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What I look for in a leisure and hospitality business
Rob Johnson is an investor in BGF’s Leeds office, with several local investments in successful leisure and hospitality businesses including Arc Inspirations, Yorkshire Wildlife Park and Coppergreen Leisure Resorts.
1. Strength of concept
This industry is full of business models based on short-term trends and crazes, often imported from overseas – trampoline parks, axe throwing, trendy exercise classes, regionally themed bars and restaurants. Many of them enjoy short-term success but ultimately stagnate as interest wanes over time, or excess supply comes into the market. We look to invest in strong concepts with proven longevity to ensure customers will keep coming back time and time again. How do I gauge whether a concept has staying power? I’ll try it myself. If it was fun for one night but I couldn’t see myself (or others) going again, I would question whether the business has a sustainable proposition.
It’s one thing to find one or two good sites and operate them well, it’s another to replicate that success at scale. A growing multi-site business needs to have appropriate team structures that allow decision making and responsibilities to be delegated. It also needs fit-for-purpose back-office systems and software, the ability to consistently select the right sites (which gets harder the further you move away from your heartland), and so on – the transition can be challenging. We tend to get involved with companies once they have gone past the “proof of concept” stage, having demonstrated they can operate multiple venues successfully.
The other side of the coin, when it comes to scale – how easy will the business be to scale from here? How many towns and cities is the business already in? How many more are left to go? How easy is it to find suitable units? How much competition is there and how many sites can the market support? Scalability is critical to demonstrating you have a high value opportunity and therefore maximising the price a buyer may be willing to pay for your business when the time comes to sell.
4. Short payback periods and a healthy return on capital
Time to get into the numbers. When a business is expanding, I want to see that each new site recoups its set-up costs within two to three years. If it takes much longer, I would question whether the business model is viable in the long term. Another way to measure the relative attractiveness of the investment opportunity is to compare a site’s set-up costs with its annual earnings to assess the return on capital. Depending on the specific sub-sector of the leisure and hospitality industry, I would typically expect good operators to be achieving a return on capital of 30-60%.
5. A well-invested core estate
Opening new sites is crucial and often the most exciting part of any roll-out. However, a common mistake is to get carried away with expansion at all costs and forget about what you already have. To stay relevant, even well-established sites need to be refreshed and upgraded from time to time. If a business is not continually investing in its existing estate and sales start to go backwards, then opening new sites simply becomes an expensive way of standing still.
6. Good data
It’s crucial to gather accurate insights about individual site performance and customers so you can easily identify and respond to any problems before the damage is done. The best operators will have embedded systems and reporting tools that allow management to view financial data and customer reviews in real time. Another benefit of having robust data at your fingertips is in helping to maximise site profitability. A data-rich business can ensure the right products are on offer at the right prices at the right times, with promotions targeted at filling capacity during quieter hours.
Which BGF investments are a good example of the kind of business you look for?
Arc Inspirations is a deal I recently completed where we provided £19 million of capital to support an accelerated roll-out plan. The business operates 18 high-quality bars in city centres and affluent market towns, such as the Manahatta in Birmingham (pictured). It is well-established and led by a highly experienced management team and ticks all the boxes above: a great concept with proven longevity (the company has been trading successfully for over 20 years); is already operating at scale; has plenty of room left for future growth; and is continually investing in existing sites to ensure the customer experience is consistently positive.
Looking ahead, are there any sectors that you are excited about investing in?
BGF is a generalist investor, so I am always looking at businesses across a diverse range of end sectors, but I’m particularly excited by companies that apply technology in education and healthcare settings. Within the broader consumer sector, I think there is a mixed near-term outlook depending on whether you’re providing products or experiences. Consumer product businesses boomed through the pandemic but we are seeing a shift in spending back to experiential retail and leisure – anything consumers can enjoy with others, from eating out to exercising, holidays, days out with the family. These are generally seeing a resurgence in demand while bigger ticket items or “deferrable spend” – think white goods, clothing, electronics etc. – appear to be getting pushed to the right.
A modified version of this article appeared in the Propel ‘Friday Opinion’ newsletter, published 13 May 2022.
Job title: Investor
How long at BGF: 6.5 years
Which office are you based in: Leeds
Work prior to BGF: Qualified as a chartered accountant at Deloitte
Interests/hobbies outside of work: CrossFit, barbecuing and looking after my dog, Elton, a Goldendoodle-Labradoodle cross – or Double Doodle to keep things simple.
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