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Morning Briefing Strap Line
Fri 28th Jun 2013 - Friday Opinion
Subjects: Wetherspoon growth pinch-points, political timing and a Russian perspective
Authors: Paul Charity, Paul Chase and Kevin Todd

Wetherspoon growth pinch-points by Paul Charity

Growing a big business necessarily involves overcoming many bumps in the road and pinch-points along the way. Last week at our Propel Multi Club conference, I chatted to JD Wetherspoon founder Tim Martin about the many and varied choke points that faced his company as it grew from a modest 500 square foot site in Muswell Hill to its current near-900 site ascendancy on the high street. Typically, Martin asked me not to brief him beforehand on the pinch-points I would raise with him live, preferring an element of surprise to keep our chat lively. Here’s ten of the major pinch-points I raised with him, proving, if nothing else, that challenges keep on coming:

1.  His own early days experience: Martin acquired the leasehold interest of his first site from industry veteran Andrew Marler and then found that running a pub threw up all sorts of challenges that could not be imagined from his earlier perspective as a customer. Not least of these was acquiring a rounded skillset. As Martin says, the popular view is that running a pub is like running a football team, everybody thinks they can do it.

2.  Cashflow: Cashflow is the bain of every emerging operator’s life. It involves a constant juggling act, especially if an operator is looking to expand. Anyone with aspirations to grow a sizeable company in this sector should examine Wetherspoon’s first decade figures for comfort on how careful expansion requires patience. In 1984, a full five years after Martin founded the company and the year he incorporated, turnover stood at £818,000 with a loss of £7,000 for the year. These figures need adjusting for inflation but show the slow and careful start that Wetherspoon made.

3.  The property barrier of the late 1980s: Martin made a conscious decision that a major route to expansion would involve applications to get unlicensed premises licensed. The downside to the decision was a relative brake on expansion because it involved a convoluted, expensive and time-consuming process. The upside was that Wetherspoon, once the process was complete, could open pubs in parts of London that had not seen a new pub in many decades. The other long-term win involved JD Wetherspoon side-stepping a long-term negative that Martin saw. The trap is encapsulated in Martin’s resonant property world-view: “Over time, you are overwhelmed by the superior forces of your landlord (with brewery leases).”

4.  The bank’s withdrawal of support in 1991: JD Wetherspoon was enjoying its most successful year ever. But the economic crisis meant his bank decided to call its loan in. The money was replaced by an alternative lender who demanded a 10% coupon and a sizeable slice of the company’s equity. Martin told our conference audience that his bank contact told him matter-of-factly: “You just can’t rely on us.” 

5.  Licence objections in the 1990s: It’s perhaps a little hard to believe now in an era when companies have stopped objecting to each other’s licence applications. But back in the 1990s and beyond objections were very common. A shareholder of any sector company objecting to a competitor’s opening needs, of course, to be concerned because it speaks volumes as to how a particular brand stands to be damaged. And, sure enough, lots of the objectors of this period are no longer around in their current form. Nevertheless, it produced expense and delays for Wetherspoon.

6.  The euro: Martin sensed an existential threat arising from the suggestion that the UK adopts the euro. He went into full-on campaigning mode as momentum to join the euro gathered pace. There was, at the time, a board consensus forming on UK entry if certain conditions could be met. A decade or more on, history has provided some sense of the damage that joining the euro might have wrought on the UK economy. Just take a look at the Spanish economy where the foodservice industry has faced almost 60 consecutive months of contraction. The euro is an example of a political issue that threatened to undermine the very basis on which the sector thrives – or otherwise. The parallel threat Martin sees now is the long-term danger posed by the food tax advantage enjoyed by the supermarkets on VAT. It’s why he has been so active in supporting the Vat Club Jacques Borel – and is supporting Tax Parity Day on Wednesday 25 September.

7.  No block acquisitions: A faster route to growth for Wetherspoon would have been to buy a block of pubs. However, the industry’s record on buying blocks of pubs is patchy at best. For Martin, a controlled, although slower, organic expansion has been preferable. The only exception has been the acquisition of eight Lloyds No 1 sites from Marston’s. Lloyds No 1 has grown to well over 100 sites but at times I have sensed ambivalence over the sub-brand.

8.  The Van de Berg property fraud: JD Wetherspoon was the subject of a very large property fraud by its retained agent Van de Berg, which diverted freeholds to third parties who enjoyed freehold values gains based on rents paid by the company. Martin believes the cost to the company has been as much a £100m, not least because these deals distorted the rent tenor of the high street. Martin has been indefatigable in pursuing the legal cases arising – and generally throwing a light on the conflict of interest that follows a property agent who is also active in property deals as a principal. The outcome of property deals that weren’t in the best interests of the company has been a drain on its strength. Says Martin: “We were only saved because I insisted on approving deals personally. It made their life a lot more difficult.”

9.  The property boom of 2004-2007: For Wetherspoon, the climate has been right to expand quickly – or not. The trick is spotting which is which and exercising self-control when the moment to expand is wrong. Between 2004 and 2007, money was cheap and deals galore were being done. Counter-intuitively, Martin and his team retired to the changing rooms during the property boom between 2004 and 2007. Openings chunked down from 28 in 2004 to 13 in 2005 and nine in 2006. The arrival of the credit crunch and lower property prices has allowed the opening tap to be turned on again, rising in each year between 2007 and 2011. But for shareholders in the property heyday, slow growth in the name of long-term company health meant indifferent share price performance. 

10.  The tax and regulatory regime between 2003 and 2013: This challenge has not been overcome. Increasing tax and regulatory costs have taken its toll on the sector in the last decade and Wetherspoon has not been immune. It has meant site Ebitda has eroded from £201,900 in 2003 to £194,900 last year despite a £7,000 per week per site increase in sales. One answer lies in creating a level playing field with the supermarkets in VAT on food. For those not yet supporting Tax Parity Day, the question is: Why not?
Paul Charity is managing director of Propel Info 

Timing is everything by Paul Chase

Harold Wilson is credited with saying that “a week is a long time in politics”. In terms of the politics of alcohol timing is an important matter, and a lot depends on the ‘big mo’ – gaining momentum for a change of direction. The government’s response to its Alcohol Strategy consultation was due to be published yesterday (27th July), but its publication has been postponed for a couple of weeks – it can’t be any longer because the government wants its ‘out there’ before Parliament recesses for the summer. So, why the delay?
 
Readers of Propel will know that one of the proposals being consulted on was the introduction of Minimum Unit Pricing (MUP) for alcohol in England and Wales. When the Scottish Parliament passed a law introducing MUP the European Commission was notified and gave an interim judgment on its legality. Helpfully, this was given just as Mr Cameron was launching his Alcohol Strategy which included the same proposal.
 
The European Commission’s interim judgment was that MUP in Scotland is incompatible with EU trade law and should not be introduced. The UK government had to respond by December last year to this judgment, which they duly did. The next step is for the European Commission to give a final judgment on the legality of MUP, having regard to the UK government’s response. It is thought likely that their final judgment will be against the measure. I suspect that the UK government is hoping that this judgment will be delivered swiftly so that they can blame Europe for their own policy U-turn. In this they may be disappointed because sources within the Commission are indicating that publication of the judgment is at least four weeks away. Might the UK government postpone publication of the Alcohol Strategy Consultation again? Watch this space.
 
And timing is very important from another perspective too: the protracted process of legal wrangling over the Scottish law could well go on until after the Scottish independence referendum, which in turn could have an impact on who will in due course be elected to govern Scotland. If the SNP loses the referendum and then its Parliamentary majority, the impetus for MUP will subside – other parties do not have the same dogmatic attachment to this policy.
 
Another issue in which timing is important is the thorny issue of a statutory code for the pubcos. I respect the passionately-held views on both sides of this debate, but I am wary of any further government intervention in our sector because I am instinctively a believer in free markets. When government seeks to regulate commercial rents in a free market, in order to determine how the cake should be divided, I see no difference in principle between doing that and regulating prices via MUP. If government regulates both prices and rents within our sector where does this process of intervention stop? It should not be forgotten that it was the Liberals under Herbert Asquith who attempted to nationalise the pub industry before the First World War, and the ‘Carlisle Experiment’ in 1916 resulted in the nationalisation of some 360 pubs under the government’s Central Control Board – a position that wasn’t fully reversed until 1971.
 
The proposition that government is the right agency to re-divide the cake is a bit rich when they are the ones taking the biggest slice! Which brings me to the issue of a level playing field in respect of tax, and specifically VAT. The VAT Club has announced a ‘day of action’ in September in its campaign to reduce VAT in pubs to 5%. Whilst I think that the achievement of this is a very tall order in the current climate, I am nevertheless one hundred percent behind the campaign. And it might prove useful as a political counter to the tendency for government to seek control over more and more of our sector. Tax equality would result in more of the cake being available for division between pubcos, lessees and, most importantly, customers, through better value for money. The argument of how a cake is divided tends to be less fraught if the cake gets bigger.
 
A government that regulates less, does less, but does it better is a pre-requisite for the proper functioning of a market economy. Timing is important and now is the time to make that argument in respect of our sector.
Paul Chase is a director of CPL Training and a leading commentator on on-trade alcohol policy

A Moscow perspective by Kevin Todd

I’m sure you all remember this tale of miscommunication by a commander in the First World War, and how the real message, “Send reinforcements. We’re going to advance” was misrepresented (send three and fourpence, we’re going to a dance!) 

The simple management principles of clear and effective communication are always important. But when you have to lead a business which speaks in a different language to your own then you very quickly get a refresh lesson!

In Russia, I am very grateful that the majority of my leadership team speak good English, and we have members of the team who can support me with required translation. But I have relearnt two important lessons of communication in my time here at Rosinter to date:

1.  Seek first to understand. For us to have a positive impact in Russia we need to really ensure we understand the issues that the business faces here. We cannot assume that our inherited knowledge from our past career is always relevant.

2.  Then ensure we are understood. I have fallen foul too many times of assuming my message has been received – to then find out later that it has not! The consequence of this can be very disruptive if the team then enthusiastically work on an initiative without a true understanding of either the objective or the agreed brief! People can be too willing to indicate they understand with an enthusiastic smile and nod of the head. But it’s only through experience that I am learning now to ask more clearly for a playback of what we have been discussing and agreeing - and frequently learn how far from the assumed answer we really are! Whilst part of this directly relates to language understanding, it makes me wonder how often in past situations back in the UK I have left the meeting without a true understanding of what we have agreed!

Working as expatriates in a foreign land, we have to accept that any problem of understanding or mis-communication is our responsibility to resolve. There is no point in getting frustrated - we are the visitors and we have to continually work on our communication skills to ensure we both understand and are understood.

Another management lesson we are re-learning is to focus on what the guest wants rather than what we want to give the guest! A simple example to illustrate the point. In Russia there is a typical restaurant standard that, for each individual, guest servers bring food to the table when it is cooked, and clear crockery from the table when it is finished, regardless of the status of the other guests at the same table. Coming from a UK culture where tables are served and cleared at the same time for the supposed convenience of the guests, we were perplexed by this. So we set out in a new trial restaurant to adopt the UK service model. Despite constant attention on this we have found it very difficult to make it happen. It’s not because the servers are not trying to do what you ask, it’s because the guest does not really want it. If a customer is used to having their plate cleared from the table as soon as they have finished eating, even if other guests at the table have not finished, then for us to leave the dirty crockery on the table can actually appear as bad service.

It’s also important for us to ensure that we fully understand how to interpret how and when to adopt new ideas and initiatives that we all observe as international development trends. A good example is menu layout and presentation. In the UK, there is a trend for simple uncluttered menu presentation – less is more. In Russia, the mid market restaurant brands tend to have very large menu formats with lots of photography and detailed menu descriptions. When we suggested that a more simplified menu format would be more ‘modern’ and, therefore, better, we quickly learnt the reasons why this will not yet work effectively. The Russian consumer is still on a learning curve of experiencing more frequent eating out and enjoys the reassurance of a menu format that shows the photographs of many of the products. In case they do not know what the item is, the photo helps explain it rather than having to ask the server or be embarrassed by not knowing. I am sure that, over time, as Russian consumers become more experienced, the trend towards more simplified menu formats will become standard in Russia also – the reality is that currently the menu photographs serve an important customer need.

So what’s happening in our business now? We are observing a fascinating pace of transition from winter to spring - the seasons changes are very fast and dramatic in Russia. Two weeks after a cold and snow-covered landscape, Spring suddenly arrives with temperatures of nearly 20 degrees and warm sunshine! There is now frantic effort to Spring-clean outside areas and to construct summer terraces and temporary external conservatories that are such a feature of restaurants in Russia.

The first fortnight of May effectively become a national holiday as there are five public holiday events (from Labour Day to Victory Commonwealth Day) in a two-week period and so office workers typically take the whole period as a holiday. Whilst based on our UK experience we would assume this is a peak trading period in our restaurants as our guests have more leisure time. I am afraid in reality the opposite is true and it’s typically a low sales season. This is because our guests tend to exit the cities for their post winter break.

Overall our development plans are progressing well. The latest opportunity for us is that we have started to sign up new locations to run the McDonald’s franchise in our airport operations. We were awarded this particular franchise last year but its taken a time period to identify and negotiate suitable locations, but we now have sites lined up to start opening from July 2013.

We are also progressing with the development of restaurant facilities in the major railway terminals in Moscow. Based on our great success and experience in the airports, there is an opportunity for us to establish ourselves in the railway terminals. These grand buildings are being redeveloped and new restaurant facilities being introduced – currently the typical catering offer is very cheap local snack stalls. But again we are having to ensure that we understand the curve of market evolution and do not become too ambitious too soon. Think about the UK market. We all admire the facilities now available at new premises like St Pancreas and Kings Cross, but its’ taken the industry several decades of evolution to get there – remember Casey Jones? We need to ensure that our offer development in the railways provides guests with what is relevant for their needs on today’s market demand curve, and not what the most modern international standards can provide.

So lots to learn, lots to do. But we are having fun doing it and we are beginning to see some green shoots of recovery and progress.
Kevin Todd is chief executive of Russia’s largest restaurant operator Rosinter

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