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Morning Briefing Strap Line
Fri 11th Aug 2017 - Friday Opinion
Subjects: The new foodservice threat from resurgent retailers, finding funding for growth in the hospitality sector, the rise of craft beer and the future of lager, and alcohol statistics – a question of context and reporting
Authors: Glynn Davis, Benoit Broch, Liam Newton and Paul Chase

The new foodservice threat from resurgent retailers by Glynn Davis

Ascending the final flight of stairs and walking out on to the rooftop of the John Lewis store in London’s Oxford Street reveals a perfectly formed British summer garden that between the trees and shrubbery has hidden a number of wooden summer houses enclosed within glossy white picket fences. Each hut comes with a button that can be pressed for service. Waiters then appear with menus offering a selection of food (from a rotating line-up of street food stalls) and a concise list of drinks.
This is the front-line of retailers recognising they have to do more than simply sell people more stuff and instead have to provide them with a potentially memorable experience. At the heart of many of these initiatives is food and drink. By offering interesting foodservice propositions retailers can become a whole lot more attractive to today’s picky, digitally-aware consumer.
John Lewis’ Gardening Society themed rooftop initiative (that runs until 4 September) is a terrific example of how to make an impact and it highlights the increasing importance the group is giving to foodservice. This can be further seen in the forthcoming appointment of its first manager of brand experience for the Oxford Street store who will apparently be responsible for running an in-store event every day of the year.
It’s a similar situation at John Lewis’ sister company Waitrose where Simon Burdess has just been appointed as its first director of foodservice. He will be joining the company from InterContinental Hotels where he had responsibility for its bars and restaurants across Europe. Part of his remit is to further develop the supermarket’s casual dining and grazing proposition within some of its branches.
Early evidence of the group’s thinking can be seen in the wine bars and restaurant areas that have been appearing in some stores including Horsham, in West Sussex, where I spotted a few people sitting down to a light lunch among the shelves of wine and beer bottles. It was far from a perfect dining environment to my taste but clearly Waitrose has intent to improve the proposition. And judging by some of the figures coming out of the US, foodservice is really where all the action is – particularly among the grocery chains.
The top performing supermarkets in America derive a chunky 49% of their sales from the fresh department (29% of this comes from the deli department, of which 60% is prepared foods), according to Nielsen. This contrasts with only 27% of sales coming from the fresh department at the country’s worst performing grocery chains.
Nielsen found it was the hot bars, salad bars, soup bars, rotisserie chicken, sushi and other prepared foods that were making up nearly two-thirds of deli sales at the better operators. It’s certainly clear which way the wind is blowing. In fact, such is the trend for prepared foods that the term “grocerant” has been coined – a rather unappetising mash-up of grocer and restaurant.
One of the major players in this area is Whole Foods that has always placed serious value on its prepared foods and its dining-in elements. Amazon also clearly liked the proposition as it recently purchased the business for $13.7bn. In terms of stores there is only a handful in the UK but when Amazon links these to its home delivery capabilities then the potential for it to disrupt the market here is magnified. Should it also buy into physical stores in the UK then this disruptive element would be cranked up exponentially.
There are suggestions Amazon could develop a store format that mirrors the new Hy-Vee grocerant outlet in Des Moines, Ohio. Customers visit the store to predominantly eat on-site and purchase the fresh and prepared foods for takeaway. They collect non-food items from designated lockers out the front of the store, which hold all the goods that they will have ordered online ahead of their visit.
This is somewhat forward looking but the template is being gradually set for a wholesale change in the way all physical retail units are structured and run. They are being radically reimagined and the shift to incorporate foodservice suggests established hospitality businesses have to be ever more vigilant and dynamic if they are to avoid being trampled underfoot by a retail industry that is being transformed. 
Glynn Davis is a leading commentator on retail trends

Finding funding for growth in the hospitality sector by Benoit Broch

All hospitality operators will take different journeys to become recognised leaders in the sector. At Livingbridge, a growth partner accelerating expansion for operators, we have first-hand experience of these varied funding routes, gained through investments in companies such as Pho, Rhubarb and Bistrot Pierre. Here’s what a typical funding journey might look like for an operator looking to grow:

Stage 1: Startup stage – proving your concept and model
When starting out, many hospitality operators look to angel investors, or friends and family, to inject some capital into their business. If their business model is not yet proven and generating stable revenue, they’re unlikely to be able to access debt facilities beyond an overdraft. This means finding an investor willing to try an unproven model – normally someone you already know or angel investors who see real potential in the proposition. 

An angel investor suits many operators at this stage as they usually have limited input in the business, allowing the operator to pave their own way as they set out. That said, every angel is different, so at the beginning all parties must agree on the level of involvement they’re looking for. 

Stage 2: Early growth – starting to expand
At this stage of growth an operator is likely to have ambitions that need an injection of capital. That might be a refurbishment, a limited roll-out, or they may be looking to take some money out of their business. Debt financing is a useful tool for raising smaller amounts, and under the debt umbrella operators are able to retain full control of their business and easily plan repayments due to the fixed costs and agreed terms.

However, the fixed nature of debt financing also means limited flexibility. Nuances in trading based on seasonality or unexpected impacts such as roadworks outside a site, can create cash flow problems. Changes in interest rates can also have a significant impact. As most loans require repayment from the beginning, operators may also have to start regular repayments before any real revenue growth has hit the top line.

An operator with rental/lease obligations will also have quasi-debt in their business, even if it’s disguised and not visible on the balance sheet. They should ensure they’re not overleveraged, as this could impact on their next stage of growth.

Stage 3: Rapid growth
If an operator has successfully grown their business they may want to de-risk their position and take some money off the table, buy out other members of the management team or shareholders, or find further investment for their next growth plans. Due to the significant amount of capital required, equity may be the most suitable funding option. 

This is especially true for operators looking to facilitate an ambitious roll-out programme, as many private equity houses will be able to provide follow-on funding after investment to support these plans. There comes a time when many owners who have successfully built a business start feeling isolated at the top; they might have a great team around them but they’re keen to obtain an external perspective and support from experienced investors in the sector. They recognise five heads are better than one and they may be asking themselves: “How can maximum value be driven out of the business I’ve created?” 

Alongside experience and a great network in the sector, some private equity firms have a team of experts who can offer functional and strategic expertise in aspects of the business including IT, talent management and marketing. They should also have views on legislative changes, the competitive horizon and broader market outlook to help provide strategic guidance. 

Many private equity backed entrepreneurs enjoy having the support of someone beside them who has a shared passion, as well as a shared investment, in helping the business to succeed. As a result, equity investment often creates fantastic outcomes for management teams; at Livingbridge on average companies more than double in value during our investment.

Stage 4: National success story
With years of solid trading and the credibility of a private equity backer behind them, an operator will have access to more debt options and will likely have a sophisticated debt and equity structure. Most businesses will already have some bank funding at this stage but the accessibility of finance increases with growth, allowing operators to have less dilution of their equity. Private equity firms can help operators analyse their leverage options and support negotiations, helping management teams use debt more tactically for their growth objectives.

So, what’s the next step? At this point an operator might be considering their future exit from the business, in which case they are likely to work closely with their management team and equity backers to create a successful and non-disruptive succession plan. Or they might be looking to continue growing with further private equity investments and considering a secondary buyout. Alternatively, they may be interested in floating – in this instance private equity firms, such as Livingbridge, which have an equity funds business, would be able to help an operator prepare for an initial public offering.

There is no linear journey for any business and although from our experience this is a well-trodden path, operators may encounter these stages in a different order, or maybe not at all. Certainly, it is likely some funding sources such as debt will always be part of a larger business, but nothing is prescribed. It is key for an operator to find out from any funding source how involved they want to be, what they can offer besides funding, and how they can help them achieve their next stage of growth – whichever path they take.
Benoit Broch is a director at mid-market private equity firm Livingbridge

The rise of craft beer and the future of lager by Liam Newton

The brewing world is changing – there’s been an explosion of independent breweries and innovation is constant. As these new breweries vie for the attention of consumers, the pressure is on to stand out from the crowd. In our view, craft beer has injected a new level of excitement and energy into the category, and that’s got to be a good thing for all of us. 
Consumers today are keen to explore and discover new things in all areas of life and that means smaller, independent brands across all sectors are being given far more airtime. For many, craft means quality, and there is a sense of enjoyment around being among the first to discover something great.
So we were very excited to announce last month we were strengthening our craft credentials with the acquisition of the London Fields Brewery, which we’ll operate in a joint venture with Brooklyn Brewery. Our flagship lagers will always remain the cornerstone of our business, but we felt such a move was essential in order to fulfil our commitment to providing our customers with variety, choice and quality.
Our intention with London Fields Brewery is to make the exceptional beers available to more people. We’ll be bringing the brewery back to its original home under the railway arches in Hackney and with the help of the team at Brooklyn Brewery, we’ll be making some great tasting beers there.
While we’re excited to be developing a craft portfolio of our own, the changes and challenges the craft movement brings to an established brand such as Carlsberg are not something we can ignore – and indeed we have not been. In fact we’ve been at the forefront of tackling these challenges head on. Behind the scenes we spent a year analysing trends in drinks sales, researching what drives consumer purchase decisions and utilising the combined results to develop a new positioning that would help propel lager back into the repertoire of younger, influential consumers – namely millennials.
The result of all this of course is our new Carlsberg Export design and the biggest and most exciting campaign the brand has seen in its recent history. With this campaign, which taps into Carlsberg’s Danish heritage and celebrates a Danish attitude towards life, we are encouraging consumers to rediscover and connect with mainstream lager. 
And that’s extremely important because lager is the gateway to all other segments within the beer category. Without premium and standard lager, 40% of consumers would leave the beer market altogether, and only 8% would migrate into higher value categories such as craft and world beer. That means those brands that are enjoying their heyday now may find their future is not so bright.
The bold changes to our marketing approach have been made to ensure we adapt to the changing market place and stay relevant for consumers – and we’re sure others will follow suit. From our research we learned that we need to move away from aspects of traditional lager advertising – it’s not enough to have a one-way conversation and present a one-dimensional brand.

We are providing new and younger consumers with a far more in-depth sense of Carlsberg’s pioneering heritage and its brand story, which has been left untapped for many years. As we strive towards offering our customers what they need in the changing market place, we will continue to research and develop a number of innovations for the future, alongside the continued revitalisation of Carlsberg and Carlsberg Export.

It’s an exciting time to be in the brewing world, and while all eyes may be on craft at the moment, we are making confident strides towards reconnecting with consumers to ensure our mainstream lagers also remain key players in the category.
Liam Newton is vice-president of marketing at Carlsberg UK

Alcohol statistics – a question of context and reporting by Paul Chase

The issue of alcohol-related harm and how it gets reported to the public is one that concerns me. We’re all very busy, so we tend to absorb headlines and not question the numbers or the conclusions based on them. That’s understandable when it comes to members of the public, but rather less so when applied to journalists writing stories. While the pursuit of a sensational headline may be what drives the tabloids, we ought to expect more from companies such as the Guardian and the Telegraph than the kind of lazy journalism we’ve seen recently.
What seems to drive so-called “public health” is the determination to relay simple messages repeatedly so they become “established fact” – things that “everybody knows”. The way in which they make claims about alcohol as a cause of cancer, and how that gets reported in the press is a case in point. The evidence of a link between drinking beverage alcohol and most cancers is extremely weak. Even where such a link has been established the numbers are usually vanishingly small. Here are some examples:
In England and Wales in 2014 there were 6,754 deaths from cancer of the oesophagus, of which just 26 – 0.4% – were recorded as having been caused by drinking alcohol. The biggest link between alcohol and cancer is in relation to liver cancer, but it is still extremely rare. There were 4,442 liver cancer deaths in 2014 of which 439 were alcohol-related – 9.9%. (Source: Office for National Statistics data).
The public often confuses alcohol-related liver cancer with alcoholic liver disease. The two are not the same. Alcoholic liver disease accounts for about 65% of deaths caused by excessive alcohol consumption. Contrary to what sensationalist headlines in the Guardian and the Telegraph said recently, in which it was claimed such deaths would “soar” in the next five years, the reality over the past five years is deaths from diseases caused by alcohol are stable. In 2011, there were 8,748 such deaths and in 2015, 8,758. The average is 8,597 per year. (Source: Office for National Statistics data).
If 65% of these deaths arise are from alcoholic liver disease, then that is about 5,588 deaths per year. Each of these deaths is an avoidable tragedy. But most of them were in men (65%); most were people aged 55 to 65 years old, and the average level of consumption was 200 units of alcohol per week – the equivalent of a bottle of scotch a day. So, the picture that emerges is one of a discrete group of alcoholics who are drinking vast quantities of alcohol over many years and dying prematurely. It is only when you understand these sorts of specifics you realise that whole population measures such as minimum pricing will not impact on the delinquent drinking behaviour of this minority of consumers.
Talking of delinquent behaviour – the latest drink-driving statistics have just been released. According to the Department for Transport (DfT) there were 1,170 serious injuries or fatalities in 2015 as a result of drink-driving. This is up from 1,070 in 2014 – an increase of 9.3%. But if you separate deaths from drink-driving from the combined figure they fell by 17% from 240 to 200. Confusingly the DfT defined the increase of 9.9% in the combined figure as statistically significant, but the decrease of 17% in fatalities as statistically insignificant, merely representing the “continuation of a period of stability”.
Predictably, campaigners are calling for a reduction in the drink-drive limit to bring England and Wales in line with Scotland, where the measure has had a devastating effect on pub businesses. The problem is not so much a dearth of accurate information, but the way in which lobby and research groups frame the dissemination of information and how it gets picked up and used in the media.
Paul Chase is a director of CPL Training and a leading commentator on on-trade health and alcohol policy

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