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Morning Briefing Strap Line
Fri 18th Sep 2015 - Friday Opinion
Subjects: The attractions of Patisserie Valerie, craft beer, the Italian way, and fat lies and sugar rushes
Authors: Luke Johnson, Glynn Davis and Paul Chase

The attractions of Patisserie Valerie by Luke Johnson

I got involved with Patisserie Valerie nine years ago when it was a Soho evergreen. It has extraordinary brand recognition considering it operated only six company-owned branches at the time. We bought it semi-blind because it was a family business and the three brothers who owned it weren’t building it to sell – so they weren’t doing all those adjustments and so forth that you are always advised to do in order to maximise the proceeds of a sale. So it was actually very difficult to interpret what the underlying profitability was. But, nevertheless, we believed in the brand and we saw the potential.

I think the fact it was an institution was very important because I think one of the great secrets of this industry is to try to create or buy or own a classic. An extraordinary number of businesses don’t outlive their founders. Many companies in other industries last for decades or more but remarkably few do in the restaurant and bar business. I am not entirely sure why this is. Perhaps it’s because our customers want something new and different and there is a fashion element to it. But also it’s only really the founders who have the obsessive passion that makes the business tick and when they leave the soul goes out of it and so often it fades – and then someone else comes along and rebrands it and it’s all change. So I am always on the lookout for something that’s sustainable and enduring. We certainly had it with PizzaExpress, which started in 1965 and appears to still be going strong. But those sorts of businesses are very rare – and indeed you only have to go to many of Britain’s towns and you will see a few others on the way out. So that was one of the things that attracted us to Patisserie Valerie.

A second thing was that, having been for some years in the casual dining space, it had struck me that it had become a lot more competitive and that, to an extent, supply was outstripping demand. Rents and rates and taxes and other costs were rising faster than profits and a lot of this was property-related. We felt during the nine or ten years that I was involved with Giraffe you could see that, steadily, the cost of taking hold of three or four thousand square feet, a classic 100-odd seat unit, was getting higher and higher and there was obviously a scarcity of A3 licensed premises relative to A1 on the high streets of Britain. There is probably at least 20 times as many A1 as A3 sites so I was particularly attracted to the idea of obtaining a business that, like Pret and many others, is A1 and not A3. These A1 sites account for the large majority of Patisserie Valerie’s sites – a much smaller footprint. Finding three/four thousand square foot sites is that much harder than finding a 1,200 square foot site.

Patisserie Valerie is vertically integrated, which has its complications, obviously, because you are producing your own items. We have our own bakeries but it means you can potentially capture more of the margin, you control your products better, and you can innovate in-house more easily. I am not as dependent on external suppliers so again I felt that was an attraction and we have exactly the same model at another bakery business I am involved in – Gail’s Bakery. I think that gives you a competitive advantage. Another key point I felt was that the offering at Patisserie Valerie was distinctive. Already, by that time, nine years ago, you had a very great many Costas, Starbucks, Caffe Nero and various sandwich chains like Pret and EAT. But no one else was doing what we were doing in the cake/patisserie space. If you go on the continent, there are thousands and thousands of such outlets, albeit they tend to be retail-focused. One of the reasons I think why Patisserie Valerie was well known is because for, arguably, many years, it was almost the only outlet of its kind in the whole of the West End.

Unusually we brought in a management team because the vendors wanted to step down. I had worked with Paul May and Chris Marsh (currently Patisserie Valerie’s chief executive and finance director respectively), my partners in the venture, twice before for many years, so I knew them very well. I had great respect for them and their abilities and I was confident that if anyone could make the business work it was them. Since the beginning we’ve also undertaken a series of what might be called “opportunistic” acquisitions – we’ve bought Druckers, Flour Power City, Philpotts and indeed a batch of sites in railway stations from Paul.

That model of making acquisitions where it make sense, we’ll continue with – it’s obviously allowed us to grow a lot faster. Being experienced in the sector means we are a relatively reliable buyer. In theory, we know what we are doing, not scared off by the features that might put off people who haven’t been in the trade before. And, obviously, there are potentially integration benefits, purchasing benefits, savings in central costs and so forth – so acquisitions have been and will continue to be part of our business plan.

The more recent step was going public last year. I think part of the reason we did that was because we wanted to realise some capital from our ownership, but we didn’t want to give up control and going public felt the best way of combining those two objectives. I have taken companies public before, most successfully, I guess, with PizzaExpress but also various others I’ve been involved with like Topps Tiles. The stock market is certainly not for everyone. Indeed, if you want the maximum valuation on your business and it’s not that large then it seems to me you should crowdfund, certainly. I think there are some pitfalls ahead for certain businesses there that seem to me to have rather astronomic valuations. I am a bit nervous that with crowdfunding some of the investors surely can’t know what they are doing, otherwise they wouldn’t be willing to pay the price. I think if it is ill-informed widows and orphans who are putting their money into some of these crowdfunding schemes then it will end in tears probably. But the stock market actually is short of public opportunities in this space so I think there would be ready demand for good businesses in the food and drink sector that chose to go public. What’s happened in the last ten to 15 years is that private equity has gorged on the sector. Generally speaking, with a couple of big notable exceptions, they have done extremely well and so they’re constantly passing the parcel, buying and selling chains amongst each other. At some point, eventually there has to be a home, what you might call “permanent capital” as opposed to temporary capital – ultimately, all private equity is temporary. It might be a five or seven-year journey but eventually private equity investors have to sell.

In theory a company can stay on the stock market for decades – Diageo, which was previously Guinness, has probably been public for 150 years or more, as has Whitbread. There are obviously many other issues. You’ve got to dance to the City’s tune, you’ve got to show rising earnings and so on but having a fragmented shareholder base that the stock market gives you has its advantages. You don’t have to face your co-owner across the table at a board meeting once a month and explain every intricate issue. So I hope that rather more companies in the sector go public in the next six to 12 months, I think that would be a good thing. I think it’s a good thing where the British public can invest in British businesses like this. And I think there are advantages to be had in terms of options for staff, in terms of covenants with landlords. These things go in and out of fashion.

I remember after we took PizzaExpress public in 1993 a whole raft of restaurant and bar businesses went public and then they all got taken private. I wouldn’t be surprised if the same thing happens again in the next year or two. What we’ve essentially done is the same as all the successful chains over the years, in Patisserie Valerie. We’ve perfected the retail formula in terms of sales, profits, margins, return on capital and then replicated it and that is the advantage of a format business like a brand. One of the characteristics we’ve noticed about Patisserie Valerie is that it is fairly adaptable. So our core estate is in high streets, but we are also in shopping centres, retail parks, motorway service stations and transport hubs. There is one or two other different types of retail location that we are also looking at and I think that’s a strength – it obviously allows us more locations to choose from in terms of how we grow the business.

Stating the obvious, Patisserie Valerie is an all-day trading concept from seven until seven, seven days a week, trading almost every day of the year if we possibly can. I think I learnt the merits of that, in other words, working your assets, in Giraffe. It’s rather a contrast to a business I got involved with recently, which is a nightclub business, where you have to do everything in about six hours a week; not what you would call sweating assets, although some of the customers might be sweating I suppose.

We try to improve as we go, so be it property, IT, marketing, HR, procurement, training or production, the objective must always be to do better, improve and be more efficient, more professional. I think underlying that sort of approach is a philosophy that I think the Japanese call kaizen, which means a policy of constant, small, incremental improvements. I think it also is an attitude that the best entrepreneur partners I’ve ever worked with displayed – a restlessness and a constant dissatisfaction with performance. I think particularly in our industry which is ferociously competitive, much more competitive than it used to be, facing more supply than demand these days, lots of new capital coming in, unless you are paranoid about the competition catching you up and always looking to do better, then the risk is you will fall behind.
This article is an abridged version of sector investor Luke Johnson’s presentation to the Propel Multi Club Conference in July

Craft beer, the Italian way, by Glynn Davis

Sat in a stylish bar close by the Pantheon in Rome enjoying an Italian craft beer, it was possible through the doorway to glimpse a lit-up row of Corinthian columns. Not only did this create an impressive backdrop but it also highlighted how Rome is managing to successfully mix the new with the old. The Italians clearly have an impressive (and incredibly long) wine history but they are also proving more than willing to embrace new beers – beyond Peroni. This certainly cannot be said of all countries – particularly where the grape is more ingrained than malt and hops.

It is good to report that Rome has a crop of beer-focused bars that have appeared on the scene, which are supportive of a growing band of Italian craft brewers, including a batch from within the city itself. Rome even has its own “gypsy” brewer Roma BrewFarm (that brews on other people’s kit), which suggests things are certainly moving along at some pace. But as I found on my recent visit to the city, you can take the people to the craft beer bar but they won’t necessarily drink all the beers you put in front of them. To attract customers to drink across the board specialist beer bar owners have adopted a policy of charging the same price for all their beers. And wines too in some places such as the wonderful No Au.

Most bars charge four or five euros for a glass of beer, equivalent to roughly a half pint, regardless of its ABV. So venturing into the city’s most highly-rated beer bar Ma Che Siete Venuti A Fà, it is possible to drink the equivalent of a pint of German Weihenstephan Vitus at 7.7% or an imperial stout from US brewer Smuttynose at 10.5% for the same price as a local brew at a more modest 5%. At the city’s flashest (and most popular) beer bar Open Baladin (that is part-owned by Baladin brewery), there are 35 taps dispensing the full spectrum of brews encompassing sours, saisons, golden ales, stouts/porters, and barley wines as well as a selection of bottles with ABVs from 3.9% for the excellent Stelle & Strisc from Birra Del Borgo to the top drawer Xyauyu Barrel 2011 that has been aged in rum barrels at 13.5%. Regardless of style or strength they all come in at a price of five euros.

I’m told if you charge a premium for these beers (that are clearly significantly more expensive for bar owners to purchase than lower strength brews) then the customers simply will not drink them. At the Il Serpente bar in the gritty but lively San Lorenzo area near the city’s main train station the barman tells me his customers reckon they are being ripped off if they are asked to pay any more than his standard five euros. This is such a difference to the UK where the differential in the prices charged for different beers – based on the ABV and country of origin can be three or even three-and-a-half times higher for certain brews. In a London pub The Three Johns, I attended a tap takeover by Milan-based brewer BrewFist earlier this year where a half pint was being sold at £5.50. Even with my willingness to pay up for world-class beer it was a bit of a stretch to cough up £11 for a pint. At the outlets of the growing Craft Beer Company chain, there is such a big spread of prices that even the most price elastic beer connoisseur would balk at the prices charged for some of the more outlandish beers.

My suggestion on Twitter that a blanket price was a rather sensible approach because it made life so much simpler was greeted with surprise by an Italian who reckoned it was a poor idea because it did little to educate customers about the differences between the various beers. Surely, such a situation is a great way to convey the message about the great variety of beer because the extremely competitive pricing of the more extreme brews makes it much more accessible for newcomers to the category to experiment. What it does not seem to do in Rome is have everybody knocking back 10.5% beer at the equivalent of £4.50 for a pint!

It would be an interesting experiment if bars in the UK adopted this same approach for a brief period. Would it completely decimate their profitability, lead to mass drunkenness, or draw in more people to try a broader portfolio of beers whose interest would be sufficiently piqued for them to then continue drinking across the board when the price differentials return? Now which UK craft beer bar owner is big enough for the challenge?
Glynn Davis is a leading commentator on retail trends

Fat lies and sugar rushes by Paul Chase

Musician Frank Zappa once said: “Some scientists claim that hydrogen, because it is so plentiful, is the basic building block of the universe. I dispute that. I say there is more stupidity than hydrogen, and that is the basic building block of the universe.” Which neatly brings me to Jamie Oliver. Oliver has decided to become an anti-sugar evangelist, and in his recent Channel 4 programme “Sugar Rush” he described sugar as “evil”. His response is to put a 10p “sugar tax” on fizzy drinks sold in his restaurants, which will go to his campaigning fighting-fund. And there are reports that Leon and Abokado are about to follow his lead. Social psychologists refer to this kind of behaviour as “virtue signalling”, which is a gratuitous example of just such stupidity.

And then there are the double standards involved. Oliver tells us that we shouldn’t consume more than seven teaspoons-full of sugar a day. So, how does he justify the nine and a half teaspoons of it in his Eton Mess; or the seven teaspoons of it in his baked cranberry cheesecake; or the four teaspoons of it in his chocolate ice cream; or the two tablespoons full of it in his bread? I could go on, but what is apparent is that saying “my added sugar is OK, but I’m not sure about yours” is just stupid. Sugar is simply a basic ingredient added to many foods to give taste and texture, and if we are to characterise that as evil then Fanny Craddock and Mrs Beeton will be turning in their graves!

The truth is that the campaigns against sugar, fat and alcohol all stem from the same ideology: “healthism”. Health campaigners believe that capitalism is wicked; that the next big step forward in public health is to get the government to prescribe a national diet, and to nudge people into making the “right choices” with sin taxes, bans and the mass reformulation of products. But the facts are not on their side. According to the British Heart Foundation (2012: 107): “Overall intake of calories, fat and saturated fat has decreased since the 1970s. This trend is accompanied by a decrease in sugar and salt intake, and an increase in fibre and fruit and vegetable intake.”

Surveys carried out by the Department for Environment, Food and Rural Affairs since 1974 have also validated the fact that calorie consumption, fats, and carbohydrates, including sugars, have all declined since 1974. And that includes consumption in the home and out of home consumption too (The Big Fat Lie, IEA publication by Chris Snowdon). This research also indicates that per capita consumption of sugar, salt, fat, and calories has been falling in Britain for decades. Per capita sugar consumption has fallen by 16% since 1992 and calorie consumption by 21% since 1974. At the same time the average body weight of English adults has increased by two kilograms. This apparent paradox can only be explained by reference to the decline in physical exercise – at home, in schools and in the workplace.

But these inconvenient facts don’t suit health campaigners. They know there’s not much you can do about long-term changes to the nature of work or the decline in school sport, so they need to construct a narrative whereby Big Food seeks to addict us all to sugar and salt in order to flog their stuff. This is similar to the narrative about the addictive nature of alcohol and the slippery slope. This notion, that the docile masses need protection for the machinations of food and drink producers, who are depicted as little better than drug dealers, is what underpins the assertions of swivel-eyed fanatics like Graham MacGregor, chair of Action on Sugar; Mike Raynor, a member of it, and Tam Fry, head of the National Obesity Forum – all of whom appeared in Oliver’s programme “Sugar Rush”.

So, how dangerous are sugary drinks and sugar in any event? According to the government’s Scientific Advisory Committee on Nutrition there is as association, based on “moderate evidence” between excessive consumption of sugary drinks and type-2 diabetes, but no evidence between sugar as such and type-2 diabetes; no association between sugar and blood insulin; and no association between sugary drinks and childhood obesity. The demand of anti-sugar campaigners to reduce sugar consumption from 10% of our dietary energy to 5% represents a reduction in calorie intake of just 100 calories a day. That’s going to cure the “obesity epidemic”? Really?

Oliver chooses to ignore the mainstream science and instead to give the oxygen of publicity to fanatical anti-sugar campaigners to whom he is just a useful idiot. In the upcoming final series of Downton Abbey (on ITV), there’s a scene where the Dowager Countess, played by the wonderful Maggie Smith, asks her moral-crusading friend Mrs Hughes the following question: “Tell me, doesn’t it ever get cold on the moral high ground?” For Oliver the moral high ground is shifting beneath his feet because he’s just not bright enough to do some basic research. It should send a shiver down his spine.
Paul Chase is a director of CPL Training and a leading commentator on on-trade health and alcohol policy

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