Luke Johnson, former chairman of PizzaExpress, is still heavily involved in the restaurant scene. His firm, Risk Capital Partners, has holdings in brands including Patisserie Valerie, Giraffe and Feng Sushi. He tells Neil Gerrard how he views the sector and what restaurateurs can expect from 2013
How do you assess the market for restaurant operators at the moment and what do you think some of the biggest challenges and opportunities are? It varies completely on where you are and what sort of restaurant operation you are running. Quick service is doing well and is continuing to take share. A lot of home-delivered offers are still doing pretty well too, so I think the whole fast food segment is pretty resilient.
Apart from fast food, chains of branded restaurants, casual dining are probably still continuing to take a bit of share from weaker independents, partly because they are investing and partly because of their brand power. But the market is still very competitive and it is not easy.
Across my various businesses, we are continuing to open new outlets and continuing to grow and feel confident. The truth is that if you are good and you offer something distinctive and you have good levels of service and offer quality, you can still make money and grow. The hospitality industry still has a lot of second rate operators, frankly.
Are you confident about the prospects for restaurants across the whole country?
What more can be done to encourage growth for hospitality businesses outside London? I really applaud the efforts of Tim Martin founder and chairman of pub chain JD Wetherspoon] and others for pushing the idea that we pay too much tax generally. Business rates, national insurance (both employers' and employees'), VAT, excise tax, corporation - the sector as a whole is a vast contributor to the Exchequer. The hospitality industry continues to create jobs in an economy that creates hardly any jobs. In the long term, Britain should become a world class, key tourist destination for people from countries like India, China and South America, so the hospitality industry should grow in terms of attracting spending. But we suffer a huge burden of taxation which is disproportionate.
Do you think the Government will pay any attention to the campaigns of the British Hospitality Association or Jacques Borel and cut VAT for hospitality? If you talk to Jacques Borel he says it is not a short-term thing, it is going to take years, and I think he is probably right. You just have to keep nagging away and not give up.
You mention that independent operators are losing market share to branded operators. What are some of the common mistakes that independents make that could be avoided? They are often undercapitalised, so they can't afford to invest in their premises or their staff. Their restaurants are very often too small to be economic. They are bland in their offerings - they are not original, so they don't stand out. If you are unimaginative then it is harder to get customers in.
It is not an easy profession - it is long hours and it is physical work and you have to deal with members of the public who can be quite demanding - much more so than they used to be. The expectations are higher, it is a soft economy and there is quite a lot of discounting around. A lot of operators are surviving only because interest rates are very low and so they are only meeting interest on their borrowings - they are not paying off principal. I think there are a number of restaurant companies that are zombie businesses, big and small.
So at some point, something has to give? Probably yes. Banks are not pulling the plug unless they have to, so they are generally not appointing administrators or forcing companies into insolvency unless they have to, which is a good thing because it preserves jobs and so forth. But sooner or later these businesses are going to have to restructure.
You made comments recently criticising the adversarial nature of the landlord-tenant relationship. What do you think should be done to put tenants on a better footing? Well, it is very difficult. I think that landlord-tenant law has been biased in favour of landlords in this country. The very principle of quarterly-in-advance rent and upwards-only rent reviews - in no other legal relationship is one faced with those sorts of terms. I think many leases are usurious. A lot of tenants are not well advised so they sign leases that are unequal documents and they are not aware of some of the consequences.
But if you want to be a successful restaurateur, one of the things you have to understand is property - not just what type of lease to sign or avoid, but also costs of construction, and which properties are a good idea and which are bad. Unfortunately I think the landlords exploit this unequal basis of knowledge.
So it is not just a case of the operator going in with their eyes open; you think the landlords bear a certain amount of responsibility? Absolutely they do. In many cases landlords are unscrupulous about service charges, they are disreputable in the way they engineer rent reviews, and a lot of landlords are, I think, pretty unethical. They are becoming increasingly dependent on restaurants and catering.
We all know that there are hundreds and hundreds of high streets across Britain where one in four shops is vacant. So landlords should be courting what I call the A3 market much more assiduously, be much more discriminating about the mix of tenants they have in their developments and less short-term in the rent deals they agree because quite often they are signing up tenants who can't make a return and therefore can't succeed.
What would your advice be to anyone thinking of starting their first venture, who perhaps doesn't know how to take the first step? Property is key, so they need to think in terms of a site. I would generally recommend first-timers to form a partnership. I think a team is much more viable and much more likely to get backing than an individual. And the skills should be complementary. If one is a chef then one should be front of house, or perhaps one should be the commercial brains.
They have got to think long term and be patient about finding the right site, raising the right capital, and doing it properly. They have got to be willing to make sacrifices. It is very different working for yourself. Hospitality is not for everyone, but it is one of those careers where people from modest backgrounds without lots of academic qualifications can do incredibly well.
How hard is it to raise capital and are banks the best place to start? It has always been difficult but I don't believe it is that much more difficult than it used to be. Howard Schultz took 250 pitches to raise the equity to really kickstart Starbucks when they had two or three branches. I think perhaps people in this country aren't persistent enough and give up too easily - they think it should be straightforward and the first person they ask should give them the money.
You need a compelling proposition to get people to back you and I think you probably have to try everything - angel investors, crowd sourcing, VCT money, banks, leasing equipment. You have got to be a bit creative, but probably take advice. If it were a doddle I guess everyone would own a business.
Is there an operator that you are not linked to at the moment that you particularly admire? At the high end, Jeremy King and Chris Corbin are very professional. A number of our celebrity chefs like Jamie Oliver and Gordon Ramsay are remarkable worldwide successes. In the branded casual dining scene, I have to give it to my old business partner Andy Bassadone and the crew at Cote. I think they have done a great job there. My old business partner David Page has several smaller but innovative things that he is up to, like Meat Liquor and Franco Manca. He has got a great eye for a concept.
It has been a couple of years since you got involved in Feng Sushi and you said you wanted to grow the online booking and delivery side of the business. How is that going? It has steadily grown. We now have eight restaurants - we have opened two, it had six when I bought it. Our online sales in many of our branches are now more than 50% of delivered sales and we are growing the business. But it is quite tough and it is a competitive space. And the economics of home delivery, with mopeds and drivers and marketing, are not the same as eat-in sit-down dining, so I am still learning.
It has previously been suggested that you may sell Giraffe. Is this still on the cards in the short term? It is unlikely in the short term. Medium to long term, who knows?
How do you see 2013? I think 2013 might be slightly better than 2012. The economy is predicted to grow. A number of operations have got better -more efficient, higher quality. So there will be a marginal improvement. Given the situation in many other places like Ireland, Greece, Italy and Spain, we should grateful for that.
In terms of investments in the restaurant trade, is there anything that Risk Capital Partners is looking at at the moment? If there was, I wouldn't tell you!
ARENA CHRISTMAS LUNCH
Luke Johnson will be the guest speaker at this year's Arena Christmas Lunch on
3 December 2012 at the Mandarin Oriental Hyde Park. Tickets cost £135 plus VAT for Arena members and £175 plus VAT for non-members. To book tickets, contact Lorraine Wood on [firstname.lastname@example.org*](mailto:email@example.com) or 020 3087 2378.
By Neil Gerrard*
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