The prolific sector investor behind Risk Capital Partners on what it takes to be an entrepreneur in hospitality, the risks around crowdfunding, the dangers of deep discounting and passing up a certain Portuguese chicken concept.
Investor Luke Johnson’s current investment portfolio includes Patisserie Valerie, Feng Sushi, Red Hot World Buffet, The Draft House, Grand Union and 3Sixty Restaurants, which comprises the Ego and Rocket brands. He is best known for his work with PizzaExpress, taking the brand from 12 sites to more than 250. He also started Signature Restaurants, which owned The Ivy and Le Caprice as well as the Belgo chai. Johnson was quizzed at Sophie’s Steakhouse in Covent Garden last month by a group of business founders and managers. Here are the best bits:
The industry has become sexier in recent years and it’s full of very clever people. That’s a big challenge because the competition is now very strong. Even the provinces are getting much more sophisticated and crowded. In some regional cities there are 30 restaurant brands duking it out for business.
PizzaExpress was a massively underexploited brand when we took it on. At the time it had a dramatically better offering than any of its competitors and a hugely profitable business model. It was very simple and high margin.
I started focusing on businesses that can trade from A1 [retail sites] about 10 years ago when it started to become hard to secure A3 [restaurant/café] properties. It’s also increasingly challenging to do the £40,000-a-week, which large, branded restaurants need to do to make a decent return on capital. That’s down to both occupation costs and how competitive the market place is now.
The difference between a mediocre meal and a great meal rarely has anything to do with price. It’s down to intangibles such as good service and food. You’ve never going to compete with McDonald’s and JD Wetherspoon on price so look to beat them at other things.
If you’ve got a good formula, repeat it. I’ve spent time doing fine-dining restaurants, other concepts and other ‘one-offs’. If you want to make a lot of money in this business you need scale.
When we ran PizzaExpress, we were operating in a much better market than we realised at the time. It was dramatically cheaper to run a business then and there were fewer competitors.
A good restaurant entrepreneur won’t panic in a crisis and will be willing to get to work early and leave late. They also need to be financially literate enough to read a cash-flow statement.
Some people are born geniuses. I wasn’t and, therefore, I have to work harder and
more thoroughly.
The hospitality industry is unlikely to get a VAT reduction. The Government can’t afford it and if it does give in, it is going to open itself up to other industries asking for the same treatment. But if Jacques Borel succeeds, I’ll certainly buy him a drink.
Crowdfunding is potentially the cheapest form of equity now available. But there are some ridiculous valuations for businesses in our sector and many investors looking for a decent financial return are going to be disappointed.
Discounting is the devil and it needs to be avoided at all costs. If you’re considering offering 20% off, I would advise reinvesting that amount in something else, like training or revamping your interior.
I met a South African chap many years ago who was looking for investors for a Portuguese chicken restaurant. I thought it sounded a bit crap so I passed. Needless to say that’s a business decision I regret.
I sold PizzaExpress far too early. I was a young man and inexperienced. I don’t know much about international expansion but I like the sound of China as a market – 1.4 billion people is quite something.
The people in this business I respect the most are Chris Corbin and Jeremy King. I’ve worked with them and we didn’t always get on, but they’re brilliant. They hire good people and they pay very well. They grow their businesses incrementally and build them to last, which very few restaurateurs do. They spend fortunes on fitting restaurants out too. I know because I paid some of the bills.
Intuition and gut feeling matter. Much of business is learning by doing and making mistakes.
Luke Johnson was speaking at an event organised by Watershed School, a management training school dedicated to the bar and restaurant business. Its clients include The Palomar, Pizza Pilgrims, Loungers and Hawksmoor. www.watershedschool.co.uk
