Mark Wingett takes a closer look at Bridgepoint’s decision to invest in resurrecting Burger King UK; what the changes at the top of Caffe Nero mean; and how this week’s expected IPO by City Pub Company has history on its side.
A calculated gamble is the best description I have heard Bridgepoint’s decision to invest in turning around the fortunes of the c500-strong Burger King in the UK. I would agree. Bridgepoint has been very canny in its track record of investing in the sector – with Pret A Manager and Azzurri Group two of its current successes – and there are a few reasons why there is more upside from taking on the master franchise for Burger King UK and looking to build a company-owned estate than downsides. The private equity firm and its new investment has a clear sector leader to benchmark themselves against in McDonald’s.
There is currently clear water between the two brands on several fronts, not least sales per store, marketing spend, store fit-out and brand affinity. As my colleague Steve Gotham, MCA’s director of insight, points outs, Bridgepoint is effectively betting that it can close these differentials and get a decent return for its troubles.
The positives are that Burger King is a strong brand with very high awareness, and a portfolio of high-footfall sites in city centres. However, over the past few years it has lagged behind McDonald’s on a number of metrics. Looking at data from MCA’s EatingOut Panel, for the three months to September 2017, Burger King loses out to McDonald’s on both value for money and menu choice at dinner, both important performance indicators.
MCA’s market analysis manager Peter Linden says: “As the new wave of branded contemporary fast food has grown rapidly in recent years, one key way in which McDonald’s has fought back is its breakfast offer. This continues to be popular and has helped the brand drive sales in the UK. Breakfast is another area where Burger King is clearly behind its main rival.”
There will be work to do to ‘reinvigorate’ the brand, but when you look at the continued strong performance of McDonald’s in the UK, it is clear that this is far from impossible. Modernising store fit-outs, developing an improved breakfast and coffee offer and improving consumers’ value for money perceptions will be key. In this respect, Bridgepoint will also be able to tap into its experience in growing Pret, which will help on all three key development areas.
As part of the deal, valued at c£50m in total, Bridgepoint has laid a foundation down by acquiring Caspian UK Group, one of the UK’s largest Burger King franchisees with 74 restaurants. It is thought that it will look to double this base of equity stores over the next three years. At the same time, it will look to invest significant funds into buying out other individual franchisees. Burger King currently has over 30 franchisees in the UK, including the likes of Kout Food Group, the Karali Group and the SBR Group. It will take Bridgepoint a while to unpick this part of the business.
Not to state the obvious, but the make-up of the new management team will also be vital. It will be headed by chairman-designate Martin Robinson, the current chairman of Casual Dining Group. It is thought that Tim Doubleday, formerly also of CDG, will assume the role of chief financial officer in the new set up, with a chief executive currently being sought.
Considerations around some potential oversupply in the burger market may also need to be factored in, as will the downturn in performance from some of the key players, such as GBK and Byron, although this is balanced by the continuing positive growth being experienced by McDonald’s UK and Five Guys. News last week that KPMG had set a date of the end of this month for bids to be made for Byron, show the volatility of the market. Acquired for c£100m by Hutton Collins in October 2013, there is now the feeling of a possible fire sale going on, with valuations for the business in investment circles ranging from £25m to as low as £15m, amid fears its backers could run out of cash. Of course, the owners might just be testing the market to gauge the current value of the business, but there feels like there is sadly more pain to come for what was once the leader of the new wave of better burger operators in the UK.
As consumers opt for a premium or value experience, it is the middle that is being squeezed. This the background to which Bridgepoint is making its calculated gamble on the value-orientated Burger King, but I’m sure it would have driven a hard bargain and run a few development scenarios for the business. If not anything else, it should be seen as positive news for the sector as a whole. At a time when it is coming under increasing pressure, a leading investment firm continues to be see long-term opportunities.
A new blend
Caffe Nero has had the same management team and management structure since it was founded by Gerry Ford 30 years ago. The control at the top of the now c860-strong brand has very much been in the hands of Ford and chief financial officer Ben Price. Indeed, “Ben & Gerry’s show” has become short-hand for some to describe the business.
It is a set-up that has worked extremely well for the business, which now covers eight countries and in 18 months will be close to hitting the 1,000-store mark. The company has also reported 80 consecutive quarters of positive like-for-like sales, whilst like-for-like sales for the past year have been +4.
However, even with that impressive track-record behind it, Ford feels that there is opportunities that the business could miss out on. Hence, the appointment this month of Will Stratton-Morris, formerly of SSE Retail and Intercontinental Hotels Group (IHG) UK & Ireland, as the new chief executive for its c660-strong UK business. Ford believes the new UK chief executive’s marketing background will complement the operational skills brought to bear by UK managing director Glyn House.
He told me: “I won’t step away from the business entirely, the idea is to have them be this dynamic duo to allow me and Ben, to get on with looking at the opportunities that are being put to us. Take the US, there are a lot of artisan players, Starbucks is the major mid-market player but there is one above that who has a lot of stores. If we can make this work there is that opportunity to go after.”
The company has 17 sites in the US, and will have 20 by the end of the year and is keen to make sure it has a differentiated product that works for the US consumers: “Even with 20 sites you can get carried away and believe it is successful. We are not there yet. All of our sites there are profitable. But we are going in a slow and steady way to make sure we have sustainable growth there.”
There is also other countries to look at, and also some day, but not soon, the need to bring in outside investment. The company, which owns 98% of its stores, enter markets in a slow methodical way, “so we can be the number 1 or number 2 brand in the markets we are in”.
Ford says: “If I get approaches to go into new territories weekly, I get approaches to invest in us every other week. If we suddenly went massive, with a massive expansion plan, we would probably need outside funding. At present, we’re ok with just our cashflow as it is, that limits us to 100 sites a year. That might be miniscule if you are Starbucks but healthy for most F&B UK brands. Even if we did have the resources to do say 500 a year, I don’t think we would do it that way because we would lose sight of what make the brand what it is.”
Capital idea
For all his new found fame appearing alongside his daughters on the reality TV show Made in Chelsea and the free publicity it has given a number of his central London pubs, it is Clive Watson’s more long-term allegiances that will determine the success of the IPO of City Pub Company.
The story goes that at the final, celebratory meeting to thank shareholders for backing his previous Capital Pub Company vehicle, which was acquired by Greene King for a total of £93m in July 2011, Watson and erstwhile business partner David Bruce, set out plans for City Pub Co. An astute move, as I imagine that heady from the returns just achieved for them, many investors decided to back the new plan there and then. Watson will hope that other institutional investors will also have good memories.
As much as the City is loathe to back late-night facing businesses, see the problems Revolution Bars Group has had to move its share price upwards, it does remember a success story. Despite wider concerns about the volatility of the IPO market, Watson believes managed pubs are still an area where the City feels confident and comfortable.
The IPO route long laid out by Watson came to fruition this morning, with the company’s market capitalisation set to be approximately £96m on admission to trading on AIM.
Unlike Capital, City Pub Co is a more spread out affair. There are the goldbrick sites in London, but these have been joined by the creation of hubs in cities and towns such as Birmingham, Bristol and Cambridge, the latter has five of the company’s sites trading within it. These hubs work well in terms of staffing and allows the company to develop its offer in each city.
As Watson has previously stated: “The only way we can successfully do what we do – running completely unique sites across a fairly broad geography – is to trust our managers on site level to run the businesses and make decisions based on their day-to-day experiences of their local market. It’s such a crowded market at the moment and there are a lot of people trying to replicate something they have seen executed well somewhere else, without really thinking through if it is right for that particular area.”
The plan is now to double its currently 34-strong estate over the next three to four years. By then I am sure, the bigger pubcos will again come knocking.
