28 June 2008
Despite a background of impressive annual turnover, rapid growth and an AIM listing, as of the last financial year, Coffee Republic had never made a profit. Chairman Peter Breach explains how the company is entering an exciting stage in its history as it embarks on a long term strategy to return value to its shareholders.
Written by Alison Withers & Produced by James Smith
Coffee Republic was formed in 1995 by Bobby and Sahar Hashemi, a brother and sister who wanted to bring quality coffee from New York to Britain. They saw the opportunity for exporting the coffee bar concept to Britain. Over the past twelve years the company has been through several phases, but is now taking a radically new direction, and embarking on what may be its most exciting phase to date.
Bobby Hashemi’s instinct had been correct, and in the eight years after establishing the first ever Coffee Republic on South Molton Street in London, the company grew rapidly, growing to more than a hundred outlets and achieved a stockmarket listing. However, the company never made a profit. In the last financial year, ended March 2006, from a turnover of almost £15 million, the company made a loss of more than £1.4 million.
Catalyst for change
While investors were prepared to forgive a company that was growing rapidly, their patience began to wear thin once the company started to contract as it did from 2003. The catalyst for change came from Steven Bartlett, an established retail entrepreneur. He believed that Coffee Republic could succeed in Plymouth, where he was living, and so he applied for a franchise.
He was surprised to be turned down, and so he applied again. Having been rebuffed a second time, he was much less surprised to discover an online chatroom full of highly disgruntled Coffee Republic shareholders. He became convinced that the company was not being run as well as it could and he resolved to do something about it.
Together with Peter Breach, Bartlett began to acquire shares in the company, and by September 2006, the pair owned 26 per cent of the company. Through the online chatroom they had gathered the support of a further 26 per cent of the shareholding, and so requisitioned an Extraordinary General Meeting to remove the company’s senior management.
The response from the Board was to ask Breach and Bartlett to withdraw the requisition in return for being installed as chairman and chief executive respectively. They agreed and took up their new positions at the end of October 2006.
Breach says: “We discovered that the company was more run down than we had expected; the coffee bars simply hadn’t been well maintained. However, the Brand Name has proved far stronger than anticipated and the quality of the coffee, which is roasted in Milan to a special recipe, is widely appreciated.”
Franchising drive
The new management immediately implemented a strategy which will see them inject renewed vigour into recruiting new franchisees in the UK and overseas. It has already announced a number of new franchise deals.. This resurgence of activity has increased the rate of applications from only a handful to seventy or more every week.
A key part of this strategy is licensing the Coffee Republic brand in foreign countries. Licensing rights have already been signed up for Bulgaria and Turkey and Breach anticipates that in the coming months the company will be announcing several larger deals.
“From taking over the reins to opening new bars takes time” Breach says: “We don’t want to rush people into it. We need to be confident that they’ll do a good job. We put them through an intensive two week training programme so we’re confident they know what they’re doing and will maintain the standards of the Coffee Republic brand. It takes at least four months from someone expressing an interest to them opening their franchise.”
Alongside this franchising drive, the new management team, with its support staff of around fifteen at its London head office has launched both Chocolate Republic and Tea Republic offering hot chocolate in partnership with Thorntons and other leading brands, and a range of teas well presented in a teapot. Its food offer is also being improved, removing items that sell poorly, and replacing them with new, more interesting products.
Last year, it launched its "All Fresh" range of sandwiches, baguettes, salads, toasties and paninis, all of which are freshly made in each of the deli kitchens every day.
It is also improving the store design, sharpening the dominant black and red colours and adding canopies to the front of many of its bars. Breach reports that these fairly simple enhancements usually have a significant effect on a bar’s revenue.
A long term strategy
However, it is a long term plan and it will take time for their success to show up in their published accounts. Breach explains: “If we sell a fifteen year franchise for, say, £18,000, we receive that £18,000 immediately, but can only show it as £1,200 revenue in each of 15 years in our accounts. We also receive Royalty based on a percentage of the franchise’s annual turnover every year. In this way we build up a long term base of annuity revenue.”
In order to accelerate the process, in March the company announced a Share Placing which raised around £900,000 and this is being followed by an Offer to all shareholders to subscribe for more shares should they so wish to raise a further £650,000. Breach says that this will allow it to prepare for growth by building its support team and also to acquire good new sites when they become available. It has also appointed an International Franchise Director to lead the overseas expansion.
Money is of course not the only obstacle that the management team will need to overcome. It operates in an extremely competitive market, and will need to maintain and strengthen its brand name. Breach notes that because the company is smaller than many of its competitors it is able to react more rapidly to developments in the market. However, it will also need to police its franchises effectively and it will need to grow its support staff to do this and to provide training to new franchisees.
As the cause of fair trade in coffee becomes ever more popular amongst consumers, so the company may face greater pressure to source its raw material in this way. Breach comments: “We are interested in Fair Trade branding and may join but, as things stand our coffee supplier based in Milan builds and maintains schools and hospitals in Central and South America where its farms are, and we feel our contribution to this gets to the essence of what fair trade is about.”
Breach is keen to emphasise that the company has embarked on a long term strategy to return value to shareholders. In the year ended March 2007 turnover will fall as franchising takes effect, and Breach expects net revenue will not improve in the year just ended but he and his colleagues are aiming to report a profit in the year ending March 2008, and to become net cash generative within a matter of months.
Breach concludes: “It takes time to turn a ship around, but Steve Bartlett is a driving force as CEO and we’re on the right path now, so it’s a case of hard work and being a little patient.”
