Inside track by Mark Wingett: Over three weeks after the event and Tesco’s £48.5m acquisition of Giraffe still feels like a bolt from the blue. Looking at it now, it is a deal that stacks up for all those concerned, although the questions it has thrown up for the sector in general may take a little longer to answer.

The price of £48.5m at first looks punchy, with many across the sector valuing the now 48-strong chain between £35m-£40m. However, it is thought that the business is on track to produce FY EBITDA of between £5.5m-£6m, leaving the deal at a more sensible footing of around 9.5x.

Anyone who has tried to get into the Giraffe site at Royal Festival Hall during half-term and endured the 25 minutes wait to be seated will understand the group’s appeal to Tesco. The supermarket giant for its part is looking to make its stores warmer and increasingly aimed at a family audience.

It is thought that the group plans to quickly open 10 sites in and around Tesco stores, and that a figure of over 150 sites could be opened in four to five years. There will be expansion elsewhere, with Giraffe looking to open “five or six” sites away from Tesco stores this year.
Tesco says it will allow founders Russel and Juliette Joffe and Giraffe’s management team to operate the chain as a separate business. However when it comes to deciding on the expansion strategy will the supermarket chain’s need for an out-of-town proposition be prioritised over another opportunity in the same location?

It has been argued that the acquisition of Giraffe is an attempt by Tesco to pull back some of the ground its bigger stores are losing to online shopping. The conundrum it faces is that it is the biggest online grocer, but it has too many big stores. It conceded that it is unlikely to develop many more giant out-of-town superstores but, in fact, is having problems finding a use for the space it already has, hence the acquisition of Giraffe and investments in Harris + Hoole and Euphorium Bakery.

As retail analyst Philip Dorgan at Panmure Gordon puts it: “Tesco needs to invest in areas that its shoppers will want to spend time doing when they spend a lot less time shopping. Eating out is clearly one.”

The supermarket giant will hope that Giraffe’s addition will not only enhance the experience for its shoppers, but also produce high margin sales across its more performance challenged out-of-town estate. For Giraffe it will surely benefit from its new owner’s buying powers and most importantly Clubcard insight, that should put it head and shoulders above many of its rivals in terms of knowing its customers.

Tesco isn’t the first retailer to look at tapping into the eating out space, with Waitrose coming very close to acquiring EAT in 2010. Indeed Tesco is thought to have previously held talks with Nando’s regarding operating sites within up to 10 of its superstores, with one currently operating in Brent Cross.

Will it be the last? Probably not - where Tesco goes others generally follow. However, it might take a rival a while to find another concept that ticks all the family-friendly/all-day dining boxes that Giraffe does. Jamie’s, Bill’s, Carluccio’s and Loungers tick some but not all, yet.

M&B’s Harvester chain is arguably the one business that also currently fits in that “family-friendly” bracket and could be the one impacted most by the Tesco Giraffe link up, with a number of its new and proposed sites on retail parks.

What does the deal do for M&A in the sector? Private equity, which has had the M&A field largely clear to itself over the last few years, may now be tempted to look over its shoulder when it comes to the deal table.

And if eating out is fair game, what else will come under Tesco’s gaze as it looks to build its own retail/leisure park hybrid - “letail parks?. A pub group (husband crèche) or more likely entertainment group (cinema or ten-pin bowling) is surely the next logical step. Indeed, Essenden, the ten pin bowling operator, is also believed to be considering acquisition opportunities across the restaurant and bar sectors as it embarks on its next stage of growth.

Supermarkets control a large part of the consumer journey, don’t expect them to loosen their grip.

Upper crust
The sale of Giraffe gave Luke Johnson a return on his original investment of around £9m. It is thought that he won’t wait around long to make a return to the eating out sector for his next deal, with the pizza market and its high profit margins believed to still hold a strong pull for the ex-Pizza Express chairman.

Linked to the bid process for Pizza Hut last year and now to the early stages of the sale process for upmarket delivery firm Firezza, Johnson, who already had a stake in Rocket, it seems understands that there is still a gap in the market for a “better pizza” proposition to move in to.

He is not alone, Soho House with Pizza East, the David Page-backed Franco Manca, and Jamie Oliver’s Union Jacks are three further fledgling operations with growth potential that have moved consumer expectations on when it comes to crust, toppings and base.

Pizza Pilgrims, yet to open a site but Rupert Clevely-chaired and high-profile investors-backed, also underlines that pizza is, like burgers before it, going through a reinvention. The movement also highlights the difficult job Rutland Partners faces in turning around Pizza Hut.

As with many menu items, the category has had to up its game in the face of consumers becoming more educated on what makes a good pizza and in many cases attempting to make their own at home. Surely sales of wood-fired ovens have gone up over the last few years.?

As consultant Mike Palmer (aka Lost in Catering) says: “Pizza’s back, this time served cool.”