Subjects: The lows of high valuations, deskilling the kitchen, and the slippery slope of health, wellbeing and happiness
Authors: Steve Kenee, Glynn Davis, and Paul Chase
The lows of high valuations by Steve Kenee
Professional investors have always been faced with the issue of business owners having an unrealistic view of what their business is worth. This is unsurprising considering growing businesses tend to be driven by ambitious entrepreneurs who see value and opportunity where others might see downside and risk. This, quite rightly, can give them a rose-tinted view of their company’s future prospects.
Combine this with overly zealous corporate advisors who often try to win mandates by promising the world and a smattering of high profile business sales/listings – if Shake Shack can list at 325 times historic earnings then why can’t I? – it’s unsurprising many business owners start to believe their own hype.
This is neither a new phenomenon nor necessarily a bad thing. Entrepreneurs will only give their all to driving a business if they believe the end justifies the means, and quite frankly, we need entrepreneurs to continue to drive the sector and the economy forward. However, whilst lofty valuation expectations would have historically been tempered by professional investors gently bringing the operators back down to earth, these eye watering equity valuations are now being offered to, and often accepted by a growing mass of (potentially) less experienced/sophisticated investors via crowdfunding and peer-to-peer (P2P) lending.
So what’s wrong with this I hear you ask? Surely raising more by giving away less is a good thing? Well, if you don’t intend to raise additional capital (and I am yet to see a growing business that doesn’t need extra capital further down the line), and if you are unconcerned whether your investors, who are probably also customers and advocates of your brand, become jaded and/or disillusioned when the promised returns fail to materialise, then there is nothing wrong at all. However, if you do want to continue to grow your business and if you feel a sense of duty to your investors, then raising equity on the back of an unrealistic valuation can have some serious consequences.
Firstly, the golden rule of investing is: pay too much on the way in and you won’t make a return on the way out. This is of particular concern when we see businesses justifying today’s value based on what they believe the business will be worth tomorrow. By all means, seek a premium if you think your business has better growth prospects than its peers, but it is important to leave something on the table. If you don’t, investors who gave you their money to help you achieve your goals will be less than thankful when that is all you achieve.
The second, and potentially bigger, issue is setting the bar too high too early can prevent the business from raising funds in the future. Once investors have invested at a certain value, if you want to raise further funds then the business will need to be worth more than it was when you raised the last round. Otherwise your existing investors will see a reduction in their value when their share of the business is diluted (as dilution without growth equals a loss in value). Again, this is potentially a bigger issue for businesses factoring-in tomorrow’s worth into today’s value as, the main issue facing growing companies is not that they aren’t moving towards their target, it’s that they nearly always need more capital to get there than they initially believed. And, if it transpires that more capital is required than initially expected to get to the same place, then by definition the initial round was overpriced.
In these situations, the best outcome is your initial investors will see the value of their investment fall when further investment is required and the worst is that it may not be possible to raise further funds at all. Putting the issue of high valuations to one side, we recognise securing funding for small business growth via traditional channels is incredibly difficult and is why we are seeing such a growth in alternative financing such as P2P and crowdfunding. Whilst we see this as a good thing, we also have some serious concerns over a lack of credible due diligence and post investment oversight/governance, which we believe will result in a number of high profile losses which could tarnish the sector and overshadow all the good work it has achieved.
It is for this reason we decided to enter the market and launch Downing Crowd (www.DowningCrowd.co.uk
). Downing Crowd aims to offer a more professionalised approach to the crowdfunding model. We will initially be focusing on raising bonds for more mature businesses, with assets in place and an established track record. We believe this will be attractive for crowd lenders and investors as it will give them a choice to use a platform managed by professional investors with a track record and reliable back catalogue of successful exits and we believe it will be attractive to borrowers as a) they will get access to a professional support network as well as funding; and b) we will underwrite the bonds thereby removing the risk that the fundraise will be unsuccessful. Our first £3.2m bond sold out well ahead of the closing date and we are about to launch a number of others, including at least one in the licensed sector. Please get in touch with Steve@downing.co.uk
if you want to know more.
Steve Kenee is head of licensed leisure at Downing LLP – an active investor with more than £800m under management
Deskilling the kitchen by Glynn Davis
PizzaExpress continues to be held up as the benchmark in how to roll-out a restaurant chain. Its success over the years can be put down to great site selection, continuous evolvement of its menu, distinctive individual restaurants, the friendly inclusive nature of its service and ambience, and the love everybody has for the humble pizza. What has also been fundamental to its rapid expansion and that of the myriad of other successful pizza chains – including Pizza Hut, Strada, ASK and Franco Manca as well as the mass of home delivery businesses such as Domino’s – is the ease of production of the core product.
Nobody would ever say it takes a great amount of skill to knock-up a pizza. The best examples require outstanding dough, top-notch ovens, and high quality ingredients but once you’ve got those aspects sorted then the actual cooking skills needed by the chef are relatively limited. This has enabled pizza chains to avoid the problem faced by many other types of restaurant – the recruitment of skilled chefs.
I can recall when both the Fish! and Chez Gerard chains had aspirations to be the next PizzaExpress and planned serious roll-outs. They failed because they hit the big stumbling block of a need for skilled chefs who not only cost a decent amount of money to attract but are also tough to find in high numbers. This makes it exceedingly tough to deliver an aggressive roll-out of an affordable offer that has any sort of complexity in the cooking.
It was not possible to deskill the chef roles in either of these concepts to enable a national brand to be built at speed and which was economically viable. The deskilling of chefs has long been debated in the industry. The butchery side of things has been one specific area that has divided opinion for years. I can remember when the renowned Gleneagles Hotel in Scotland was looking at outsourcing its butchery requirements to a third-party specialist and there was an outcry in the chef world this signalled the end of the fully rounded chef and the brigade in this high quality kitchen would be bereft of the full portfolio of basic skills.
Maybe it is no surprise today there is a general restaurant industry trend at the mainstream end of the market for concepts and menus that very much deskill the roles in the kitchen. Some of the more popular and growing chains of today offer a very limited range of menu options, which has enabled them to mechanise the food production process and in so doing remove the need to recruit expensive chefs with a wide range of skills.
When you look at the likes of Burger & Lobster, Vapiano, the various burrito chains, and the Wagamama’s of this world there is a move towards equipping the kitchen team with very specific skills they can use to cost-efficiently deliver the restaurant’s compartmentalised requirements. It is clearly not necessary to equip them with anything approaching fully rounded chef skills but what is being taught is constantly being reduced as restaurants increasingly seem to be focusing on ridiculously limited, never-changing menus. Burger & Lobster doesn’t even have a menu. It has two dishes and its aim is to be the exemplar in the delivery of these two items. These restaurant concepts are about absolute simplification in order their competitively priced business models stack up.
The US-based chain Chipotle was so enamoured with the mechanistic way McDonald’s had perfected (and largely invented) the production of its food that it sold a stake in its business to the giant burger maker. This has since been reversed but the desire for food businesses like Chipotle to simplify their production processes continues apace. This fuels the increasing polarisation between the higher end of the food chain where the full gamut of skills are taught – and are absolutely needed – and the lower end where the training is specifically focused around what the individual will be required to undertake in the production process. Nothing else needs to be taught. It’s cooking of the battery-farming variety.
This is a world away from the artistic creativity that takes place in some of the top end kitchens and helps them stand out from the pack. Clearly one man’s art is another’s pile of building bricks and so diametrically opposed restaurant types both have their places in today’s vibrant market. But let’s hope the growth in the one-dimensional kitchen roles within many of today’s popular restaurant concepts does not just create an army of people who are bored out of wanting to progress further in the restaurant industry and build a long-term career.
Glynn Davis is a leading commentator on retail trends
The slippery slope of health, wellbeing and happiness by Paul Chase
Have you noticed how changes to the use of language are often employed to soften us up to accept extensions to the power of the state over our daily lives? An example is the increasing use of the term “health and wellbeing”. It is no longer enough for the state to provide a health service that treats illness and disease; it must now, and increasingly does, focus on a much more nebulous task – the provision of ‘wellbeing’.
Now, call me old fashioned, but back in the day you were healthy if you weren’t unhealthy, ie suffering from a recognised medical condition. If you were suffering from an illness or disease then a doctor would diagnose it, and treat you or cure you, or not as the case may be. But “wellbeing”, or the lack of, is a subjective condition, not an objective one, and its link to “health” provides the opportunity for all kinds of state-sponsored mischief. In fact, wellbeing isn’t that far away from the concept of “happiness”.
So what happens if our National Health Service morphs into a National Health and Wellbeing Service? Or even a National Health, Wellbeing and Personal Happiness Service? A bottomless money-pit is the inevitable result. And there are people out there who no doubt have the best of intentions, but consider it their business to poke their noses into all sorts of things that really aren’t their business, in the name of “health and wellbeing”.
Which brings me to councillor Izzy Seccombe. Izzy, as I shall henceforth refer to her, is the Local Government Association’s (LGA) community and wellbeing spokeswoman. Now, we all know councils are strapped for cash, but they still have enough money to fund surveys by the LGA into vital matters, such as how many people drink tap water when they are dining out (I kid you not). The LGA’s survey apparently discovered only a third of diners drink tap water when eating out. But don’t worry, Izzy was soon on the case. She said this: “While most restaurants will happily provide a glass of tap water on request, we’re saying it shouldn’t be something you have to ask for. Some people may be too embarrassed. Others may simply forget it’s an option.”
You’d have to be extraordinarily absent minded to forget that you can drink water if you’re thirsty, but “embarrassed”? If asking for a glass or jug of tap water in a pub or restaurant embarrasses you, then I fear that your life may consist of a never-ending series of insurmountable challenges. So, let me offer a bit of scenario training:
I rock-up at a pub restaurant with my friends and I’m greeted by a member of staff:
“Good evening sir!”
“Good evening. I have a table booked for four adults and two kids – in the name of Chase.” (member of staff consults list).
“Yes sir, come right this way.” (We sit down and menus are distributed).
She asks: “Would you like to order some drinks while you’re looking at the menu?”
“Bill, Ben, what would you like? Two pints of IPA please; and could I have a bottle of Shiraz for me and my partner? Oh, and a jug of iced water for the kids?”
You see how this works Izzy? Not a trace of embarrassment.
But Izzy wheels out the ultimate justification for health and wellbeing: “what about the children?” She wants water on the table whether you ask for it or not because it will help in the “fight against childhood obesity”. And because it might also protect adults from the temptation (that’s the word she uses) of “that extra alcoholic drink”. And she is not alone in her concerns. Russ Ludwa, chairman of the British Dental Association’s health and science committee, said: “Diners deserve a choice, but shouldn’t feel they have to ask for the one option that doesn’t come bundled with sugars, acids or calories.” Er, Russ, asking for what you want is called “consumer choice”, it’s what we do when we go out and buy things.
I have visited numerous countries around the world, and the only one where you almost invariably get offered water whether you want it or not is America. So obviously they are a nation of slim people right? Oh no, they’re not – they’ve got the biggest obesity problem of any nation on earth! The fundamental problem here is that these people don’t have enough to do. Giving “health”, let alone “health and wellbeing”, to local councils was a fundamental mistake. It awoke all these virtue-signalling local nannies from their slumber, and invited them to join in a chorus with all the other fuss buckets that want to regulate the tick and tock of other peoples’ lives.
“Off with their heads” I say!
Paul Chase is a director of CPL Training and a leading commentator on alcohol and health policy