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Paul Charity

CPL Training's Public Relations Advisor

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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

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One industry executive suggested to me recently that a note of bravado had entered sector reporting of late. I understood what he meant. With many companies firmly in expansion mode, confidence has returned with a vengeance – and there is a danger of this tipping over into unqualified bullishness.

An antidote has been a series of presentations at the Propel Multi Club Conference series, where a host of entrepreneurs have returned to a similar theme: starting and growing a business is subject to endless setbacks. Resilience in the face of adversity is the key quality required to side-step the multiple elephant traps that beset any growing business.

At a conference a year ago, JD Wetherspoon’s founder, Tim Martin, joined me on stage to go through his first decade’s figures. They are testament to the challenge of making decent early-years profits and generally gaining traction, with the problem of insufficient cashflow an ever-present threat. The early years of Wetherspoon are a story of its founder gingerly finding his way, beset, in Martin’s own admission, by the struggle to overcome an incomplete skill-set.

In the formative years of a business, every opening represents a mortal threat. No matter how carefully a company budgets for a new opening, there comes a stage where money has to be thrown at a site to get it finished.

Personal credit cards and “alternative” short-term financing in the form of family and friends often comes into play. The bank account will inevitably look depleted at opening and the future of the business will hang on a new site’s performance. The scenario is likely to repeat itself over and over through the single-digit openings. Oakman Inns’ founder, Peter Borg-Neal, told a recent Propel conference that his main building contractor converted the bill into an equity stake at his first site in Tring, when a funding gap became apparent. My brother, Kevin Charity, told our last conference that a loyal member of his office staff lent his business £65,000 to get it through one funding gap.

At last week’s Propel conference, Morgan Davies, the founder of Barburrito, described the life of an entrepreneur as “Live, Die, Repeat”. He meant that entrepreneurs need the courage and stamina to innovate on a constant basis in the sure knowledge that many ideas will not work. Other ideas will work for a while – and then won’t. He compared the life of an entrepreneur to the fairground game Whack-A-Mole, where moles pop their heads up, and have to be firmly hit with a mallet. And, of course, that game only speeds up as it progresses: problems and challenges tend to increase in number and speed-of-arrival the larger a business gets. There is a stage where a company founder may have grown a business dramatically, but cannot yet afford the in-house personnel required to cover the ground. The trick here will be to pick up new skills slightly faster than the rate at which they will be called upon, like studying for a higher degree on a self-imposed fast-track. Successful entrepreneurs overcome obstacles by drawing on every ounce of inner resource, like those Grand Design subjects who build Tuscan villas out of a pile of rubble by working endless hours with a demonic glint in their eye.

There will be moments of crisis when a funder needs to hold his nerve. Alex Reilley, the founder of Loungers, told the recent Arena lunch that like-for-like sales began to drop across his embryonic estate when the credit crunch arrived. Fortunately, the company had the confidence to avoid the obvious knee-jerk response of discounting.

It is not just start-ups that are subject to endless travails as they navigate their businesses through choppy waters. Our recent conferences have had wonderful presentation from mature businesses that have found themselves in high seas. TGI Friday’s Karen Forrester gave an electric presentation on how her key resource, her staff, were galvanised to engage with customers and transform the performance of the business. La Tasca’s chief executive, Simon Wilkinson, told last week’s Propel conference how his business, beset by a number of year of double-digit sales declines, was being transformed through a cathartic focus on staff and customers. It is little short of incredible how quickly a company culture can be overhauled. La Tasca now has a staff turnover of just 5% and is climbing month by month, site by site up the TripAdvisor rankings. Nigel Wright, chief operating officer of the under-rated TCG pub group, who also made a presentation last week, underscored the point that it is not just formative businesses that can be short of capital expenditure. Innovation and product development have kept TCG’s like-for-likes moving forward.

At the far end of the sector spectrum are those businesses that are publicly listed. Scrutiny levels here are, by definition, at their most intense. But the challenge remains the same as for start-ups: the application of entrepreneurial spirit to out-perform the competition and to do the things that are right for the long-term health of the business. Last week’s Propel conference heard a tour de force presentation from Luminar’s current chief executive, Peter Marks, on how the company had succumbed to the temptations of self-defeating financial engineering as it became ex-growth. I wonder whether we will ever see another publicly quoted nightclub company, given the unique challenges of a business where the tide comes so far in and goes so far out. In Luminar’s case, the business has returned to private ownership where it is can be run according to the fundamentals without distraction: a supreme attention to operational standards, with every day fought like it might be the last.

Paul Charity is managing director of Propel Info

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Almost wherever you look at the moment, there’s evidence of tenanted pubcos upping their game. In a fiercely competitive world, the tenanted pubcos are doing their bit – acting with a retail-minded focus, investing, using their scale to deliver competitive advantage to their licensees, competing hard to recruit the best licensees.

One small but positive sign was to see senior executives of the major tenanted pub companies last week in Morzine, France, mixing with some of the cream of the UK’s retail community on the Association of Licensed Multiple Retailers annual ski trip. There were senior representatives from Punch, Paul Pavli and David Wigham, the head of Spirit leased, Chris Welham, Mick Howard from Star Pubs & Bars and others in attendance. It’s an important change for the better. There have been times in the past when the tenanted world has seemed like a “them and us” kind of existence. I’ve been involved in major pub sector award ceremonies where the tenanted top brass couldn’t even be bothered to turn up to celebrate their tenants’ successes. The ideal virtuous circle of pubco and quality tenant must replicate the Domino’s UK model where the two sides of the property and retailing equation mix socially to break down the barriers of mistrust that too often have dogged the tenanted world.

Just this week, Propel has reported a host of news stories that point towards much-improved relationships within the tenanted universe. We reported that Spirit Pub Company and Pesto, the multi-site operator led by Neil Gatt, had abandoned a two-pub partnership in Yorkshire – and the pubs will be transferred to Spirit’s managed division. On the face of, it’s a story of failure. I’d argue a contrary view. Spirit has embraced the multi-site community, who now run almost 25% of its leased pubs. It is showing a determination to invest and innovate, with turnover leases introduced for retail partners like Peach Pub Company. The Pesto partnership was more evidence of this eagerness to experiment. But not everything you try when you are being bold will work. In the past world of pubco/tenant relationships, Pesto would, likely, have been made to stick to the terms of its lease, continuing in situ, losing money and creating bad will. It’s a positive that Spirit has allowed Pesto an “out” so quickly. Spirit, with a decent brand portfolio now, has ready-made solutions for the sites – and the quick and non-punitive action here will burnish its reputation among the UK’s growing band of high quality multi-siters.

Punch Taverns led the tenanted pubco way in re-casting its internal culture. Just ask Brian Whiting, of gastro-operator Whiting & Hammond, how eager Punch is now to back quality retailers with investment and support. This week, Propel reported that Punch is applying its Champs sports bar concept to a site in Washington. It’s an example of a pub company generating an exciting and rounded piece of retail format off its own bat.

Innovation and investment is also in evidence elsewhere among the big tenanted operators this week. Marston’s, which deserves credit for pioneering franchising in the sector, announced developments in online communication and Star Pubs & Bars is investing a record amount, circa £18m in its tenanted estate. This morning, Propel reported that almost £1m will be spent on six pubs in Lancashire. Part of the supposed benefits of the tied pubs is that the relationship can support licensees in tougher economic times. Enterprise Inns chief executive Ted Tuppen told Propel this week that the company’s estate in Plymouth has survived the 22-strong pub cull the city suffered last year thanks to the support the pub company model offers. The claim deserves to be taken seriously. And, last but not least, Greene King’s future is clearly all about a growing managed division. But it’s still hard to imagine a Greene King future without tenanted pubs - and it’s good to see it supporting its two Michelin-starred tenant Tom Kerridge with investment, as Propel reported this morning.

One story in Propel this week points to the on-going danger that the major pub companies must avoid. It has been an oft-repeated statement of faith that outstanding pub retailers should not be penalised by their landlords for their success. Too often tenanted companies have moved Fair Maintainable Trade goalposts to earn more in rent. Former Greene King tenants Tony Leonard and Dominic McCartan were stellar performer for the company at their two Brighton pubs over the course of 12 years. They ended up, in my view, over-rented, Lo and behold, they are now producing £1m of turnover from the tiny, tiny Snowdrop in Lewes in East Sussex after walking away from their tied pubs. The long-term plans now being actioned by our large tenanted pub companies will require pubco self-restraint when rent review time arrives.

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There’s a host of high quality, independent restaurants in Horsham and my family uses them a fair bit. But it’s fair to say branded food and beverage claim the majority of our household out-of-home spend. So I thought I’d make list of where we spent the most money in 2013 and why. The following list doesn’t include branded offers that we would certainly frequent if they traded in Horsham. YO! Sushi, for example, is our 14-year-old’s favourite branded restaurant but we have to travel to Guildford to find one. So, here’s where the most cash was spent in 2013 in descending order.

1) Costa Coffee claims top spot by dint of its ubiquity. The daily routine starts with a Costa Coffee purchased when picking up the newspapers. There are four Costa Coffee machines dotted at service stations close to Horsham and a shop in the centre of town. Often, I’ll pop out and buy the office a Costa as a treat. Most days involve buying at least two and sometimes three. Such is the need for a morning caffeine fix that I’ll drive between Shell stations looking for a machine that’s actually working.

2) There’s a Premium County Dining Group site at Handcross near Crawley, The Red Lion. It was converted from a Chef & Brewer when Paul Salisbury and Paul Hales were still in favour at Mitchells & Butlers. It started well, nose-dived and has come storming back in the last year or so, as a young and talented manager, Neil Robertson, has taken it by the scruff of the neck. The menu is little short of wonderful, with lot of great choices and great fixed price options. It’s a first choice for post-work and weekend comfort eating. PCDG contains the wow flavours that set Browns apart in its heyday. It’s a 20-minute drive from Horsham, which is testament to how good this site is.

3) Wagamama: How do they serve food with such speed and consistency? No nonsense, super-friendly service. Tasty choices galore. When you’re in the mood for slurpy noodles nothing else will do. And then, this autumn, they brought back our all-time favourite, kare lomen, whose absence I never quite got to the bottom of despite badgering the ever-patient Ingrid in Wagamama’s marketing department. I think we went to Wagamama three times in four nights to satisfy the kare lomen cravings. Sometimes they ‘comp’ our meal because we’re regulars and they’re very nice people.

4) Cote: Metronomic service, great value, utterly consistent. Breakfast is hard to beat for complete reliability and we go most weekends. Nerdishly, we travelled to the Reigate branch on opening weekend for breakfast – and it was just as good as Horsham. We take friends to Cote on special occasions, too.

5) Bill’s: Some of the magic has been smoothed away since its evolution from the Lewes template, but the menu’s still outstanding, with lots of things you actually want to eat. And it’s still charmingly eccentric. Invariably, something goes wrong during service at Bill’s in Horsham. And service is far from quick. But the staff are lovely and quick to acknowledge the screw-ups. We keep going back because they are so darn nice – and they’ll get there eventually.

6) PizzaExpress: The venerable pizza brand is still the family first choice for pizza and pasta, especially now there’s a calzone option. It’s just so reliable and feels like pretty good value-for-money. We like Prezzo too, but not quite as much. We don’t ‘get’ Strada and we’ve tried Ask Italian a few times in the past year and been disappointed – everything felt a little pinched and mean, portion-wise.

7) Toby Carvery: When you’re in the mood for a roast dinner, Toby is hard to beat. It’s worth enduring the long, snaking queue at the carvery, the unsmiling service from the put-upon carver and the shambolic atmosphere induced by the sheer number of customers piling in at peak times on a Sunday. It’s a slam-dunk people-pleaser and there’s been a blizzard of coupons this year to provide even sharper value at the Langley Green branch in Crawley. Makes you wonder why Mitchells & Butlers isn’t adding them much faster.

8) Harvester: We have two options – Crawley and Haywards Heath and they both got used a fair bit in 2013. Again, tremendous value and the salad cart knocks spots off the equivalent at Pizza Hut, whose new generation site in Crawley Leisure Park is disappointing. Harvester lays claim to the only mainstream restaurant brand whose takeaway option we actually use once-in-a-while. That food critic Tom Parker Bowles didn’t like Harvester was as predictable as Will Self feeling nauseous in a JD Wetherspoon.

2014 sees a Giggling squid and Nando’s opening in Horsham. How much our leisure spend will they capture? I’ll let you know in a year or so…

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McDonald’s is indisputably the world’s leading restaurant company by sales, a global phenomenon. What is perhaps less well understood is its claim to be the best spotter of emerging restaurant brands. In the UK, McDonald’s took a 33% stake in Pret A Manger back in 2001, disposing of the 33% holding in 2008, when Pret was sold to the private equity firm Bridgepoint for £345m. It was never revealed how much McDonald’s paid for its 33% stake, but suffice to say it booked a healthy profit for its seven-year investment.

Far and away more impressive as a pick of brand star potential was McDonald’s investment in Chipotle Mexican Grill. The Chipotle brand is widely regarded as the most important game-changer on the American restaurant scene in the past two decades. But McDonald’s got involved at a very early stage, in 1998, when the company operated just 14 locations in the Denver, Colorado area. The length of McDonald’s involvement at Chipotle was not dissimilar to its Pret A Manger investment. By 2005, McDonald’s had helped Chipotle grow to 460 sites and had invested around $360m. The time had come to spin Chipotle off. An Initial Public Offering in January 2006 saw McDonald’s bank around $1.5bn for its 90% stake in the company, the kind of return that would put a smile on the face of the most ambitious of private equity bosses.

By any measure, McDonald’s had ridden its Chipotle winner fairly hard – and earned a wonderful return for its shareholders. The subsequent history of Chipotle in the public markets had led some commentators to suggest McDonald’s left the stage far too early. Chipotle shares have soared by more than 1,300% since its IPO and have climbed by 44% this year. Its shares change hands at giddy 44 times its price-to-earnings ratio, twice that of the still-hugely-respectable 22 times that McDonald’s commands. Chipotle’s remarkable returns have positioned it as a hyper-growth stock, putting it in the same category as certain tech stocks, with the result that investors and lenders now have a considerable appetite for the broader sector, looking for the next game-changing fast-casual offer that will rip away chunks of the enormous eating and drinking-out market. Chiptole’s share price success is based on its impressive fundamentals. “It turns out that Chipotle is probably the best restaurant brand created in 20 or 15 years, with the best growth and profit metrics in the industry,” says one analyst. Each new Chipotle unit produces annual sales of $2.1m, which throws off Ebitda of circa $574,000, while average opening costs are $800,000. The return on investment for each site comes to around 72% – in the normal course of events, operators tend to be delighted by a ROI north of 30%.

So far, Chipotle is largely a US success story and is broadly unproven abroad. It currently operates around 1,500 site in 44 states but only has units in three other countries. Its six London sites still seem to be finding their way, and the UK operation has required a couple of cash injections from its US parent. Nevertheless, the success of Chipotle has paved the way for other successful IPOs in the US. The sandwich chain Potbelly Sandwich Works, with its 300 US locations, has seen its shares double in value in its early days as investors bet on the company’s chance of seizing a much larger share of the sandwich market, big enough to match the privately owned Subway, which has grown to 38,000 units around the globe.

Back in the UK, perhaps we will not have too long to wait before an explosive sector growth story creates the same kind of investor enthusiasm when it is launched on the public markets. There is talk of Patisserie Valerie taking the IPO route next year. Earlier this week, owner Luke Johnson told me that the brand had achieved its targeted £12m of operating profit this year. And yesterday, at our Propel Multi Club Conference, Johnson reported that he thought the brand had potential to expand to almost 300 more sites, presumably even without the possibilities thrown up by its nascent concession trial in Next outlets. Yesterday, also at our conference, Peter Hansen, founder of Sapient Corporate Finance, predicted a rash of restaurant sector IPOs in the coming few years. “The best restaurant groups will list on the equity markets,” he forecast. Interesting times ahead.

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About The Author

Paul Charity

Former Group Editor of the Publican's Morning Advertiser, Paul has a wealth of experience in the licensed retail and drinks industry. During his career Paul has helped to establish licensed retail trade publications.

His commercial awareness and communication skills have led Paul to develop his own PR agency, Propel, and he is now the CPL Group's Public Relations Advisor. Paul is responsible for producing high quality news stories and external newsletters as well as building media relations and helping to develop business strategies by launching the CPL Group in the casual dining arena.