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Morning Briefing for pub, restaurant and food wervice operators

Fri 2nd May 2014 - Friday Opinion
Subjects: The craft beer front-line in the United States, expanding Innocent abroad, the challenge of staff engagement, the fragmented but very healthy pub sector
Authors: Jean-Paul Russek, Adam Balon, Ann Elliott and Geof Collyer


A dispatch from the craft beer front-line in the US by Jean-Paul Russek

Like many fellow Propel readers, I am a fan of all things craft beer, and this has increasingly been the focus of my trips to the United  States. The trip I have just returned from was to one of the hotbeds of US craft beer activity, namely Washington State and Oregon – although a week in cities like Seattle and Portland can only scratch the surface. I am not writing to debate what is and what is not craft beer but I am pretty clear our US colleagues are more comfortable on the definition - and the role that the Brewers Association in the US plays is perhaps key to this.

These are some of my observations from my week of beer heaven:

• The sheer number of breweries, now close to 3,000 (just 500 in 1994) and growing daily is astonishing, each with a myriad of beer choices. Beers on offer were IPAs, pale ales, bocks, stouts, porters, ambers, brown ales, Hefe Weizen, red lagers, black lagers, several Belgian styles, especially saisons and many many others. IPAs were the most popular ale type in the North West, with so many hop-growing regions nearby. At the excellent Beveridge Place Pub in West Seattle I could choose from 18 different IPAs (including six "triple IPAs"), all from different breweries. Even late-night, back-street, so called "dive bars" offered craft brewery taps at around 50% of the total number of taps.

• The average ABV of the (many) beers I sampled was comfortably 7%-plus. I rarely saw much below 5%. When it was available it generally had the word "session" attached. That a majority of US craft is high in ABV is interesting in itself. The historic associations of traditional macro-brewery beers would be "ice-cold and weak".

• I loved the fascination with IBUs (International Bitterness Units). These were almost always listed in detail, often on giant screens on every back bar. My highest IBU drink of the week was at the Silver Moon Brewery Pub in Bend, Oregon: a beer of its called Maui Wowie had 146 IBUs. While common wisdom here may regard this as undrinkable I found it to be pleasant and surprisingly well-balanced even though a high 9% ABV. Incidentally, a pint of this in the fine pub cost just $5 – £2.96.

• Is there a more beer-driven town anywhere than Bend? This Central Oregon town, two hours south west of Portland has a population of 65,000 (a little bigger than, say, Lowestoft), and is surrounded by beautiful mountains and scenery. Yet it is the home of 18 breweries, including the well-known Deschutes and the very much up-and-coming 10 Barrel Brewery. Half of the breweries are less than five years old. Most of these breweries had some form of bar/brewery tap, each with is own distinct style and offer. The Crux Fermentation Project was my favourite, where you could enjoy any six of its fine beers in 3oz (9cl) glasses on a tray for $10 with a decent menu to match. As I chatted to fellow customers (who were all ages and a decent male/female mix), it was clear they were here to sample as many different styles of beers as possible and enjoy the laid-back atmosphere.

• The rise of cask beer was also noted. According to the Brewers Association, there are around 500 cask ales stockists in the US, which historically were New England-based, such as in Boston (where there are already a number of Cask Marque-accredited bars). I noticed a cask offer in almost half the bars I visited: normally the one single handpull, with a rotating choice. Quality was good and as the team in Belmont Station Bar in Portland told me, it is on the rise as a beer choice. This bar also had 1,200 beers at its adjacent bottle shop and is one of several great craft bars in this city.

• It is also not just about enjoying pints of beers in bars. I noticed craft beer cans in almost every bar, of decent quality and typically from brewers further afield. This is also clearly a trend on the rise. (Siba’s canned beer festival here in the UK in September reinforces that). Many bars also offered "growler" fills too, where customers bring in their own glass or metal canister, typically two or four-pint capacity, and get them filled up with draught beer to take away. There was a queue for this service at the Fish Bowl Bar in downtown Olympia where the bar team told me this was a sizeable part of their trade. Finally, in Oregon, in the two supermarkets I visited, the range of craft cans and bottles was incredible, I stopped counting at 50 different breweries, with a wide choice of styles, while mainstream beer was tucked to one small corner.

In conclusion, I believe the US market, in the North West at least, is exploding even faster on the ground than we read about. The choice, innovation, knowledge and, above all, quality were excellent. I work in the UK pub trade and am passionate about how good our industry is. My US experience tells me there is another dimension to our great business that can challenge our preconceived views and give us some clues where this part of the trade is going.
Jean-Paul Russek is a partnership development manager for Punch Taverns and also the company's regional cask and craft beer champion. He is also a member of the American Homebrewers Association and a Cask Marque Ambassador.

The Innocent 'test, learn, change' cycle ran at double speed abroad by Adam Balon

We were at our first trade show in France, proud to be exporting the Innocent dream. The stand carried our usual mission statement, this time translated into French. It explained Innocent smoothies were 100% natural and contained no colourings, no water, no sugar and no preservatives. Encouragingly, we were getting plenty of interest, but something felt odd. Our message seemed to be provoking a lot of Gallic smirks and chuckles. It was only when we stopped a passer-by to ask what was so amusing that we understood the true limits of GCSE French. Our stand had certainly made an impression, though not in the way we had anticipated. Since "preservatives" does not translate directly into French, it turned out that we were advertising "condom-free" fruit drinks.
Innocent’s foreign expansion started by accident. When Marks & Spencer closed down its store on Boulevard Haussmann in Paris, new owner Galeries Lafayette decided to replicate the M&S food hall by selling English snacking products. A distributor contacted us in late 2005, offering to ship our drinks to France without us having to do anything at all. Soon Innocent was on sale in a lovely store in the middle of Paris. Better still, when we looked at the numbers, we were selling more at this single point of distribution than anywhere else in the UK. "Great," we thought. "This international stuff’s easy!"
We hired a guy in Paris to be our one-man team and started to build up stockists. We went to trade shows and, eventually, got the wording correct on our stands. But, of course, we soon realised the idea of one man doing what dozens did in the UK was ridiculous. He was getting swamped. At the same time, the company faced a larger strategic decision. Should we go for category or international expansion? After rigorous analysis we ended up choosing the latter, partly to drive value but also because our UK supply chain team was already flat out trying to keep up with demand.
The next choice was America or Europe. We seriously considered America and even had a deal in place with Starbucks, which fell through at the last minute. It was a blessing, as it would have been too big a step for us and may have killed the business completely. But we knew that if we wanted to do international, we needed to do it properly – with a country manager and a full sales team. The idea was to keep them focused mainly on sales and marketing but give them almost complete creative control over the brand.
However, the approach was only semi-successful. While invigorating local teams, it created a huge amount of navel-gazing about small details that didn’t matter. Certain elements of the brand’s message may have played more strongly in some countries than others. But generally we found consumers were more alike than we had expected.

So we standardised our marketing model and became far more didactic about how our strategy was executed. We then pumped serious money into each territory to ensure the highest-calibre local teams were flying our flag. It was only then that our international business started to take off.
All was going well, until the money began to run out. In 2008, our UK profitability fell away fast. International structures were in place but now we did not have the funds to throw at them. Suddenly, we realised we would have to scale back our European expansion or raise capital to support it. That’s when Coca-Cola came in and our rate of growth increased exponentially. In any business the test, learn, change cycle must be quick. But overseas it has to run twice as fast to avoid haemorrhaging funds.
In Austria, we learned this lesson, but only just in time. Initially we tried to adopt our UK model of using "hero stores" (such as independent health food shops and cafes) to stock products and build the brand organically before going to the supermarkets. The problem we found was that Austrian purchasing behaviour is very different from ours in Britain. Austrians tend to go to restaurants at lunch and order schnitzels (or other food, but mainly schnitzels) from menus, so there is not the same demand for hero stores. Thankfully, our Austrian sales chief identified the flaw in our strategy very quickly. Within three months, business was floundering and we were on the verge of shutting the operation down. However, he went direct to the supermarkets and managed to convince them to stock our products – not just anywhere, but front of store.
Today, per capita sales in Austria are almost as high as they are in the UK. The fact that a chilled juice market in Austria barely existed before Innocent arrived make this achievement all the more impressive. So much so that the Austrian sales guru and his team now run the brand’s German operation too.
The glamour of being an international business is inescapably cool and seductive. Who would not want sales everywhere from Copenhagen to Kuala Lumpur? But never underestimate the sheer cost and complexity of foreign expansion. And always carry a reliable foreign dictionary.
 This article first appeared in Piper Private Equity’s new book Going Global: 30 Years 30 Insights. For more information or to order a copy, go to Adam Balon worked as a business analyst at McKinsey & Co and marketing manager at Virgin Cola before launching Innocent with co-founders Richard Reed and Jon Wright in 1999. Innocent now sells in 15 countries across Europe and turns over more than £200m. The brand is now majority owned by Coca-Cola Group. Balon, Reed and Wright recently stepped down from running Innocent to set up JamJar to invest in their own start-up businesses. Balon joined Piper’s Advisory Panel in 2011.

The challenge of staff engagement by Ann Elliott

I have been reading a great book over the past few days called The Employer Brand by Simon Barrow and Richard Mosley, recommended to me by Glyn House at Wagamama. It is a brilliant book and I cannot recommend it highly enough
In their introduction, the two authors say: “How people feel about their employer brand is increasingly critical to business success or failure. Leading companies realise its importance in attracting and engaging the people they need to deliver profitable growth. They are also beginning to recognise a positive brand experience for employees requires the same amount of focus, care and coherence that has long characterised effective management of the customer brand experience.”
This approach really touched a nerve with me, as our brands in this sector are nothing without the belief and commitment of the people on the front line – those who have to serve customers day in and day out. As far as these customers are concerned, those that are serving them are the personification of the brand. I see this time and time again – in Pret, in Living Ventures, in Nando’s, in Wagamama and in Corbin and King’s restaurants to name but a few.
So what is that makes these companies so special? What have they done to create a brand that teams really want to work for?
At the end of the day they all have engaged teams who feel really valued. They have people who say (according to the authors of Go Mad about Employee Engagement by Jo Hutchinson and Rob Huntington): "Today at work …"
• I made a difference
• I shared a really good idea
• I helped a customer
• I added value and someone told me I did
In their book, there are two quotes that really brought the power of real engagement home to me. The first was from Peter Drucker: “Employees will only complain or make suggestions three times on average without a response. After that they conclude that if they don’t keep quiet they will be thought to be troublemakers or that management don’t care.” (I think this could equally well apply to customers)
The second is from Jack Welch: “The essence of competitiveness is liberated when we make people believe that what they think and do is important – and then get out of their way while they do it.”
I have run many internal focus groups on engagement where team members have moaned, almost from the moment they sat down, about their hours, salaries, overtime or contracts. They haven’t been able to think of anything positive to say about anything – least of all the senior management team, who they usually describe in the least possible positive terms, often using Anglo-Saxon words to illustrate their anger and frustration (though it has to be said, they are generally positive about the team around them). Of course they are not really complaining about their remuneration – well, most of them aren’t anyway. They are complaining because they do not feel valued, and if they do not feel valued, they do not much feel like valuing the guest. As Simon Barrow says: “People’s attachment to their employer tends to be driven by the value they derive from the total work experience, including the inherent satisfaction they derive from the tasks they perform, the extent to which they feel valued by their colleagues and their belief in the quality, purpose and values of the organisation they represent.”
I love this idea of the total work experience and its parallels with the customer journey experience. We, as employers, have to understand what our teams want, need and expect in their work journey and to measure how we are delivering against these. And we need to constantly appreciate what we should stop, start and continue to do to create a powerful employer brand
• To engage with teams, employers need to
• Communicate their vision and goals
• Listen to team feedback
• Make things happen in response to this feedback
• Recognise and reward the right behaviour
A good start would be to read these two books - fascinating and thought provoking.
 Ann Elliott is chief executive of Elliotts, the leading sector PR and marketing agency

The pub sector is fragmented but in the best shape it’s been in for three decades by Geof Collyer

Having survived the smoking ban, above-inflation excise beer duty increases and the recession, as well as a more conservative attitude towards leverage, the pub sector has emerged in much better shape than at any stage in the past three decades. Despite the significant decline in beer volumes – now 45% lower than 15 years ago – the sales mix of the pub groups is now more geared to growth than a rearguard action on declining volumes. The eating out market data suggests that there has been at least nominal growth in spend on food away from home in all but six of the past 196 quarters since ONS records began in 1964. We estimate that over 50% of most pub groups’ revenues is now driven by their customers going out to eat and drink rather than just drink. For the major quoted pub groups, we estimate that this is closer to 65% to 75% of total sales. The eating-out and drinking-out market is worth some £70bn of annual revenues. This is split between nine sectors. Given competition for share of our wallets, and the growth in different day-part trading (not just lunch and evenings), the pub and restaurant sector needs to be benchmarking itself against all participants – both licensed and unlicensed – in the eating-out space, not just the pub outlets.
Depending upon which data source one looks at, there are between 280,000 and 320,000 outlets in the UK eating-out and drinking-out market competing for our cash, of which around half are licensed to sell alcohol as well as food. Pubs and restaurants account for 100,000 sites. Within this, there are currently circa 55,000 outlets that would be classified as pubs today, versus 75,000 some 25 years ago. The pub market is more fragmented than at any stage in the last 25 years: in 1989 the top 10 pub groups (dominated by the national players) accounted for 26% of all licensed premises, versus 14% today.
In such a fragmented market, there is ample scope to not just gain share but also to grow the pub and restaurant sector as the UK economy emerges into an upswing. With real wage growth now expected, the pub and restaurant space is ideally situated to benefit as consumers seek more low-ticket, affordable treats. We also see many opportunities to break into other day-part trading areas, providing scope for increasing like-for-like sales growth potential, although companies will need to avoid this becoming too dilutive in terms of margins.
We also expect to see scope for a step-up in mergers and acquisitions activity, not just among the smaller players, but also as the larger groups diversify away from pure pub formats. We see most – but not all – of this deal potential happening amongst the managed pub and restaurant groups. Among the Top 200 Propel Blue Book groups in the pub and restaurant space, we have identified 54 private companies with annual revenues of between £20m and £600m and 87 private companies that have sales below £20m. We see a number of these seeking further development capital, which can come either from traditional banking sources, private equity – which likes good roll-out stories – or well capitalised pub and restaurant groups. We have seen this kind of activity with the takeovers of Loch Fyne Restaurants, Capital Pub Co, Cloverleaf and RealPubs, all of which have recently joined the Greene King stable as their backers sought an exit rather than fund the next stage of development. These deals for Greene King have helped improve ROCE by around 100 bps and delivered better like-for-like sales and profits growth. Among the top 200 groups in the sector, there are only 16 that are licensed and are quoted on the London Stock Exchange, Full Listing or AIM, accounting for just 14% of the eating and drinking-out market's revenues. We believe that some of the 131 private companies might like to join them at some stage.
Because of their absence of drinks-led trade, the restaurant groups have performed significantly better than the pub groups over the past five years, though the groups with a greater London and South East bias have still outperformed the market. It is no coincidence that the companies that passed their dividends (Mitchells & Butlers, Enterprise Inns) or cut them (Marston’s) to reduce debt during this period have underperformed the most. JD Wetherspoon passed its dividend in 2009, while it was in refinancing mode, and then restored it in 2010, also paying a catch-up special dividend in the process. Along with the Restaurant Group, Greene King and JDW are the only three major groups that are delivering above previous peak (2007) ebita and earnings per share in absolute terms. JDW has also consistently bought back stock, which has helped its EPS growth. We have always rejected the notion that absolute levels of debt are more problematic than low fixed-charge cover, and have consistently argued that a group’s ability to service its debts is more important, as is having enough free cash flow – after investing in the business and funding any amortisation payments – to pay a dividend. So in our view, the groups that are seeing strategy driven by the balance sheet (Spirit, Marston’s and Enterprise Inns) should deserve a lower rating than those where balance sheets are supporting strategy. Our analysis shows that Greene King and M&B are funding their future profits growth from internally generated cash flows, with Enterprise Inns reducing its overall leverage by nearly one quarter. We think we have conservative ebita forecasts over the next five years for Enterprise Inns. This is more to do with trying to prove a point about needing stable ebita in order to grow the earnings per share. This feature, alongside significant de-levering, makes ETI one of our top picks. If one adjusted for the buybacks, and allowed for the Greene King 2009 rights issue, we see the performance of JDW and Greene King as broadly comparable and the best over the past five years among the pub groups.
Geof Collyer is leisure analyst at Deutsche Bank and the above is extracted for his 127-page sector report The Chips are Up. He credits the Propel Blue Book of Sector Turnover and Profit as the "basis of much of his analysis" for the report. The Blue Book is available to buy – contact

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