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Morning Briefing for pub, restaurant and food wervice operators

Fri 6th Dec 2013 - Friday Opinion
Subjects: Investing in the sector to make a difference, Tony Hughes, average service and a formula for outstanding service
Authors: Luke Johnson, Chris Muller, Ann Elliott and Chris Edger

Our approach to sector investment by Luke Johnson

There can be added value with money. Gail’s Bakery, where we invested two-and-a-half years ago, is a live example. We were intimately involved in appointing a new finance director, replacing the auditors of the business, introducing new property agents to the company. We found a new PR agency, we introduced a new specialist productivity consultant to the bakery, we helped choose a new EPoS system, we revised their format completely for the monthly management accounts. We introduced a new bank and negotiated that facility for them, we helped and continue to negotiate and choose sites, arguably the most important decision moment for any restaurant business. We helped to appoint new IT, marketing and retail operations executives, introduced a major new customer, now the biggest customer, on the wholesale side. We found new advisors to help with expansion of the bakery, helped negotiate terms with a publisher for the forthcoming cookery book, to be published next year, and helped choose new website designers. We get involved in debate about the annual budget, helped agree the staff incentive and bonus arrangements. We helped on the new catering offer for the business and introduced new builders and architects for openings. Our involvement is a combination of helping with cost savings and efficiencies, new senior appointments, advisors and some top-line benefits. We help, on an on-going and infrequent basis, in areas like expert advice on health and safety, legal, HR, rent review negotiations and rent rebates.

Profits have roughly trebled and this year we’re aiming to make about £6.5m. We’ve got ambitious plans to grow. We’ve trebled the size of the retail estate since we got involved and we think it’s got much further to go. We always act as line partners at the businesses we back. There are owners, founders, executives who are shareholders alongside us. Almost invariably, we invest in straight equity rather than loan stock. It makes a world of difference. The reason we tend to do that is that we are right alongside the other owners. We are, if you like, quasi-debt. We are there, within reason, for the long term – at Giraffe, we were investors for nine years. I was actually the most reluctant to sell. But I respected the views of my fellow shareholders, particularly our partners Russel Joffe and his team, who were in a slightly different position to us and wanted to realise some money and unquestionably saw Tesco as a good long-term owner for Giraffe. And although we were there for nine years in all, which seems a very long time, it was a successful outcome. And it showed that patient capital with a genuine interaction – so that we respected the views of management and they respected our views – is productive. Clearly, the vast proportion of all the work and output is down to the full-time executives. But there is a difference between different sorts of money. So, for example, if we are involved with a company and we jointly approach a bank there is a better chance at the margin that they’ll take the proposition that much more seriously because we have done it quite a lot of times before. That is actually why we keep doing this – it’s because it’s much more interesting. I think if we were just money then it would be very boring. One of the fatal questions that too many people in private equity and venture capital ask in the first meeting is: “How are we going to get out?” or “Where is our exit?” I never ever ask that question. Just as with Giraffe, if you have a great business that is growing, improving its top and bottom lines and adding value, then, for sure, people will come knocking – and you’ll end spoilt for choice on buyers. I don’t believe you need to annoy and alienate a founder, who has probably built this business up over many years, put their heart and soul into it – by reminding them, at the very first meeting, that all you are interested in is the money; that you don’t care very much, if anything, about customers, staff, suppliers. I genuinely believe that Return on Investment isn’t our only priority. We want to be involved in businesses we can be proud of, businesses that create jobs, businesses that deliver good experiences and great service for the price-point they are offering – and are active, positive members of the business community. We’ve been fortunate in that the hospitality sector, and the casual dining segment, has been a growth market – so I think it’s much easier to deliver on those measures in an expanding sector. We’ve also been fortunate in having sound partners who are empathetic to these sorts of objectives because if you talk to entrepreneurs, money actually comes three or four on the list. What matters to them are things like autonomy and building a business of which they can be proud.

I think an investor needs to put himself in their position, realising there will be difficult moments. Almost all growing businesses go through hiccups. It’s very rare that any business enjoys continuous upwards mobility – there will always be obstacles, there will always be mistakes. Sensible financial backers understand that from the get-go – no business is perfect, no management is ideal. One has to be pragmatic and understanding for these relationships to work. The right kind of tension is required so that there’s not weak compliance. But one investment version is where you have passive co-owners who simply turn up once a month for a couple of hours, listen, say nothing – and go home. Or you have show-off bullies, who turn up and throw their weight around, talk about things that they don’t understand – and alienate the people doing 99.9% of the work. I can’t pretend we’ve always got it right. But I always say to people we might be working with, “Call one of the following people, our partners, current and ex, and ask how they found it”. And I never warn partners there’s a call coming because they need to get a straightforward opinion. And I like to think, mostly, it’s positive feedback even if we are challenging. We will stick our hand up if we think there’s a major error going on or there needs to be discussion and debate. But you must, eventually, back management or change it. Our investment model is a partnership between reasonably well-informed money and outstanding people driving the business forward. It’s almost standard that a business turning over £5m to £15m will have areas where there’s room for improvement – and that’s where I like to think we can contribute and make a difference to take the business to the next stage because this is a much more competitive and sophisticated industry than it was. This permanent state of having to get better, making small, incremental changes that will keep you evolving and offering something interesting is necessary. Arrogance and complacence is one of the great enemies – only the paranoid survive. That absolutely applies to our industry. 
Luke Johnson is the founder of Risk Capital Partners and the above article is an abridged version of his presentation to the most recent Propel Multi Club Conference

Tony Hughes by Chris Muller

I read with great interest the recent Propel Quarterly magazine article “What my mentor meant to me” and was, of course, struck by the number of times people mentioned Tony Hughes. My immediate thoughts were how much Tony was a mentor to me, as well.

Now, apparently, I am not much of an operator, as Tony has reminded me often after a second attempt at starting my own restaurant company here in the States a decade ago. I still think my pizza start-up ‘Za-Bistro! was a great concept, but like Knead the Dough, it proved to be no PizzaExpress. This was surprising since back in 2002 my creative mind freely “borrowed” ideas from them both, as well as from All Bar One.

This begs the question, how would I even know about those iconic UK concepts in the first place?

It was because in 1997 my German friend, Gretel Weiss, insisted I meet a visionary leader, Tony Hughes from Bass. So while I was in London speaking to the F&B team of Millennium Copthorne Hotels she arranged for me to be picked up during my Saturday afternoon break by Tony and his friend, Mike. Off we went, for a breakneck spin around London to see an All Bar One, Brown’s, an O’Neill’s and then we were on the M1 speeding out to see an ancient pub with a gleaming new kitchen and a plaque saying it was a Vintage Inn, and a ramshackle Toby’s Carvery and then a new Harvesters. We barely made it back in time for me to join my real hosts for dinner at the very chic (and very seriously self-important) Criterion. All through dinner my mind raced like I was in the midst of some illicit affair.

In fact, because of that six-hour whirlwind tour with Tony Hughes my perspective and my professional life changed completely.

Since that day I was honoured to have been a part of the Bass Leisure Retail/Mitchells & Butlers family for a decade. Literally hundreds of the most creative restaurant people I have ever known attended seminars with me, from senior managers to the annual “restaurant manager of the year” award winners. Without Tony’s visionary support I would never have met any of them, including people such as Karen Forrester, David McHattie and Kevin Todd. Through Tony I was also introduced to a wider network of innovators including Ian Neill, Peter Martin, and Robin Rowland. Like an awards ceremony speech, the list is simply too long to complete.

What reputation I have anywhere in the UK (and parts of the US) restaurant industry begins from that one long afternoon with Tony Hughes.

But, as I noted, he has never really considered me to be a decent operator, a charge I take quite seriously. So how has Tony truly been my mentor? He insisted time and again that I should focus on what I do best, teach. What Tony did for me more than anyone else in my professional life was encourage me to be a better teacher, and because of him, I think I am.

Like so many who he has influenced, there is a shelf filled with “Tony” books in my office. He introduced me to the writings of Charles Handy and Marcus Buckingham. Tony once invited me to join him for a private dinner with Ken Blanchard. More than that, though, Tony challenged me every year to consistently create newer, more cutting edge executive programs and seminars so he could send his people to learn about themselves and the industry they were changing back home. He encouraged me to reach beyond my limits, to hone my own presentation skills, refine the content of my lectures, and maintain the relevance of the ideas I discovered. To this day, Tony Hughes makes me think.

For years I have given a lecture where I describe the person defined as a “professional manager” – someone who knows that success comes from the development of people and that time spent on helping others succeed is never wasted. I say that in our lifetimes we would be lucky to work for just one such caring leader. I always tell my audience that I base this role model on Tony Hughes.
Christopher Muller is dean of Boston University’s School of Hospitality Administration and one of the world’s leading foodservice academics

A diary of average service by Ann Elliott

I am sat in Villandry on Great Portland Street. It is 9.50am. My table was booked for 9.30am. They couldn’t find my booking when I came in. “Maybe you are in the café not the restaurant?”, they say. “I don’t know. I didn’t know there was a difference,” I respond. Perhaps I am supposed to know that they have two different places and two different systems but I don’t. I feel stupid and a bit awkward, like there is a secret society I am meant to know about.

I am stood at the entrance desk desperately trying to find my name on their screen. Having said, “I should have a booking for two in the name of Ann Elliott”, they point to someone different on the screen. I don’t have my glasses on so I can’t see clearly, but it doesn’t vaguely look like my name. Eventually they find my booking – in the restaurant. That’s good. I don’t feel quite so much of a prat now. Such a relief to know I am in.

They point to a table set for three. Are they sure that’s mine? I sit anyway and cross my fingers.

Like everyone else in the restaurant I get out my phone and my iPad. I look around. It’s about half full – mainly men. It’s a lovely looking place – great windows looking out on to Great Portland Street, good lighting, plenty of space and some nice soft seating. Bit uniform – every table is the same, every chair is the same – but still it’s comfortable and light.

They come to take my drink order. “Just a coffee”, I say, “not a cappuccino though”. Not the clearest of orders. My waiter repeats: “A cappuccino”. “No, not a cappuccino, just an Americano with hot milk.” He walks off before, I think, he hears the hot milk part. Someone else comes back with a coffee but no hot milk. I ask for hot milk and it’s there in a second. It’s good coffee.

I pick up the menu and have a good read. Lots of choice. Seasonal fruit salad, homemade granola, porridge, Shropshire sweet cured bacon sandwich, Severn and Wye smoked salmon and scrambled eggs with toast and curly Cumberland sausage bap. Prices look reasonable. It’s all clearly written. Not much up-sell or provenance beyond the words Shropshire and Severn – I had expected a bit more with it being Villandry. They have two interesting juices though – green energy (apples, kiwi, pear and celery @ £4.30) and pink flame (red apple, plum, pink grapefruit and red grapes @ £4.30). No great song and dance about them and they are a bit hidden away – at those margins you might want to bit more noise.

It’s now 10.06am. I have been sat here 36 minutes. No one has come for my order. No one has actually looked at me. No one has come over to ask if my guest is joining or if I want anything else. No one has asked if I want more coffee. Yet there are lots of waitresses and waiters around, who all look very efficient. I have looked up, honestly I have, but no one has looked me in the eye or made contact.

I will finish this article soon as I want to get it off to Paul Charity. Maybe having my laptop out has put people off but surely they could still ask me something?

This isn’t a bad experience. I am happy sitting here and working away. It’s relaxed and unhurried. My guest has arrived – I am about to sign off. It could be so much better though. I could be engaged with, listened to, paid attention to so that I want to go and tell everyone how wonderful it is. I won’t. Sign off at 10.11am – still hungry.
Ann Elliott is chief executive of leading marketing and PR agency Elliotts –

How do you get the people who come through your doors to promote you on Twitter, Facebook and elsewhere? By studying the Positive Advocacy Equation, says Professor Chris Edger

Successful food service concepts have high rates of positive customer advocacy, defined by Fred Reichheld – the high priest of Net Promoter Score, or NPS – as vigorous/enthusiastic recommendation. Chains such as Nando’s and Toby Restaurants have strong advocates, who make unsolicited word-of-mouth recommendations, particularly on social media. But how do firms achieve this nirvana? How can they develop and nurture raving fans? 

Often, experts in this area locate service as the most important variable: happy staff equals happy customers equals repeat custom plus advocacy. This is an undoubtedly important element within food service, given that, unlike retail, customers often depart premises with little more than intangible memories, rather than tangible goods. However, I would argue that the art of improving advocacy is contingent on a number of factors and, more importantly, it is the firm’s ability to balance the equation between these elements that is of greater importance. A failure to do so will result in “deadly combinations” that will degrade any proposition. 

Few commentators on customer service companies would disagree with the notion that positive advocacy (PA) is contingent upon high levels of customer satisfaction (CS) where perceptions exceed expectations (p-e): to put it algebraically, PA=CS(p-e). But what does this actually mean? Essentially, users of a brand/format will have certain preconceived ideas of the net benefits of their proposed interaction with that brand or format, which might either be exceeded or disappointed during actual interaction.

Perceptual reactions, either way, will be expressed through repeat business (or not) and/or positive/negative advocacy. But what are the major elements of the branded food service experience that mediate perceptions?

Positive perceptions (p-e) in the customer satisfaction (CS) mix are a function (ft) of a perceived value (V); CS(p-e)ftV. This is not to say that value in this sense means “cheap”. Rather, the customer feels that the goods/services/experiences (s)he has purchased are “great” value. Put more prosaically, the customer does not feel ripped off but delighted by the overall experience. But what are the constituents of this perception of value? I would point to four inter-related elements (with various sub-components) that comprise the “value mix”:

Price (£) – The price of purchase is a critical factor in shaping perceptions of value. Users have various expectations regarding price, based upon their understanding of the product positioning. Undoubtedly, perceptions are inflated or deflated by the costs of purchase in association with their (un)conscious sensory satisfaction with the factors below. 

Product quality (pq) – A critical element of the food service equation, particularly in relation to price, product quality (ingredients, portion, preparation and so on) will mediate perceptions. Consumers who are charged a high price will expect “best”. Conversely, those charged a low price will expect “good”. It is the degree to which (through menu innovation, sourcing, production efficiency, hygiene standards and so on) firms can over-deliver on quality against a given price point that will improve perception. 

Amenity (a) – The sensory environment within which the product is delivered (location, ambience, decor, seating, lighting, music, toilets, security and so on) also affects perceptions of value. For cheaper transactions, “basic” environmental facilities are acceptable to consumers. Perceptions will exceed expectations where high levels of structural and functional maintenance prevail. On “high end” occasions, environmental excellence is taken as a given by users. 

Service (s) – The final element of the equation is perception of service. A lack of “emotional contagion” on the part of service providers and an absence of immediate “defect rectification” will disproportionately affect customer perceptions. Other mediators include service-cycle speed/effectiveness and service provider knowledge. The degree to which these factors disproportionately affect perceptions of “great” value will inevitably be tied to the factors listed above; most notably price. In low-cost venues, consumers will expect “functionality” but be delighted by “emotional” service. In higher cost outlets, consumers will demand “personality” and knowledge from their service providers (and probably be surprised when they get it …). 

Thus, the positive advocacy (PA) equation in food service is the outcome of a complex set of factors involving the degree of customer satisfaction (CS) that is derived from a state when perceptions exceed expectations (p-e), a function (ft) of a perception of great value (V) involving associations between price, product quality, amenity and service (£, pq, a, s); PA=CS(p-e)ftV(£,pq,a,s). 

Getting back to the two firms cited at the beginning of this piece – Nando’s and Toby – one can see how this equation holds true. In the case of Nando’s, perceptions exceed expectations due to consumers being extremely satisfied by the relationship between what they are being asked to pay and, in particular, its association with exceptional product quality (predominantly marinated chicken) and excellent amenity (eclectic decors and high levels of safety/cleanliness). An element of self-serve within the service chain could act as a detractor but this is seen as a benefit by users in terms of granting immediacy/access. In the case of Toby Restaurants, its combination of self/full-table service cycle (where users are waitress-served but proceed immediately to the “deck”) allied to a perception of “abundance and freshness” (chef-carved roasts and fresh vegetable buffet) fulfils a perception of high value, especially when price is added into the equation.

Indeed, both chains have, through high throughputs and the cheap sourcing of a limited number of mainline products, been able to generate high levels of cash margin that have sustained their investment in amenity. Overall, both chains have got their positive advocacy equation spot-on. Those retailers that fail have constructed a deadly combination where the perceived value of their experience does not correspond to what users are being asked to pay, combined with, in relative terms, poor quality product, amenity and service.
Professor Christian Edger is former human resources director at Mitchells & Butlers and teaches at Birmingham City University. This article appears in the current edition of Propel Quarterly magazine

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