of Leeds City Centre will see three new craft beer retailers open their doors. When combined with the businesses already present, this will create a cracking little enclave for beer drinkers – the North’s newest (and best) ready-made pub crawl perhaps? One of these new operators will be the flagship drink offer in Yorkshire’s prime retail development of the past ten years – the Trinity Centre. If ever confirmation were required of the inexorable move of Craft Beer into the mainstream then you have it right there.

Who would have thought we would ever take our cue in beer and brewing from the US? Clearly they started this whole Craft Brewing thing as a way to try to match the variety, quality and interest of our (and the rest of Europe’s) beer offer, but in recent years they have overtaken us in the variety, interest and innovation stakes. We could live with it when this happened with TV shows; throughout our formative years it was an incontrovertible fact that our TV was better than theirs, and then one day we woke up to the Sopranos and all that changed; seemingly forever. However, when it comes to beer we’re glad to say we appear to be fighting back and our craft beer sector is fast becoming as exciting and widespread as that represented by the US Brewers Association.

Recently Brad Tuttle has been commenting in Time magazine about the Craft Beer sector, and he listed seven signs that it is becoming “mainstream”. These included a new Craft Beer movie (Drinking Buddies if you must know) and a TV show (Brew Dogs; sic!). Perhaps more important than these though; are the signs of an increased involvement in the sector from big retailers (good) and big brewers (bad). This neatly brings up the question of size and its role in what is or isn’t a “Craft Beer”.

We are sure we are all familiar with the current debate about the definition of “Craft” and the two clear strands of the debate, namely;

1.  Do we actually need a definition – yes was the message from the research we recently conducted on behalf of SIBA.

2.  What is the definition? (We can hear you now: “Not another piece about the definition of craft beer …” no, come back, this one is different – it’s like the beer itself, a little more full flavoured, perhaps even provocative).

Talking of provocative, we all know that BrewDog have put themselves front and centre in the debate about what Craft Beer is, and good for them. On 16 October they posted a piece to their blog entitled “Defining Craft Beer”. By the time they closed the thread on 20 October there were over 12,000 words in response (just out of interest for any undergraduates out there, that’s enough words for an honours dissertation!). We would say at least 60% of these were articulate and well-thought-out contributions to the debate (a pretty good ratio for that dissertation) and the majority were related to the size/independence of brewers “allowed” to sell their beer as “craft”.

As might be expected on a blog from this source, contributions were overwhelmingly of the notion that Craft = Small/Independent. Though there are some interesting and creative ways of defining small and/or independent the fundamental point is clear – craft beer does NOT come from a big brewer. Our research with top executives, beer and brewing commentators, policy makers and other industry professionals, however, was more equivocal about the role of size/independence in defining a craft brewer. 

There is a very strong case to be made for the notion that Craft Beers should come from small, independent brewers, even the word “Craft” itself being part of the evidence. If we were starting this whole development from scratch we may not choose the word “Craft” as the key descriptor; given its suggestions of “skilful handiwork”, “producing things by hand” and “specialised knowledge and training”, all of which, to a greater or lesser extent, could reasonably be claimed by our regional and national brewers. 

More compelling than the “semantic” argument, though, is what it means to customers and the impact this meaning has on opportunity for brewers. It is pretty much beyond doubt that when we consumers see the word “craft” linked to products, we associate it with unique, small scale operations. We do not, for example, expect to see mass-produced teapots in a craft pottery.

The term “Craft”, therefore, indicates a certain attitude to beer and the process of brewing and selling it; this is what the people who currently consume craft beer buy into. However as Craft Beer becomes more mainstream there is a good chance that this will be lost. The innovators and early adopters who recognise and value this element of Craft Beer may well move on to the next fashionable product/category. These are hipsters in their 20s, into cutting edge indie music sporting “authentic” beards and riding single speed push bikes and they have NEVER been serious ale drinkers before. If we lose the essence of what attracts them to the category we will lose them from ale for good.

The category growth, increased distribution opportunities and rump of demand from the market majority will be left to the big brewers and their marketing and distribution clout. What then for the choice, innovation and excitement currently present in the sector? We cannot rely on the big brewers, with their quest for economies of scale and ever greater cost savings, to maintain it. For this reason we need to be determined in our resolve to overcome in the debate over what a Craft Beer is. Size does matter, and for once small is what we crave.

So there you have it, one interpretation of the debate, including the research undertaken; however as with all research the data can be interpreted slightly differently and for that alternative view watch this space! 
Guy Lincoln and Francis Patton are senior lecturers at Leeds Metropolitan University. They have both worked extensively within the industry and have recently been involved in a series of research projects looking at the future of the beer sector and the role of craft beer within that sector

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