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Morning Briefing for pub, restaurant and food wervice operators

Fri 22nd Feb 2019 - Friday Opinion
Subjects: Flying by the seat of their pants, pizza pressure and operators must be marketers too
Authors: James Hacon, Glynn Davis and Ann Elliott

Flying by the seat of their pants by James Hacon

Being an “entrepreneur” is something of a buzzword. A whole ecosystem has developed around it, with incubators, clubs and god knows how many books. We’ve even got a television show dedicated to startups in our sector seeking investment – My Million Pound Menu. 

During the past decade I’ve founded a few businesses and sold a few as well as working with lots of others. I have had mild success of my own and, perhaps as is always the case, helped others find much more success. One thing that has always concerned me is the culture that has built up around the idea of entrepreneurship. In my early 20s, I became wrapped up in it – attending regular sprint sessions, working from incubators, and generally bathing in the warmth and glory of calling myself an entrepreneur alongside my peers. 

Obscurely in this world, because of the heavy influence of technology startups the whole premise of starting up has seen aspiring entrepreneurs taught they have to be fixing a problem, bootstrapping is the only way to get going, and you can worry about commercialisation later. In the tech world there’s no lack of angels looking to invest in the next big idea, with the knowledge lofty valuations give them a little more comfort around the risk. 

You’ll often hear well-known influencers in the startup space promote the need to work relentlessly and tell you struggle is what it takes to be a successful entrepreneur. “Struggle-porn” as one business editor called it recently. 

In the past year, Think Hospitality has invested in several early-stage concepts and worked with many people on all kinds of entrepreneurial journeys of their own. We’ve met far more – too many, truth be told. I’m always willing to meet with people who reach out to offer guidance and support but my first questions are always around sustainability of the way the business is working and the commercials. 

More often than not there’s a lack of knowledge or even basic understanding around the commercials and financials. Usually the business owner is working unsustainable hours and not accounting for this in any way, which means there’s no true indication of how the business is actually performing.

There have been a few occasions where we’ve tried to help people save their business with restrategising, refinancing and turnaround projects, something that may come as no surprise given the well-documented issues in our sector.

Compared with many countries, it’s simple to start a business in the UK. Owning a pub or restaurant has always been a dream for the masses and has long been realised through opportunities presented through the leased and tenanted sector. In a way, the opportunities created by street food and market hall propositions, which reduce ingoing costs, has meant starting a hospitality business has become easier than ever. In these type of models, entrepreneurs are able to concentrate on the food as there’s usually limited staff, little infrastructure and footfall delivered to their door.

The challenge, as many reading this will know all too well, is food is only one aspect of a great business. There are a number of incubator-type programmes run by food hall and market operators that help teach the skills to get set up within this model but it feels like there’s a significant gap in helping these business owners take the next step into bricks and mortar and sustainably expanding from there. 

The idea of scaling a business to multiple sites is attractive and often an entrepreneur’s intention but it’s no easy feat. It takes a lot of experience and knowledge to do this effectively. A good idea or popular concept isn’t enough. There are many well-documented examples of small brands that seemed to be on a winning streak and scooping major accolades in our sector, who rolled out too quickly and have now virtually disappeared. Only yesterday I met an operator currently riding high on publicity and exposure that, beneath it all, is skating on thin ice.

It’s one thing to be entrepreneurial and take risks, another to be reckless when taking new sites, credit lines from suppliers and other peoples’ money. 

With the slowdown in brands scaling, an increase in company voluntary arrangements and a respective increase in property availability, some landlords are increasingly taking bigger risks on who they let their sites to and directly fuelling unsustainable growth by financially supporting these entrepreneurs with what seems like little due diligence.

As a sector we need to encourage diligence and robustness in how we approach helping entrepreneurs. We need to be careful not to overexpose young brands in the sector as it’s far too easy to let ego and ambition run away with itself.

If you are reading this as an entrepreneur, my biggest advice is to know your numbers, spend time with professionals on your financial planning and leave yourself breathing room. I am in no way trying to clip your wings but would encourage you to learn to walk before running, ideally with a good warm-up first.
James Hacon is managing director of Think Hospitality, which advises multi-site brands on growth, brand and development strategy, as well as investing in early-stage concepts with a bright future

Pizza pressure by Glynn Davis

PizzaExpress is an undoubted foodservice phenomenon that has helped make the reputations of a number of individuals – starting with its founder, Peter Boizot, running through to Luke Johnson, Hugh Osmond, David Page and Paul Campbell, among others.

It was sad to hear of the death of pioneering restaurateur Boizot, who passed away at the end of last year aged 89 having set up the PizzaExpress business in 1965. In doing so, he created what is an incredibly enduring brand that has grown into a chain of almost 500 outlets.

It has also been sad to see the quandary sector investor Luke Johnson finds himself in. With Hugh Osmond he was behind the growth of the PizzaExpress brand in the 1990s, when he helped take it from 12 to 250 units and its share price move from 40p to £9. However, of late he has become embroiled in the shocking and sudden collapse of Patisserie Valerie.

In the age-old tradition of bad news coming in threes, the third piece of PizzaExpress-related bad news is the chain finds itself in the unprecedented position of coming under a lot of pressure. While it would be wrong to suggest we’ve reached “peak pizza” in the UK and that PizzaExpress has had its day, there’s no doubt the sector is over-run with players. This has led to declining profitability for PizzaExpress and falling like-for-like sales in 2018. 

The unlikely situation of a turnaround this year has led ratings agency Moody’s to downgrade the company’s debt. It was trading recently at only 47p in the pound compared with 90p a year ago and this has resulted in some activity in the market with the implication buyers of this cheap debt could look to gain control of the business through the back door.

Current owner Hony Capital is due to repay about £650m of borrowings during the next three years – as part of total debts of more than £1bn – and PizzaExpress is understood to have had interest costs of approaching £90m in 2017, for instance, during which time it made a pre-tax loss of £28.7m.

The company’s management has clearly recognised action needs to be taken and has devised a five-year plan – Future Express – to refresh the brand and its enormous store estate. This is the problem with such large businesses – undertaking any refurbishment and upgrades takes a lot of time and plenty of money.

Another sign the company understands the need to change its model can be seen in its decision to launch spin-off brand ZA, which involves offering pizza by the slice alongside its full dine-in offer. The plan is to convert some PizzaExpress restaurants to the new format. This move highlights how its core demographic is increasingly shifting to food-on-the-go and home delivery.

PizzaExpress isn’t the only established player in the market to feel the pressure – Domino’s is also in the thick of it. There’s talk its store base is nearing maturity while it continues to have a fractious relationship with many of its franchisees, who want a greater share of the group’s profits. Franchisees have threatened to open fewer stores, which would clearly reduce expectations of sales and profits. Such issues prompted analyst Goodbody to reduce forecasts and downgrade its recommendation on Domino’s to ‘Hold’.

Another worrying sign is Domino’s trial with Just Eat, in which it offers products on the aggregator’s site. Domino’s management argues it is failing to reach younger consumers and this route will help it connect with that important part of the market. One of Domino’s strengths was it was digitally savvy and had great visibility in the market place, which combined to ensure it didn’t have to give away margin to third-party aggregators. It’s tough to see such a move in a positive light.

The vast majority of the UK population, however, continues its love affair with pizza – it represents more than one-quarter (28%) of the country’s delivered food market for instance – but this isn’t necessarily resulting in an easy life for the long-established incumbents.
Glynn Davis is a leading commentator on retail trends 

Operators must be marketers too by Ann Elliott

Earlier this week Propel shared the latest Coffer Peach Business Tracker for January sales, which revealed: “The big contrast was between managed pubs and group-owned restaurants in the capital, with the former down 0.5% against a more significant 4.1% sales decline for restaurants in January.”

If you ran a group-owned restaurant and probably needed 4% like-for-like growth in January just to stand still in the face of increasing costs but actually delivered minus 4.1%, what would you do? An 8% gap is difficult to bridge. There may be an upside during half-term week but otherwise there are no large sales hikes on the horizon until Easter, which this year is in the middle of April, with the prospect of quarterly rent and rates invoices hitting the desks well before then. It must be difficult to remain resilient and optimistic.

I doubt there’s a lever out there group-owned restaurants haven’t pulled in the past 12 months in an attempt to increase sales and cut costs. Where do they go now to look for sales growth or minimise expenditure?

Technology: Easy ordering and payment, especially at table, has to be a way operators can increase spend per head. Last week I spent three hours working in a London pub and spent the princely sum of £6.70 because I didn’t want to leave my table and belongings and they didn’t offer table service. I could have easily spent closer to £30. This doesn’t have to be an expensive “own app” solution, there are cheaper and quicker options on the market.

Low pricing: It can’t be a coincidence high-value operators such as JD Wetherspoon (large breakfast of two fried eggs, bacon, two sausages, baked beans, three hash browns, mushrooms, tomato and two slices of toast for £4.99 and coffee with free refill at £1.25); McDonald’s (hamburger or cheeseburger 89p) and Greggs (sausage rolls 95p each or four for £2.85) have all delivered positive like-for-like growth recently in contrast with the performance of group-owned restaurants. In the first two brands, technology has undoubtedly helped to drive sales and cut labour costs. Could more struggling brands look to introduce hyper-low-priced items to their menus to generate footfall and sales?

Voucher sales: Many restaurants are missing an opportunity to sell vouchers on their websites – properly and legally. This is a no-brainer. It’s cheap and easy to do using a simple plug-in from a number of tech companies and profitable as only 70% of vouchers are generally redeemed.

Content: The holy grail. Many restaurant groups want a Greggs-style activation campaign – vegan sausage roll launched in an Apple phone box, Fenwick’s reverse shop logo, sausage roll replacing Jesus in the nativity, the Valentine’s idea, exclusive WhatsApp group for VIPs, the mince pie air freshener, Greggs pranking foodies with its undercover restaurant at a London Food Festival. These are low cost, very creative and garner a huge social following and masses of coverage. It’s probably the most common brief we receive. Finding an outstanding idea (or lots of them) and activating brilliantly can make a huge difference to a brand’s performance.

Local: Many brands don’t do enough consistently and don’t always have enough stores to make national activity financially viable to attract local clientele. Genuinely being part of a community, looking for ways to give back, visiting local influencers with vouchers or coffee and cake, being a hub for other services in the area, and regularly talking to other businesses are all cheap and effective ways to inspire local visits. It’s not all about putting an ad in a rugby club calendar – it’s about meeting face to face.

Customer first: A bit of a no-brainer but restaurants should always start from understanding a customer’s needs, wants and expectations and continually talk to and consult them (inside and outside their site). Of course they can use technology but a brunch every other Sunday with users and non-users run by the manager will gain even more valuable insights. These days operators have to become marketers too.
Ann Elliott is chief executive of Elliotts, the leading integrated marketing agency in the hospitality and leisure sector –

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