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Money talks: Hospitality investors on which businesses will survive the crisis

07 May 2020 by
Money talks: Hospitality investors on which businesses will survive the crisis

While restaurants are largely in hibernation, the industry's investors are busy protecting their assets, seeking out new opportunities and finding innovative ways to grow turnover. Chris Gamm spoke to four of them about the challenges and opportunities ahead

Luke Johnson

Luke Johnson is chairman of Risk Capital Partners, Gail's Artisan Bakery, the Genuine Dining Co and Brighton Pier Group, and owner of All Star Lanes

Luke Johnson
Luke Johnson

How have your investment priorities changed following the coronavirus crisis?

My absolute priority is protecting my existing businesses. All new investment is broadly on hold until we have a better idea of how things will turn out, when reopening is allowed, what social distancing and other restrictions might be in place and the likely demand from customers.

Being realistic, it isn't just us as share- holders focused almost entirely on current investments: banks and lenders will be, too. New deals will be at the back of the queue.

You reached out to hospitality businesses seeking investment on Twitter earlier this month. Did you get much response?

I was more interested to hear who might be looking for capital and when. You don't make an investment in 24 hours. It was about gathering intelligence.

Lots of people got in touch and I'm working through them now. Most people are looking to start a conversation about opportunities when lockdown ends and getting working capital to help reopen.

I might make one or two investments, but not lots. It will genuinely take some time to get to know an opportunity, understand the model and do due diligence. All that's harder because of the complications under lockdown.

I also put the tweet out to show that I haven't given up investing and am still open for business in the sector. I've been investing in this sector for 30-odd years and I am not giving up.

No one's pretending it's easy at the moment and it will probably remain hard for some time. We don't know what level of trade there will be, the added cost of doing business or how easy it will be to persuade staff to come back and work. People will be very nervous about travelling on public transport and dealing with the public.

Would you look to invest in businesses best suited to the post-coronavirus world?

No. I'm a fundamental believer in people being social animals. There may be some inhibitions for a while, but fundamentally we want atmosphere, dining out and drinking out. You can't do that on Zoom.

In terms of different models, I've read that home delivery is not necessarily having a good time. I think a simplistic conclusion might be drawn, but that doesn't mean it's right. It's too early to say that everything is changing. It is now, but will it still be in three or six months? I generally invest on a five-year horizon.

I've been investing in this sector for 30-odd years and I am not giving up

What have you learned during the crisis?

We're finding the people that are built for crises and it's interesting to see which managers are dealing well and which aren't. It's important to keep teams informed and stay in touch and stay positive. I have a firm belief we'll return and people will want to go out and have a great time. The industry has to be ready and willing to serve delicious meals when we're allowed to.

What's your advice for those seeking investment?

One thing is for sure: if you're not an established brand, you'll struggle to break through now unless you have a magical formula. This disaster may be the death knell for turnarounds.

However, if you're a high-quality established business that has got a good customer base, reasonably sensible finances and the basics are good, this could just be a temporary disaster based on an interruption.

Robin Rowland

Robin Rowland is Europe operating partner at Trispan, chairman of Thunderbird Fried Chicken and Rosa's Thai Cafe and sits on the board of Fuller's and Caffè Nero

Robin Rowland
Robin Rowland

What are the biggest issues the brands you work with are facing?

Most businesses, despite furloughing staff, are still burning cash and that's what's sweating people. Everyone is doing the maths around the minimum turnover needed to open without suffering a nosebleed. I estimate businesses will need at least 70% of pre-Covid turnover to generate profit at site level.

Rent is the key number. Barely 30% of operators have an agreement with landlords. To get businesses on their feet, they need three to six months' rent free. I think the government needs to weigh in and be the lender of last resort to landlords, or waiver or amortise the loss of immediate rent over the remaining lease. It doesn't solve the problem, but it gives people half a chance to survive.

Are you still looking to make investments?

Our first priority was defence and minimising cash burn in our existing portfolio.

Trispan's three operating partners – Tortilla's founder Brandon Stevens, his equivalent in the US, Ben Butler, and myself – are uniquely placed to look at opportunities to invest and we can be the source of growth capital for some brands. Banks are now likely to cut lending multiples, so if you've got a good business and want to grow it, you could be stuck.

Previously we were looking to invest in companies with more than £2m earnings before interest, tax, depreciation and amortisation, but for the right opportunity, we could look at smaller scalable opportunities.

Brands we would invest in need to show a consistency of results, be in a position with high-growth potential, with a brand relevant to millennials, a delivery element, strong management and without a high capex sites model.

How have investment priorities changed following the coronavirus crisis?

People have to rebalance their expectations and understand what their business is worth. There's pre- and post-Covid currency.

As there is no certainty of growth, businesses know they're unlikely to achieve 5% like-for-like growth. People should expect to go backwards for a year before they can go forwards.

But if entrepreneurs don't carry on growing their business, they could lose momentum and competitive advantage. Their value could decrease if they don't grow.

People have to rebalance their expectations and understand what their business is worth. There's pre- and post-Covid currency

Are there any particular formats or concepts best suited to the likely changes to the way restaurants operate?

Fast-casual is in a good position if it provides value for money and quality food, where you can get in and out in 45 minutes.

Operators will need to find another 10%-20% of income on top of their existing model to survive and will need to be creative. Two ways of doing this are food deliveries and virtual brands.

Rosa's Thai kept 11 out of 19 restaurants open doing deliveries. It's doing very strong business and it means it can pay a premium to staff who seem happy and want to work. Delivery was already 35% of Rosa's Thai turnover before coronavirus, so the business knew how to do it well.

Rosa's Thai in Ealing also has a virtual Korean chicken brand. You order it on Deliveroo and wouldn't know it's come from Rosa's. They've got a fantastic kitchen and a very good chef; they can service that without affecting the Rosa's Thai business.

Pre-Covid, many kitchens were under-served, doing less than £10,000 a week. If you have a kitchen built for £20,000-£25,000, often by doing a few things brilliantly, you have the potential to use that facility more intelligently. It's the new way operators need to start thinking.

What's your advice for those seeking investment?

We will want to get our hands on your trading history very quickly. Once we understand the story, we crave more detail. We will have to present to an investment committee and numbers talk more loudly, frankly.

If you want investment, you've got to be prepared to quickly open yourself up to an immense amount of scrutiny. It's not like going to a bank for a loan; it's like getting married to a partner.

Finally, employ a great lawyer who understands what private equity looks for.

Chris Miller

Chris Miller is founder and chief executive of White Rabbit Fund, which has opened 15 restaurants since 2016 under four brands: Kricket, Lina Stores, Island Poké and Kym's

Chris Miller
Chris Miller

What changes have you made to the brands you work with?

We closed all 15 restaurants before we were mandated to do so. At first we flipped Lina Stores and Kricket onto delivery, but the view was it wouldn't be right to demand people to come into work when there was a fear for their safety. We still have delivery brands ready to go and will launch them when we are ready.

Lina Stores has been most active, operating a grocery delivery business. We have now launched the online grocery, and sales are looking very promising.

There is a full grocery offer of meat, cheese, fresh pasta, sauces, olive oil and cook-at-home pizza and pasta kits. We've got enough space and systems in place so we're confident staff are safe and secure and they're getting paid extra to be there.

We went early and hired two refrigerated vans, have willing drivers and are doing the logistics ourselves to deliver all across London. Within a week we created a full online grocery delivery platform. It's been doing very well and I'm really excited.

What plans are in place for reopening?

I'm having conversations with people in Hong Kong and Germany, where some businesses are open but people won't go out. It's into their psyche now, so how will you get 100 people sat together in a restaurant? It will take a long time.

We will be starting with deliveries, so opening up sites, getting chefs in cooking and then delivering meals. We have a plan for removing tables so customers can be further apart, for example 1.5m, which is in place in Hong Kong.

We've ordered temperature checkers as it will be good practice to check staff and guests. We had a long conversation about if that is right, as we're obsessed about great hospitality and creating a friendly atmosphere and asking to check people's temperature at the door doesn't feel right. My personal view is that we're trying to protect staff and guests, so it will become an acceptable part of trading. Turning up at a table in gloves and a mask might be taking it too far though. Hospitality is still about warmth and friendliness.

How will investment priorities change following the coronavirus crisis?

Very few will be investing in this market. Generalist funds won't go near it in a while as they've seen so many disasters with larger-scale operators. There will be a lot of big names going into administration because they weren't doing well before. It won't be 100% to blame on Covid-19 because it doesn't happen that quickly.

Funds should ask what fills the high street. Everyone wants to eat and drink and will want to socialise when there is a vaccine and it's safe to do so. That won't go away. What will change is the way we do this and delivery. Cook at home kits will be even bigger than before.

If someone comes out levered to the hilt with debt to get through, banks won't be clambering to lend more money. They will have lent more than in many years previously in a very short space of time.

There will be a massive shakeout of those just surviving. There are not huge margins in hospitality and a lot can't survive a 10% drop in turnover. My estimate is 60% will reopen, maybe more if government support or a vaccine happens rapidly.

Turning up at a table in gloves and a mask might be taking it too far though. Hospitality is still about warmth and friendliness

Have you got any deals in the pipeline?**

Some international opportunities are still progressing where we have found the right partners who see the scale of opportunity on the other side of this. There will be cheaper properties, some super-premium sites available and more labour available, as the sad truth is a lot of people will still have their roles made redundant when they come off furlough.

We have a franchise deal signed for Island Poké for 42 stores across France, Switzerland, Belgium and Luxembourg. These are still ongoing and we're working on another franchise deal for one of our other brands.

There needs to be a sensible discussion with landlords as pre-Covid rents are a thing of the past. They haven't seen enough pain yet to fully adjust pricing. Wait until they've had properties sat on the market for six months.

What brands would you like to work with?

I'm really keeping my eyes open for who's adapting to the new world and finding brands that have flexibility in their revenue streams. Look at Lina Stores, which has got the original delicatessen, the restaurant offer, but we can also do a large full-scale restaurant, online grocery, delivery and own brand retail.

The winners will be restaurants physically designed for the new world, for example with separate doors for diners and deliveries, pick-up collection points for groceries and tables spaced apart from one another. But you can only afford to do that when you're getting bigger properties at lower prices.

James Horler

James Horler is chief executive of Ego Restaurants, non-executive chairman of Cartwheel Recruitment, Notes Coffee and Ping Pong, and an investor in Corazón and Leon Restaurants

James Horler
James Horler

What were your immediate priorities following the coronavirus crisis?

Right now it's about protecting my current investments, rather than looking to invest. I'm heavily invested in Ego Restaurants and protecting that investment has to take absolute priority. Fortunately, there are no loan notes or private equity investments, only very conservative levels of debt, and the business has performed very well over the past three years.

Because the business is sat on a reasonable amount of cash, we were able to meet our short-term creditor needs and have since been successful in getting the Coronavirus Business Interruption Loan Scheme (CBILS). We needed this to effectively deal with longer-term creditors due to having to unwind the negative working capital. The loan allows us to effectively hibernate the business and pay all our suppliers in full.

We believe we'll be able to repay the loan quite quickly, within 12 months, because we will get positive working capital when we open, and know we'll get the same terms from suppliers because we've paid them in full.

What advice are you giving to other brands you work with?

There are a lot of unknowns, but I'm trying to keep the teams focused on what we know right now and what we're doing to manage the situation. There's no point worrying about pubs not opening until Christmas because too much energy can be spent on the ‘what ifs'.

Some of the private equity-backed businesses have issues accessing CBILS loans when accumulated losses are greater than 50% of share capital. If you're unable to get a loan, then it is more challenging to fund the business.

You've got to know if that's the case and start thinking about other means of finance, like high-net-worth individuals or other institutions.

Good businesses should be able to repay debt quite quickly because of positive working capital. But all of this is subject to landlords not being greedy. Landlords need to accept that they've got to share the pain.

If companies raise money to see them through this period of hibernation, it can't go straight out to landlords insistent on being paid for periods of closure. Most aren't confirming their position yet and are talking about deferrals. If a site in London with high rents starts trading in July and the landlord wants paying for April, May and June, there won't be the funds there.

Are you still looking to make investments?

The competitive landscape will change. I'm not looking to invest right now as we have so far to go on this. I think that by the end of May or the beginning of June you'll see more and more companies unable to get through this situation, because of the CBILS position, the cost of rent and because of suppliers making statutory demands.

What I do know is once we are through this situation, there will be lots of demand and fewer players. The businesses that survive will have a competitive advantage.

Are there any particular formats or concepts best suited to the likely changes to the way restaurants operate?

I think high-volume operations will find it difficult. If one of my bigger pubs with 140 covers reopened, but we could do a maximum of 50 covers, it would give me a real headache. I've got to operate the floor, the bar and staff the kitchen and I would need management and cleaners, but with only 40% of revenue. I can't cut payroll by 60%. It would be a real challenge to be profitable.

I think it is very likely that the bigger premises, such as large events spaces and nightclubs, will find it harder for longer. The winners are likely to be smaller operations. I'm chairman of Notes Coffee, and because that market is a quick in and out, with typically 20 to 40 covers, it could come back strongly.

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