Despite full-year losses of c£25m, the Tesco-backed Harris + Hoole has experienced improving fortunes over the last eight months as the retailer has looked to stabilise the coffee chain it launched as a joint venture in 2012. Over the next 12 months, that process is set to continue with a restructuring of its operational team and further strategic disposals on the agenda, as the supermarket giant eyes an exit from the brand.
What coffee wave are we on? If you listened to serial sector investor Luke Johnson after his private equity vehicle Risk Capital Partners invested c£3m in the Brighton-based Small Batch Coffee Co., you would have heard we are on our second wave. Many would argue that we are still experiencing a third wave - which considers coffee as an “artisanal foodstuff, like wine, rather than a commodity”. In the US, commentators already declared the beginning of a fourth wave last year, where there is a new focus on the whole coffee experience beginning at the farming operations through roasting and brewing, where a barista’s job started becoming an art. It’s fair to say that Tesco was hoping to surf at least one of these when it decided to enter into a joint venture with Nick Tolley and his siblings Laura and Andrew, the founders of Taylor Street Baristas, to launch Harris + Hoole in 2012.
With a mandate to expand, and rapidly - H+H at one point grew to over 50 sites, and whilst the Tolleys strove to make sure the brand had a strong foundation, in terms of training, proposition and a community focus, the business was always fighting against the issues faced by its parent company and a consumer base still needing educating on how long a decent coffee takes to make.
Over 12 months ago, and in line with the Dave Lewis becoming Tesco’s chief executive, that expansion programme was halted, only an already agreed opening at Stansted Airport has been added to the H+H estate since. During that time, speculation has mounted about the chain’s future. One rumour suggested that at one point only a handful of the sites were in profit and with full-year losses of c£25.5m to 1 March 2015, up from £12.8m the year, the problems the business has had are clear. Not that Tesco has been unsupportive; it has loaned the company £48m so far and earlier this year pledged to provide a further £7.5m of funding to ensure the company meets its obligations.
In July, Adam Fowle, the former chief executive of Mitchells & Butlers and current chief executive of Tesco Hospitality, joined the group’s board and took more control of the brand’s overall direction, bringing in fellow former M&B director Adam Martin to aid the process. Management focus on driving sales growth coupled with a tighter control on shop costs followed, which has led to the majority of shops turning to profit after the early life-cycle of opening in the formative years of the business. This has also been aided by a marked decrease in the time from opening to profitability for the shops opened in the year to 1 March 2015. I understand that this has also come through in like-for-like sales performance, which has been positive since the start of the group’s financial year. It is fair to say that the company hopes, indeed expects, losses to be considerable less at the end of its current financial year.
Earlier this year, Nick Tolley, co-founder and chief executive of H+H, told M&C that he and his siblings Laura and Andrew would be stepping back from their involvement in the brand to focus on the Taylor Street Baristas business. At that stage, the issue of whether the Tolleys had found a buyer for their share of the business was put on hold. However it is understood that Tesco is hopeful of acquiring the outstanding stake by the year end. With the ownership structure cleared up, it is thought it will look to then begin an exit process in the run up to the end of next year. However, before then I understand that it will look further restructure the operational side of the business and look to again trim the brand’s estate, the majority of which reside in or close to Tesco stores.
As for a buyer, well there are plenty of coffee brands looking to grow their estates, especially in the South East and Home Counties, where H+H is predominantly based, that would surely cast an eye on the business, whether that be for individual sites or packages. However, with the majority positioned in or near a Tesco, it will depend on the health of its parent company’s core business to make those locations attract for any suitors, as would an ongoing relationship with the retailer.
Whatever the endgame, it is clear that the unpicking of Tesco’s move into the UK’s eating and drinking-out market has begun, which will bring its ownership of Giraffe into sharper focus as we move into 2016.
