Fri 27th Feb 2015 - Friday Opinion
Subjects: Crowdfunding, the importance of a great deal and bad ideas on alcohol regulation
Authors: Martyn Cornell, Cyril Lavenant and Paul Chase
The wisdom of crowds by Martyn CornellSince the Financial Services Authority in the UK made changes in regulating crowdfunding in April 2014, crowdfunding has boomed as a source of finance for small businesses. Last year, equity-based crowdfunding reached £84m, up three-fold on 2013, and 20 times the sum raised just two years earlier, according to research from the innovation promoter Nesta and the University of Cambridge. Almost £10,000 an hour was being raised via crowdfunding in the UK, with equity and rewards projects being launched at a rate of 45 a day, and successful projects were raising an average of a little over £9,500 each.
Naturally, the hospitality industry has been in among those taking advantage of this newly popular form of funding, and there have been some spectacular successes. Hugh Fearnley-Whittingstall's River Cottage Canteen raised £1m through Crowdcube, from 283 investors, in the space of 36 hours, funds that will enable his business to launch an outlet every year, taking it to seven units by 2018. Chilango brought in £2.16m through its "burrito bond" fundraising, at the time the largest amount ever raised on Crowdcube, with 749 people investing. The coffee shop chain Taylor Street Baristas, led by Richard Shaer, raised more than £1.5m in cash through its own mini-bond on Crowdcube.
Big-name investors such as Jon Moulton, who put £25,000 into the brewer Delavals as it attempted to raise £400,000 via the Investingzone.com crowdfunding platform, and another £50,000 into the Edinburgh-based pizza delivery firm La Favorita Delivered, again via Investingzone.com, and Luke Johnson backed the equity crowdfunding idea. Writing in the Financial Times, Johnson said: "Part of the explanation for the sudden expansion of crowdfunding is very low interest rates. Investors are receiving poor returns on bank deposits, so they are searching around for other places to put their savings. Of course, punting money in crowdfunded projects is much more dangerous than leaving it in the bank – but also more exciting. "However, he warned: "Crowdfunding cannot offer the experience, mentorship and connections that veteran investors provide. Weak ideas will still fail to find the necessary backing. And many crowdfunded projects will go broke. But as an alternative to the traditional forms of finance for cash-strapped ventures, it represents a real breakthrough."
The publicised successes of crowdfunding mean that it is now being seriously considered by many. A survey by the law firm Irwin Mitchell found that just under a third – 32% – of entrepreneurs and business leaders believed crowd-funding would be their most likely option for raising new finance in the next 12 months, only slightly fewer than the 38% who said they would turn to more traditional sources of finance such as bank loans. Another 17% said they would look for peer-to-peer lending and 13% would seek angel investment. But more than three quarters – 77% – said that they would consider investing themselves through an equity crowd-funding site.
Taking the crowdfunding route is certainly not a guarantee that shedloads of money will suddenly flood through your letterbox from eager investors, however. Of the 330 businesses launches on Crowdcube, Britain's biggest crowdfunding site, in 2014, only 105 were funded, giving a success rate of just 32%. This means that for every Chapel Down, the Kentish wine maker that raised more than £4m last year on the crowd-funding website Seedr, three and a half times more than the original target, for some 15% of the company’s equity, there are a couple like Angela Malik, who sought to raise £350,000 on Crowdcube to expand her Modern Asian Deli concept in return for 18.9% of the equity and ended up attracting less than £3,000, not even 1% of the sum she was after. Others who struggled to reach their targets include Samba Swirl, the first self-serve frozen yogurt chain in the UK, which fell well short of the £285,000 it was seeking through Crowdcube even after raising the amount of equity on offer from 7.3% to 10%, and the developer Corryard Holdings, which tried to raise £1m in return for a 20% stake in a project to develop a five-star hotel near Perth in Scotland and brought in less than 5% of that sum.
One big criticism of equity crowdfunding is that it gives away equity in a company, at a time when the potential future value of that equity is very hard to calculate. Critics of equity crowdfunding say entrepreneurs may be valuing themselves too cheaply, and missing out on future wealth. However, Callum Campbell, chief executive and co-founder of the crowdfunding platform Fireflock, based in Canary Wharf, in London, says that for the hospitality sector, like other business-to-consumer industries, "crowdfunding suits them very well. The reason is, I think, that these are businesses that like the idea of their customers being shareholders too, people who, to coin a phrase, like the product so much that they buy the company. So the sector can benefit very well from accessing capital through crowdfunding – it benefits both the company and the consumer. When you've got a substantial and loyal customer base, if you appeal to those people as customers, you're likely to appeal to them as investors. You can also offer them discounts and so on as shareholders – it's a great way to interact with your client base."
Seeking to raise money through crowdfunding is also a good way of testing the viability of an idea, seeing if it has public appeal, Campbell says: if your idea cannot raise cash, it is also unlikely to find customers. "What's happening in the States is that a lot of VCs are saying to people, 'Look, before you come to us for money, why don't you go down the crowdfunding route first?'," he says. "And the reason why they say that is that it's a 'proof of concept'. Is there demand out there for your product, do the public like it, are people willing to put their money where their mouth is? It's a good testing-ground. From the company's point of view, it can be an important part of their marketing strategy to go down the crowdfunding route."
On the perceived risk of revealing your plans to rivals, Campbell says: "You don't have to reveal everything. And I don't think you have to be too sensitive about what you reveal – there's a massive gap between having a plan and being able to implement it. The chances are that you're not the only person with that idea anyway. But you need to be able to show that you can execute it, and execute it better than anybody else."
One success story is Pizza Rossa, the London-based artisanal pizza-by-the-square-slice concept, which has run two crowd-funding exercises through Crowdcube, raising a total of some £600,000 to fund its expansion. Company founder Corrado Accardi, who is now being asked to speak at conferences and to business school classes on how to run a successful crowdfunding campaign, says the benefits of exposing the company on a crowdfunding platform are more than just straightforward cash-raising. It also gives the opportunity to meet potential suppliers and, in his case, potential franchisers. During Pizza Rossa's first crowdfunding campaign, "We had expressions of interest in franchising from 15 different countries," he says.
According to Jean Miller, chief executive of the equity crowdfunding platform InvestingZone, the first step for fledgling companies looking for crowdfunding should be a donation platform, where companies solicit money in return for goodies such as discounts on products, invitations to exclusive events, special merchandise and so on, with bigger donations attracting better offers. "Donations sites can be a great way of introducing an idea to the market and, executed well, could even unleash latent demand for a product or service," Miller told the website CrowdFundBeat. "Funds raised on reward or donation platforms are typically used to develop the product further or determine market entry. In contrast, equity crowdfunding should be used when your business is ready to start looking for serious investors that can back the company and help it grow in the long term.
"Once you have decided to use equity crowdfunding then the next step is to attract the support of a few good-quality investors. What’s needed is sympathetic investors that understand start-ups, which often require larger funding requirements but have longer time-scales to market and the potential to generate high returns. However, to attract investors you need to create a robust, well-written business plan that includes detailed financials and assumptions. This information can then be used to create a sensible valuation and share structure that takes into account how much money your company will need to raise to meet objectives and how many shares you are willing to sell. We often work with companies that are wary of adopting shareholders. However, by drafting a strong business plan, your company will be more successful in attracting the support of investors who can provide sound advice on achieving future growth and add real value to your business."
Martyn Cornell is managing editor of Propel Info
Meal deals are growing increasingly important, by Cyril LavenantThe foodservice market had a really positive year in Great Britain. In 2014. Among the "Big Five" countries in Western Europe where the NPD Group tracks the foodservice industry, Great Britain was the only one to register visit growth, with an improvement of 0.9%. Germany saw a fall of 0.1%, France a drop of 1%, in Spain visits were down 1.3% and in Italy they fell 1.9% (YTD November 2014).
We know that two factors have a direct impact on the performance of the foodservice industry: GDP growth (and growth forecasts) and consumer confidence. For both metrics, Great Britain outperformed its European neighbours. British GDP was up 3.5% in 2014 (and is expected to remain at least above 2% growth in 2015 according to various sources). In contrast, Germany achieved GDP growth of just 1.4%.
A growing economy has a direct impact on the morale of consumers. For the first time in many years, British consumers are starting to feel positive again about their purchasing power as well as their financial situation and are increasingly confident about the future. This cannot be said of consumers in France, Spain, Italy or even Germany.
However, at NPD we feel that these two factors do not tell the whole story, regardless of their importance. The British foodservice market has a specific strength that other countries do not have: it is a very dynamic industry in terms of new and diverse concepts. Many operators have realised that consumers’ needs and habits are changing quickly and are taking the necessary actions to satisfy these needs, and even anticipate future trends.
For the year ending November 2014, British foodservice market visits increased by 0.9%. This is a very encouraging indicator for the industry, as it represents the first year of true growth since 2008. However, this growth does not mitigate the losses of these consecutive years of bad trading. Indeed, British foodservice traffic is still lower than 2008. The past 12 months saw 11.05 billion foodservice visits, against 11.7 billion in 2008, a drop of some 650m visits, or 5.6%. So while Britain’s population has grown, visits per capita have declined from 197 a year in 2008 to 173 in 2014. Fortunately, total spending is down just £74m on 2008, at £50.7bn. Food price inflation has helped maintain spending, but at the expense of consumers who are trying to save money.
Among the winners, two channels in particular are a good indicator of what consumers are looking for these days. First, the quick service channel (including fast food, pizza, ethnic, fish and chips) is up 1.5% in terms of visits for the year ending November 2014, and up by 4.7% compared to year-end November 2008. This channel now represents 51% of all foodservice market visits, up from 46% six years ago. The success of this sector is clearly linked to its affordability, but also to the constant innovations and improvements made by operators.
In addition, the pub channel is growing for the second year in a row, with visits up by 0.9% over the past 12 months. However, as many in the industry know, there is a huge difference in terms of performance between branded pubs and independents. The first category grew traffic by 5.8% in the past year while independents lost 6.4% of their traffic. Branded pubs now represent 63% of total pub traffic, up from 40% for the year ending November 2008, a 57% rise. This trend is likely to continue in coming years if independent pubs do not adapt their business to satisfy the demand for good food, affordable prices and family-friendly locations, all delivered in a way that appeals to young adults aged between 18 and 34.
On the downside, vending machines, workplace canteens and college/university canteens are still losing visits. The decline regarding vending machines is associated with the snacking occasion declining by 4% this year and by 11% since 2008 (and this is true for the morning snack, the afternoon snack and the late snack moments). Snacking is an occasion that savings-oriented consumers find easy to cut out, especially if it is an opportunity to cut out an all too often unhealthy treat.
What about the full service restaurants channel? If we include casual dining restaurants in that channel, the sector is showing slight growth of 0.4%. However, when we remove the more modern and more recent outlets that belong to the casual dining sector, it is another story.
Over the past six years, consumers have visited foodservice outlets less frequently to save money. It is no surprise that consumers have cut down on the most expensive eating-out occasions. This has impacted full service restaurants because they are the most expensive outlets and most of the time fail to deliver a great experience.
As a result, full service restaurants (excluding casual dining chains) are among the biggest losers, with a 19.6% decline in visits since 2008, representing 200 million fewer visits. More specifically, the traditional independent restaurants have suffered massively, with traffic declining by 18.7% in the same period.
At the same time, the casual dining sector has grown strongly, growing visits by 18.1% since 2008. Obviously, this expansion has to be linked to the increase in the number of outlets. But this growth is a mark of success; the casual dining chains can keep opening new restaurants because they are meeting consumers’ needs, while many traditional independent ones are closing because they are not. Casual dining chains offer modernity, specific identities and clear branding that reassure consumers who do not want to take chances when they eat out. For many years now, consumers have been increasingly choosing brands over independents. Independents now only represent 46% of yearly traffic, down ten percentage points since 2008 when it was 56%.
The casual dining chains also provide a pleasant atmosphere and a specific decor. They are particularly appealing to families and young adults (the 18 to 34 age group) looking for good quality food at affordable prices. The casual dining sector now represents an important (and growing) 4.2% of the British foodservice market in terms of visits. The performance over the year ending November 2014 underlines the success of casual dining: full service restaurants (excluding casual dining chains) are down 1.8% while casual dining restaurants have increased their traffic by 7.8%.
London remains a booming place for the foodservice industry with a 10.1% increase in traffic, against a drop of 0.8% in the rest of Britain for the year ending November 2014.
A good example of this dynamism is the growth of "pop up" concepts for on-the-go consumption. When we look specifically at lunch on the go in the quick service channel, traffic was up 2.8% in London, against a smaller increase of 1.1% for the rest of Britain. Pop-ups can be found wherever a few square meters of retail space become available. The variety of food they offer is fantastic, even overwhelming. It is no longer a simple story of Chinese or Lebanese or burgers: you can now find pulled pork (with many different tastes and options), Venezuelan food, Ecuadorian food and exotic food from many other countries. And these concepts are working. During lunchtime, it is easy to find long queues of consumers willing to wait ten or even 20 minutes to get their food. These outlets offer exciting new and good quality food despite a rather high average ticket for food-on-the-go. As a result, contrary to what we see elsewhere in the industry, independents in the quick service channel in London have regained lunch on-the go traffic (up 9.2% from a year ago), even though they are still losing ground in the rest of Britain (down 4.3% from a year ago).
London is clearly ahead of Paris when it comes to food diversity and health concepts. It is not surprising to see some big players in the British foodservice scene grabbing major opportunities in the French capital, which was not so long ago considered the city of food diversity but is now lagging behind London and other destinations in this respect. In another sign of the dynamism of our industry, London is not the only place where new food is appearing; Leeds is also a very good example of a city where you will encounter many new concepts.
Offering valuable and relevant meal deals remains crucial in the foodservice industry. Visits that include a meal deal increased by 9.2% in the past 12 months. This is in contrast to the 0.6% fall in visits that include neither a promotion nor a meal deal (and this is the sixth consecutive year this type of visit has declined). Few outlets can thrive without a good deal proposition. Only 3.5% of all visits to independent outlets include a meal deal, against 19.9% for all branded traffic. And these visits are only up 0.3% for independents against a 10.4% increase for branded outlets. As a result, chains have grown total traffic by 5.3% while independents have lost 4.5% of visits.
At the same time, visits including a promotion (coupon, BOGOF, any price discount) have increased by a rather small 2.4%, a much slower pace than is the case with meal deals. Meal deals are catching up with promotions – meal deals are offered in 12.9% of visits and promotions are offered in 15.6% of all visits. This move away from the pure price reductions that are evident in the grocery market is a good trend for the foodservice industry.
Breakfast has gained 5.6% in visit terms this year and this occasion now represents 11% of total foodservice traffic, up by one half of a percentage point over last year. However, a very good sign for the industry is that lunch (up 1.9%) and dinner (up 3.6%) have also grown significantly. Lunch is a particularly positive sign, as it can so easily be replaced by home meals. This daypart saw three consecutive years of decline, so the upturn is encouraging.
The dinner occasion continues to perform well. It is growing again and has weathered the economic crisis much better than other dayparts with a decline of just 1.8% since 2008, against 5.8% for the total market. This is consistent with the good health of the industry during weekends, with four consecutive years of visit growth at weekends. What does this say about consumers’ needs? It indicates that consumers are increasingly looking for an experience and want to socialise when they eat out. People making dinner visits because they want to socialise are up 5.1% in the past 12 months. That is a significant result given that the average ticket for a “socialising” dinner is 50% higher than for a “functional” dinner.
The foodservice industry started to grow again in 2014. However, the drop of approximately 650 million visits since 2008 represents a gap of over 6%. A strong GDP performance and improved consumer confidence will not be sufficient to deliver strong future growth. The foodservice industry will have to keep demonstrating its ability to deliver innovation. And it will probably take at least three more years to achieve the same level of visits that the market had in 2008.
Having access to the latest intelligence and insight and responding to emerging trends will be the keys to good performance. Manufacturers, operators and distributors who manage to understand consumers and follow their fast-changing behaviour and needs will have a much better chance of succeeding and growing ahead of their competitors in our very fast- moving industry. In addition to changes in consumer tastes and needs, we are facing other structural changes that operators will have to take into consideration: an ageing population, increased working from home, growing online sales, people travelling more and more.
There are many issues and trends that will keep us all awake and make 2015 and the following years very exciting, if a little uncertain.
Cyril Lavenant, is director foodservice UK and France for NPD Group
When 'voluntary' means 'or else' by Paul ChaseBad ideas are like viruses; as they spread, they mutate. In relation to the regulation of alcohol, bad ideas mostly come from central government, but sometimes they arise out of local initiatives, often introduced with the best of intentions. “Reducing the Strength” schemes are one example and “Alcoblow” schemes are another. What these two “voluntary” schemes have in common is that operators feel pressured into accepting them because they fear they will get more than their fair share of attention from the local police or the licensing authority if they don’t.
Reducing the Strength
The first Reducing the Strength scheme began in Ipswich in September 2012. The idea was to get off-trade retailers to voluntarily remove cheap, high-strength alcohol with an ABV of 6.5% or above from their shelves. In practice this meant beers, lagers and ciders, not spirits. The justification for this was to protect vulnerable street drinkers, who tend to target cheap, high strength white cider and similar products. Crucially, the scheme also involved interventions with street drinkers to get them into abstinence-based treatment programmes.
I have no doubt that this scheme was well-intentioned, but it has spread and numerous local authorities now operate such schemes. And the original idea has mutated. In Nottingham, for example, the definition of “high strength” alcohol was beer, lager or cider of 5.6% ABV or above, not 6.5%, and the scheme was not linked to assistance for street drinkers. Not only that, but the licensing authority decided that for all new applications for off-sales premises the applicant would have to agree to participate in the “voluntary scheme” or there would be representations (objections to the application) from the licensing authority. This is how a well-intentioned, well-run voluntary scheme can mutate into something that is adopted for tokenistic reasons, in a crude way and becomes compulsory. Every retailer who had joined voluntarily now understands that changing their mind isn’t an option.
Alcoblow schemes are another one of these well-intentioned local initiatives that are spreading and mutating like a virus. The first such scheme was introduced in Norwich in September 2013. The idea was to create a voluntary scheme whereby venues in the city centre sign up to the use of breathalysers. Door supervisors are equipped with them and when they think a customer in the queue may be intoxicated they can ask the customer to blow into the breathalyser. The machine was set to give a "green", "amber" or "red" reading. ‘Green’ meant you had not consumed alcohol; amber that you had and red that you were double the drink-driving limit.
Customers could, of course, refuse to take the test, but venues could make it a condition of entry that they must – rather like searching. The basic idea was that door supervisors would be able to initiate a conversation with a customer about how much they had had to drink and if they registered "red" on the machine, then make a decision about whether to admit them to the premises. All voluntary, of course. Similar schemes are now being introduced in Birmingham, Norwich, Durham, Plymouth and elsewhere.
Now, why would anyone object? Is this not an excellent example of retailers and the police engaging in partnership working so as to combat drunkenness and ensure a safer night-time economy? Well, here are some of my concerns: first, do we want to treat our customers in this way? We are in the hospitality industry, and most operators I speak to are concerned to get away from the bouncer image and to integrate door supervisors into the customer service team; to make them more customer-friendly. Arming them with breathalysers and expecting them to test customers in public or semi-public situations does not exactly sound welcoming to me. On the contrary, it seems to me to be a humiliating way to treat our customers. If door supervisors think a customer is drunk, they should refuse them admission. Testing twice the drink-drive limit is not necessarily “drunk” in any event.
Second, suppose that a customer registers "red", but the door supervisor, after speaking with them, finds that they are perfectly pleasant and reasonable and can conduct a lucid conversation, so he decides to admit them. Inside the premises the customer has a few more drinks and then gets involved in a violent incident with another customer and gets injured as a result. The police are called, and in the course of their investigation they discover that the customer has been admitted despite their "red" reading. You can imagine the scene in court with a bewigged barrister saying to the manager: “Oh, so despite knowing that this man had drunk double the drink-drive limit you decided to admit him so you sell him even more drink?” This raises the whole question of an operator’s duty of care and opens a tin of worms around vicarious liability.
And finally, at what point will we see police forces extending this voluntary scheme to inside the bar?
In my view partnership-working between operators and police is generally a good idea. But when an operator and a policeman put their heads together and decide to reinvent themselves as social engineers in order to modify the local drinking culture, there are potentially a whole range of unintended consequences.
Paul Chase is a director of CPL Training and a leading commentator on on-trade health and alcohol policy