INVESTING IN THE RESTAURANT SECTOR

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This article first appeared in Caterer and Hotelkeeper magazine May 2013

By Andy Gregory

George Osborne’s Budget may have been full of gloomy economic updates but it also included some patches of light for the leisure and hospitality sector.

In an industry where good news has been in short supply since the crisis, these concessions will add to the perception that light at the end of the tunnel is just about coming into view – and encourage more businesses to invest accordingly.

On the demand side, while serious headwinds remain, the Chancellor’s decision to freeze the fuel escalator and further extend income tax personal allowances will boost consumers’ spending power (and the tax cut on beer was a subtle nod from Mr Osborne on how to use that boost that many in the sector will appreciate).

Moreover, the Treasury also offered supply-side reforms that will benefit employers in the industry as they seek to grow their businesses. The Employment Allowance, which comes into effect next April, will subsidise employers’ national insurance contributions by up to £2,000 a year. The Chancellor says up to 2.5 million employers will qualify for the new allowance, while 450,000 of the UK’s smallest businesses will pay no employer national insurance contributions at all.

The measure is specifically aimed at boosting job creation – it effectively means a business will be able to hire one new member of staff on an annual salary of £22,500, or four employees on the minimum wage, without incurring any additional national insurance contributions.

For labour-intensive businesses in the leisure and hospitality sector, that’s a welcome reform – particularly for those with ambitions to expand. It should encourage more companies to open new sites and hire new staff.

Nevertheless, a programme of openings – particularly if it is aggressive and ambitious – requires significant investment. And while the climate for openings may feel more benign, the problem of how to fund site roll-outs hasn’t gone away.

It’s a common dilemma for fast-growing leisure and hospitality businesses.

Though it may be possible to finance some additional openings from cashflows at existing outlets, rolling out new sites in this way is likely to be a slow process. And that delay might mean missing out on prime sites, or seeing competitors steal a march.

While bank debt might be a solution – assuming this form of finance is even available - it is likely to come with strict performance-related covenants. Businesses often encounter unexpected difficulties when developing new sites and such covenants can leave them vulnerable as they try to cope with these short-term setbacks.

Business Growth Fund may be able to help. The long-term equity finance we provide is well-suited to businesses with ambitious and realistic plans to grow rapidly. It can deliver the funding that will enable companies to realise those plans with a cushion of protection to see them through hiccups along the way.

We will invest between £2m to £10m in businesses with an annual turnover of between £5m and £100m. We only take minority stakes in companies; we are building not buying businesses – and doing so for the long-term.

The leisure and hospitality businesses in which BGF has already taken stakes are proving that despite the difficult economic climate, it is possible to prosper and grow with the right business plan – and the support necessary to underpin that growth.

BGF’s investments in the sector began in March 2012 with a £3.25m stake in Barburitto, a Mexican restaurant chain with six outlets in the North of England.

The investment has kick-started a rollout programme, with Barburrito planning to triple the number of its restaurants it operates within four years. The business began that programme in March 2013 with the launch of its first London restaurant, in London’s Paddington Station. It expects to open a further three outlets over the next few months.

Similar investments include Boost Juice which was launched in the UK by Richard O’Sullivan, whose track record in the sector includes the development of Millie’s Cookies, which he built to 100 stores before selling up for £24m. O’Sullivan launched 10 Boost bars before approaching BGF for help with dramatically accelerating the rollout of the chain. The fund’s £2.5m investment in the company, made at the end of last year, should enable the company to open 10 new sites in each of the next three years.

Then there’s Peyton & Byrne, the family business of celebrity chef Oliver Peyton, where a £6.25m investment made by BGF last December has given the company the firepower that it needs to expand on several fronts. BGF also introduced Peyton & Byrne to Mike Johnson, the former chief executive of Whitbread’s restaurant chain, and he is now helping the company roll out more of its bakeries and restaurants.

At Wear Inns, meanwhile, an £8m investment by BGF in May 2012, together with additional funds from an existing investor, has already enabled the pub chain to add 11 new pubs to the 15-strong portfolio it had previously built up. Wear’s strategy is to buy up underperforming pubs with the aim of reversing their fortunes – it’s an intelligent business plan, but one that may require significant investment.

Finally, there’s Camino, a chain of tapas bars in London run by an experienced management team that have previously built a diverse range of successful bar and restaurant businesses. BGF put £3m into the business in December 2012 and Camino now plans to step up its site rollout programme – and to double the number of people it employs.

What do these businesses have in common, other than operating in different parts of the same sector? Each company has ambitious plans for the future and a realistic roadmap for getting there. BGF’s money will help them fulfil their potential.

 

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