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Morning Briefing for pub, restaurant and food wervice operators

Fri 19th Sep 2014 - Friday Opinion
Subjects: Crowd-funding, one-sided stories and the rise of the ‘super-pub’
Authors: Paul Charity, Paul Chase and Jack MacIntyre

Crowd-funding is the democratisation of investing by Paul Charity

You hear dark mutterings about the rise of crowd-funding. Some regard investors as naive and fear there will inevitably be an almighty train crash involving a crowd-funded business that will lead to greater scrutiny of the whole process. Certainly, you come across businesses looking for investment with unrealistic valuations of the existing enterprise, which in some cases is no more than a business plan. One sector entrepreneur told me he thought the Chilango mini-bond was an “unethical” way to raise money, given how little most of its investors can really know about the Mexican food market. Certainly, the self-certifying process to join as an investor is little more than a tick-box exercise.

But for me, the rise of crowd-funding amounts to the democratisation of the investment process. Given paltry interest rate returns from major financial institutions, here is a chance for ordinary citizens to side-step the legions of sluggish and expensive institutional funds and put their money to work. There is fun to be had along the way as well, with many crowd-funding businesses offering decent perks, not to mention the generous tax breaks that come with investing in start-up businesses. The crowd-funding market is exploding. The market leader, Crowdcube, with its 89,398 registered investors, saw as much investment in the first half of 2014 as in the preceding 12 months.

The market is developing, too. This year has seen the launch of the first mini-bonds, allowing investors to lend money to more established brands, as well as buy an equity stake in start-ups and early-stage businesses. River Cottage Canteen recently raised £1m by borrowing from “the crowd” and will be paying them back 7% interest per annum over a four-year term. These bonds are not without risk, however, which is why they offer higher interest rates than many other investment opportunities. By contrast, the Mexican restaurant brand Chilango offered 8% interest on its bond, reflecting, one assumes, a higher degree of risk investing in the business compared to River Cottage (ironically, the higher rate of interest itself becomes part of the larger risk profile).

There is an element of the wisdom of crowds at work here in a very direct way. The speed and weight of money drawn into particular investments reflect the collective judgement of many thousands on the investment appeal of particular businesses. There is always the danger of a lemming-like rush towards a particular investment, under-researched investors drawn by other investors. But in terms of track record, it is not as if the decision-makers at the professional lenders, the big banks, have covered themselves in glory in the past decade or so. And it is clear that crowd-funders can spot an investment they like. Crowdcube itself reached its own recent investment target of £1.2m in just 16 minutes last month, with individual investors parking their money alongside a private equity firm. Crowd-fund investors preferred River Cottage Canteen to Chilango as an investment, judging by the speed of take-up. River Cottage hit its £1m target in 36 hours. Chilango took a number of weeks to raise £2,160,000. Investors liked the cut of Chilango’s jib – it was the largest amount raised by Crowdcube so far. It’s just that they liked River Cottage Canteen even more as an investment prospect, judged by the speed of the cash flowing into its bond.

An analysis of the Chilango investment community shows the way crowd-funding largely draws those with a bit of money to punt: Chilango’s investors do not look to be staking their life savings. Its 748 investors made an average investment of £2,900, while 22% of the investment group were women.

An estimated 20% of the businesses looking for investment on crowd-finding websites hail from the world of food and drink. Businesses from our sector are particularly suited to fund-raising of this sort because prospective investors can make judgments on the quality of what those businesses do based on the investors’ perspective as consumers. There is less publicity attached to the companies that fail to attract funding through crowd-funding. Watching the major crowd-funding websites, I would estimate that three in four businesses fail to reach their investment target – and quietly fade away. The crowd has spoken, and may well have done founders a favour with their lack of enthusiasm.

It is worth remembering that the grand total of businesses to have been funded so far through Crowdcube is just 143. Like your average series of Dragon’s Den, invested businesses are heavily out-numbered by those that are judged to lack investment appeal.
Paul Charity is managing director of Propel Info

One-sided stories by Paul Chase

In recent articles for Propel Info and for Propel Quarterly, I have highlighted the one-sided nature of much of the health lobby discourse about alcohol and about food. This discourse does not just blur the line between truth and falsehood; it is blatant propaganda that deliberately aims to misinform in order to create an alarmed public opinion.

This deliberate policy of misinformation works. I spoke at a recent conference and asked the audience “What is the annual cost to the taxpayer of alcohol misuse?” Straight away three members of the audience chimed back: “£21bn”. “Where does that figure come from?” I asked. None of them knew, and why should they know? People generally accept big numbers, particularly when they come from authority figures who speak for government or “public health”. So I explained that this particular number came from a Cabinet Office study conducted in 2003, and that it was made up of five different numbers, including £4.4bn for “intangible costs” of alcohol misuse and £5.5bn for “lost productivity”.

Both of these numbers are entirely fictional and are not economic costs in any real sense. People are astonished to learn that the intangible costs of alcohol misuse consist of subjective monetary valuations of pain and suffering, such as the £100,000 that is attributed as a cost to an alcoholic for every year of pain and suffering that is caused by his or her alcoholism; or the £2,400 that is estimated as the cost of the pain and suffering of each victim of an alcohol-related assault. And in relation to “lost productivity”, the £5.5bn cost ascribed to this is only credible if you assume that if an alcoholic worker dies early, his job is not filled by a live (probably non-alcoholic) worker, or that the days off work recovering from hangovers results in lost productivity because nobody covers the sick workers job.

It is obvious to anyone other than the terminally naive that these costs are conjured up to inflate the alcohol harm figures. But there is a more basic design fault of these cost-of-alcohol analyses: it is precisely the fact that they are cost analyses, not cost-benefit analyses. If we think it logical and sensible to cost pain and suffering, should we not also put a monetary value on the benefit of pleasure and enjoyment? What is the subjective monetary value of a good night out with your mates? Or the enjoyment of an alcohol-fuelled flirtation? Even to pose these questions is to lay bare the absurdity of including such calculations in any analysis of either the cost or the benefits of alcohol use or misuse.

But what about the health benefits of alcohol use that get buried or denied by the health lobby? One of the most erudite and influential thinkers on alcoholism and drug addiction alive today is the American academic Stanton Peele. He has been researching and writing on these topics for 40 years. In a recent article titled “The truth we won’t admit: Drinking is healthy”, published in Pacific Standard, a magazine devoted to the science of society, he had this to say:

“In 2006, the Archives of Internal Medicine, an American Medical Association journal, published an analysis based on 34 well-designed prospective studies – that is, research which follows subjects for years, even decades. This meta-analysis, incorporating a million subjects, found that ‘one to two drinks per day for women and two to four drinks per day for men are inversely associated with total mortality.’ So the more you drink – up to two drinks a day for woman, and four for men– the less likely you are to die. You may have heard that before, and you may have heard it doubted. But the consensus of the science is overwhelming: it is true. The US public health establishment buries overwhelming evidence that abstinence is a cause of heart disease and early death. People deserve to know that alcohol gives most of us a higher life expectancy, even if consumed above recommended limits.”

Peele goes on to assert: “Even drinking more than is recommended, without displaying clinical symptoms of problem drinking or alcohol dependence (and these are not subtle), is generally better for you than drinking nothing.”

In other words, even if you drink a bit above recommended daily/weekly guidelines, but not to pathological excess, then the mortality research figures prove that your length of life and chances of developing alcohol-related illnesses are generally less that if you are a life-long abstainer from alcohol.

This type of research never gets the oxygen of publicity because public discourse on alcohol is dominated by an absolutist, loony-left dominated, alcophobic public health movement that has become a vehicle for Big Business bashing. We only get one side of the story.
Paul Chase is a director CPL Training and a leading on-trade health and alcohol policy commentator

The rise of the ‘super-pub’ by Jack MacIntyre

There has been a raft of media coverage detailing the decline of the Great British Pub – the place down the road that was once the social hub of every community across the country. According to the British Beer and Pub Association, 28 pubs are closing each week, and there are apparently tough times ahead for those that do survive. In the face of this recession-led adversity, there has been a marked evolution in the pub sector over the past few years. What does the rise of the super-pub in particular tell us about the evolution of the foodservice sector in general?

There was no shortage of coverage of the Good Pub Guide 2014 recommending that “bad pubs” should go out of business, allowing more talented and savvy licensees to open better establishments. The response on social media was lively. One view was: “We need to preserve all the pubs we can. A bad pub is usually a reflection of a bad publican.” Others were less charitable: “With a pint costing £3.20 and a can of beer from a supermarket about 80p, I have to wonder what I am getting for my extra £2.40 every time I drink a pint in a pub. That’s the challenge a pub has to meet these days.” But there was no disguising the sad nostalgia for the way pubs used to be: “A place where you went to relax with a pint and a smoke … a place where you let your hair down and socialised … a place where food was crisps, nuts or a toastie that everyone was happy with … a place with a jukebox, a dartboard, and a pinball machine … happy days indeed!”

The business models of chain pubs are obviously often very different from the independents, with the former commonly providing better options for non-alcoholic drinks, food, families, and interior zoning for different types of customer. Venues are increasingly bringing in customers at different times of day, producing tailored offerings that allow for constant footfall outside traditional evening hours. As some chain pubs have developed the broadest possible customer appeal, moving towards the title of “super-pubs”, it is easy to argue that only they have evolved significantly. But is this due to the superior financial resources of the branded chains, better foresight, market intelligence and business know-how, or a combination of the two?

Changing tastes and the pain of a recession have ensured a marked evolution in the pub sector over the past few years. But it is not a story of all ships sinking in universally turbulent seas. Just look at the differing fortunes, often resulting from starkly different business models, of chain pubs versus independents.

Over the past five years, pubs generally have grown their numbers of food and drink visits by 2.1%, the equivalent of 25.5 million more visits in the year ending March 2014 compared to the year ending March 2010. This seems a reasonable level of success, given the economic downturn and the performance of the total out-of -home market overall.

But this figure, combining the performance of chains and independents, masks what is really happening. Over the same period, chain pubs have grown visits by 26%, equivalent to 159 million more visits, and independents have seen visits fall by 22%, equivalent to 134 million fewer visits. This stark contrast provides an explanation behind the seemingly contradictory figures seen in the media’s coverage of pubs closing down, and reports from many industry analysts that the sector is in fact doing rather well. This chains-versus-independents contrast is the key stand-out trend within the pubs sector, and is an exaggerated version of what we are seeing at a total out-of-home level. In total, out-of-home visits to chains from the year ending March 2010 to the year ending March 2014 have grown by 10.6%, equivalent to 555 million more visits, while visits to independents have fallen by 13.7%, equivalent to 829 million fewer visits.

The fact that visits to independent pubs are in decline in every region of Great Britain should show how important it is to understand the market and the key trends driving these changes, and ultimately act as a call to action for operators within this sector.

So, how are pubs evolving and diversifying in the face of a challenging economic climate and marketplace? Part of the answer is immediately apparent when looking at the proportion of visits coming from each part of the day. In 2009, just 3.4% of visits occurred at breakfast. This has now more than doubled, to 7.3% in 2014. Successful pubs have diversified away from the traditional “pint and a packet of pork scratchings after work” market positioning that was long the norm. Many pubs are now moving towards a full day’s offering, with gastro-menus, alcoholic and (increasingly) non-alcoholic beverages. This diversification has developed as more pub operators understand the importance of broadening their business base.

Alcohol is still a very important part of pubs’ offer, and no publican would thrive if he or she forgot the traditional and primary reason why a pub exists. Nevertheless, the move away from offering only alcohol has been another marked trend over the past five years.

In the year ending March 2009, 46% of beverages served in pubs contained alcohol; this has dropped to 37% in 2014, with coffee (a 7.7% share of beverages in 2009; 9.6% in 2014), cola (from 18.8% to 21.8%), and even bottled water (from 3.2% to 5.8%) being the big winners from this shift. Cola now has a bigger share of beverages than beer does – unthinkable! Considering the significantly greater profit margin for cola versus beer, this is a trend that will be exciting many operators who are taking advantage of it – and frustrating those who are not.

To contrast chains and independents: just 26% of beverages sold in chain pubs contain alcohol (down from 36% in 2009), with cola alone selling as many servings in the year ending March 2014 as all alcoholic beverages combined. Beer accounts for 13.9% of beverage servings in chain pubs (down from 18.7% in 2009), against 28.1% in independents (down slightly from 29.3% in 2009). Independents rely on alcohol for 53% of beverage servings and, tellingly, this has remained relatively flat since 2009 (53.5% in 2009). Quite apart from product profit margins, clearly, any pub that focuses exclusively on alcohol is alienating two thirds of its potential customer base – and this isn’t even including food, which has become even more essential for survival in an increasingly competitive market.

A huge 91% of pub visits now include food, with burgers (appearing in 13.2% of visits to pubs in 2014, up from 9.7% in 2009), and breakfast items (now 7.3%, up from 4.8%) driving this branch of diversification. A key factor in this success has been meal deals (think of the popular “beer and a burger” promotions) utilised in almost a quarter of all chain pub visits, falling to just 6.8% of independent pub visits. Without these product-linking, value-oriented offerings, there is clearly much less of a pull factor for consumers to either enter the premises, or feel the need to purchase food at their local. I remember that my old local pub’s menu went about as far as a cheese and onion sandwich (a slab of “plastic cheese” garnished with raw onion, sitting between two slices of bright white bread). Menus in pubs in 2014 have moved on significantly. Calamari, whitebait, fruit, croissants and muffins are all now staples on the menus of pubs across the country, and operators who miss out on this will risk losing ground to competitors, especially the chain pubs.

Pubs that have been able to adapt and survive (and in some cases, thrive) through the economic downturn have recognised the need to attract a different clientele. Linked in with the diversification of pub menus, premises and attitudes, is the burgeoning trend of family visits to pubs – a demographic that has been propping up visit growth at a total out-of-home level: 2.1% growth, against a 0.8% decline in “adult only” visits. In 2009, family visits accounted for 29.6% of visits to pubs, and this has now grown to 35.5%, an increase of 65 million visits, equivalent to 17% growth between March 2009 and March 2014.

It is becoming difficult to adhere to the traditional view that children are being dragged along to the pub with their parents any more. They are, in fact, moving closer towards becoming the decision-makers and drivers of behaviour in this sector. “Pester power” is well known and well documented in more overtly child-focused sectors such as toys or confectionery, but it is increasingly becoming a force in the foodservice market too. Customers cited “because my kids like it there” as their reason for choosing a pub in 10% of visits in the year ending March 2014. This is up from 8.9% in 2009, and compares favourably with the 7.8% average in total out-of-home visits. Presuming that these children were not deriving their pleasure from stolen sips of dad’s pint or from raiding the drip trays, then we can see clearly here that pubs have come a long way in expanding their appeal. The introduction of the – at the time, controversial – smoking ban in 2007 did much to assist the family-friendly nature of many pubs, a feature that has been extended through diversification of menus, meal deals and a multi-zonal approach in many pubs. Successful operators have learnt that it is no longer satisfactory to offer children smaller portions of adult meals – they should be deemed worthy of dishes created with them specifically in mind. When it comes to this vital “family friendliness” metric, there is a stark contrast between chains and independents.

Consumer responses to the question of their primary motivation for choosing a pub over other out-of-home channels show that 14% of visitors to chain pubs went there because their children liked it, against just 5.5% in the independents. The fact that independent pubs are missing out on the key demographic that is driving growth at both a “total out-of-home” and “total pubs” level is worrying, and is a useful barometer of their success (or lack thereof) in diversifying their customer base and, as a by-product, boosting average spend.

The significant resources available to chain pubs, especially when compared with their independent counterparts, have been a key driver of change and growth in the sector. Specifically, the chain pubs’ ability to create multi-zonal “super-pub” premises has brought a new breed of licensed establishment to life. Operators have not lost sight of the fact that customers visit the pub for different reasons, and that the internal focus can be widened beyond wholly family or wholly food. The “super-pubs” that we refer to have emerged with distinct areas, all contained in one establishment, often comprising:

• A front bar – catering for the “quiet drink” customers

• A food area – more family-oriented

• A back bar area, where sport is shown, and the atmosphere is louder and more male-dominated.

• A more developed outside area, with space for smokers and beer garden fans, and, in some cases, climbing frames or children’s play areas.

This zonal approach deals with some of the misgivings that operators (and locals) have about their pubs becoming generic gastro-entities, and allows for a co-existence of different demographics under the same roof, with their money all going into the same till.

Clearly, smaller operators and independents do not have the same resources, either to find larger premises, or refurbish their premises to accommodate this one-size-fits-all multi-zonal pub approach. So this is a business trend where branded pubs have a clear advantage. Many independent pubs are ill-equipped to cope with even a few weeks or months of slow trade, let alone to think about expansion and renovation, but, as we have seen in the case of other means of diversification, there are still other subtle and cost-effective ways of adapting in this environment.

On balance, the chains have done a better job of adapting their offering to meet market needs over the past six years. The branded chains have deeper pockets and can invest in their premises more readily, put financial muscle behind promotions, and utilise consumer research to understand the market, anticipate change, and maximise emerging trends. While many of us can list our favourite independent pubs that are getting the formula right, there are many independent pubs that can, and must, do much more. Small changes to menus, decor, ambience and promotional structures can reap big rewards, even if the operator does not have the financial might or logistical ability to transform their venue into one of the growing breed of “super-pubs”.
Jack MacIntyre is foodservice account manager at NPD Group. He can be contacted by email at:

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