Restaurants: Fyne tuning

Mark Derry is a former roughneck who now runs arguably the most respected chain of seafood restaurants in Britain. But it wasn't the three-and-a-half years on the oil rigs that gave him an appetite for fish. Rather it was the entrepreneur's eye for an opportunity.

Back in 1997 he saw the opportunity presented by Loch Fyne Oysters, a company struggling to make its fledgling restaurant business work. Actually, he didn't even have to go out and find the opportunity. It was brought to him and his business partner Ian Glyn by Loch Fyne.

The company had opened two restaurants in England: one in Elton, Cambridgeshire, and the other in Nottingham. But their combined weekly turnover was less than £14,000. By contrast, the first restaurant opened with the help of Derry and Glyn, in Cambridge, took £30,000 a week on opening.

Loch Fyne Restaurants then took off in earnest. To fund the first three restaurants under the new team - Cambridge, Barnet and Twickenham - £1.4m was raised through the Enterprise Investment Scheme (EIS).

"We tapped our mates, mostly Johnny Noble," says Derry. Noble was chairman of Loch Fyne Oysters and became chairman of Loch Fyne Restaurants (LFR). Noble, a laird, had founded the seafood supply business back in 1977 and based it on the banks of Loch Fyne, the location of his baronial estate. The quality of his products and a commitment to environmentalism rapidly delivered a dedicated following for the business.

"It was around the time of BSE. Everyone else was doing pizza, so we thought, why not try seafood?" Derry says.

The big problem with seafood is the quality of supply. Derry was convinced that to succeed you needed to be certain that this could be guaranteed. The "almost religious" following that Loch Fyne enjoyed was enough to satisfy him that here was a supplier he could trust.

As well as Noble, an early investor was Core Growth Capital, a fund that specialises in small and mid-sized companies. It has a history in the leisure sector, having backed Luminar and Henry J Beans. It has been a fruitful relationship. Like other early investors, Core has received five times its original investment.

While there was brief speculation that LFR might float, Derry himself was never enthusiastic. "My view is that we have to be a bit bigger than LFR for a float. Unless you have a market capitalisation of more than £100m, you don't get the interest," he says.

LFR was unlikely to obtain a listing that valued it at much more than £30m. "At this size, you run the risk of people forgetting about you," says Derry. The refinancing of LFR, necessary after the expiry of the EIS support, was therefore unlikely to come via flotation.

Instead, venture capital firm Hutton Collins, a former backer of the Wagamama noodle bar chain, paid £21.8m to take control in October 2005. This was for a business that generated pre-tax profits of £330,000 on sales of £27.9m in 2004. Earnings before interest, tax, depreciation and amortisation were £2.4m, giving a historic multiple of
nine times.

A new company, Premium Casual Dining, was set up to do the deal and Glyn and Derry are among its directors. Less than six months earlier, LFR had announced it was undergoing a strategic review that could result in one of four options: a trade sale, a sale to a private equity firm, a float, or a refinancing.

The new structure leaves Hutton Collins holding just over half the equity, with the rest in the hands of the directors of LFR, who, apart from Derry and Glyn, include finance director Helen Melvin and managing director Richard Morris.

Premium Casual Dining bought a company that has not only 25 Loch Fyne outlets but also five Petit Blanc brasseries.

The reason why LFR bought into Petit Blanc in June 2003 was never entirely convincing. It was certainly a unique opportunity to acquire four restaurants for just £1.1m. They were bought out of administration in the teeth of other buyers, including coffee bar chain Madisons.

A key appeal of Petit Blanc was its higher margins. Gross profit is about five percentage points higher than at LFR, where the GP averages 67-68%. And Derry argues that grouping different restaurant concepts together under one roof can give a business scale. He points to The Restaurant Group, where he believes the group is stronger than its constituent brands.

But Loch Fyne is a strong, idiosyncratic brand that sits uneasily alongside anything else. Derry has hinted that a rethink of the link-up could be on the cards. Fortunately, he had set up the Petit Blanc acquisition via a separate EIS fund, so separation would be much less problematic than it might have been.

Derry has also delivered on his promise to bring a greater focus and discipline to the management of Petit Blanc - adding one more restaurant in the process - and it's now a strong enough business to once again stand alone.

So, LFR will again be a single, focused business. In addition, Derry has ambitions to do more with the Loch Fyne name. An early attempt to build a retail concept within existing restaurants, in a style similar to Carluccio's, has largely been abandoned - although the restaurants still feature a fresh seafood counter at the entrance. "We tried to do retail and we were rubbish at it," Derry admits.

What is planned, however, is to make more of the Loch Fyne name via international licensing and outside catering. This Loch Fyne brand company is the third Loch Fyne business - there are the restaurants, the original seafood business, now owned by its workforce since the death of Noble in early 2002, and the brand company.

In some ways, the brand company is back to the future for Derry. He was in the wine and spirit division of Whitbread in the USA for some of the 12 years he was with that company. And his father was an employee of Bell's, hence he grew up in north-west Scotland.

An understanding of liquor retailing, particularly wine, has been crucial to the success of Loch Fyne. Its tight margins on food mean it has had to make cash elsewhere, and one way has been to cut out wine merchants.

"We need help buying wine but we don't need to pay an expert £200,000 a year, which is the difference between using a wine importer and what we do now [buy direct]," says Derry.

Like all good entrepreneurs, Derry can turn problems into an advantage or selling point - and still make money. Now in his mid-40s and with a young family, he might be expected to want to take things a little easier. But he's too excited about what he does to want to do that.

It's a philosophy he brings to the business as well, insisting that the general managers and head chefs at each outlet make the workplace fun and exciting. "It has to be an environment where you want to come to work," he says, perhaps drawing from his experience of working on the rigs, where teamwork is critical.

But for Derry, it's the restaurant world that's been his oyster, and his business skills the knife that opened it.

Loch Fyne quick facts
Loch Fyne history

• 1977 Loch Fyne oyster farm started by Johnny Noble.

• 1987 Restaurant and smokehouse opened.

• 1997 Loch Fyne Restaurants created with Mark Derry and Ian Glyn.

• 2001 Opens 11 restaurants in a year.

• 2002 Johnny Noble dies.

• 2003 Loch Fyne Oysters bought by workforce. Purchase of Petit Blanc.

• 2005 Refinancing with Hutton Collins.