Rochester, Kent -- On Wednesday, 8th November, I met David Page, the Chairman of restaurant chain PizzaExpress(LSE: PIZ) and Glen Tomlinson, the company's Finance Director. After coming to the stock market in 1993 through a reverse takeover, long-term shareholders have since been amply rewarded as the group subsequently expanded its dining format throughout the UK. But don't think that, with over 250 restaurants in the UK, the company has in any way matured. There's still plenty of growth to come and, combined with a reasonable valuation, the company exhibits considerable investment merit.
In the beginning...
PizzaExpress itself was founded in 1965 by Peter Boizot, a man who Page described as of "high principle, with European ideals and who resisted all attempts to put coleslaw into baked potatoes". Essentially, that description encapsulated the early success of the company.
Being "keen on the excellence of the product" and the introduction of a greater service quality, both experienced at length by Boizot on the Continent, was a then radical approach to operating restaurants in the UK. On the service issue, Boizot's method was one of combining a naturally enthusiastic Italian quality with a directly incentivised American model. In stark contrast, Page remarked that in 1965, typical UK service was "Fawlty Towers stuff".
Alongside a differentiated offering, the dining improvements set PizzaExpress far apart from the rest of the sector. According to Page, it was all the foundation for "twenty-four years of market dominance in the mid-market [restaurant sector]", the group's dining format establishing itself in the hitherto unexplored casual dining middle ground. "There were no other similar corporate businesses until 1989, when Café Rouge started. There was either expensive foreign dining or cheap and cheerful cafes. PizzaExpress filled the gap." Page recounted.
Good management
But expanding from just a handful of restaurants required more than just good food and good service. There are "various management skills you have to develop" informed Page, adding "you, your partner and a manager can probably run four or five restaurants. But as soon as you get beyond what you can physically cope with in terms of individual presence, you need proper management and proper incentives."
Boizot started to franchise and it was, according to Page, "a really good way of going past six pizza restaurants". And with the franchisees putting up their own money to run the outlets, the system became "one way of making sure people were motivated on service, quality and control of cash". It's worth noting that Page himself was PizzaExpress' largest franchisee, after having worked his way up from washing the dishes during his student days. Page joined the board of PizzaExpress when his franchise operation merged with the company in 1993.
Whilst PizzaExpress has thrived from the continued attention paid to the quality of the food and service, just how much of a factor is pricing to the company? In terms of importance, Page put the affordability issue behind food but before service. Page also indicated that his clientele was quite sensitive to any upward movements in pricing: "People who follow the company, especially in the City, think we could put up our prices by 10% and nobody would notice. They are completely wrong."
Tomlinson also noted that the company's diners tended to vote with their feet: "The feature about pricing is that only a very small percentage of people will complain. By far the majority, 90%-plus, will stop coming. And by the time you've noticed that, it's too late."
UK Pizza
PizzaExpress currently has over 250 restaurants in the UK and Ireland and the company declared at its latest annual results that there was room "for at least 450". Page looked back at recent history to dismiss any suggestion that the new restaurants would not live up to the existing estate: "People have said that we've opened in all of the good sites already. But the top five restaurants (in the group) have all opened in the last four years." Tomlinson agreed: "The restaurants opened in the last fiscal year averaged £500,000 [turnover]. Three years ago, the figure was £400,000".
Site availability appeared not be a problem either. Page pointed to a number of pub operators, fellow restaurateurs and struggling retailers, all of whom had property on the market, to highlight the floorspace opportunities that were available: "There will be no pressure for tertiary and secondary retail sites for the foreseeable future. Basically because traders are having a hard time," assured Page.
In terms of the opening schedule, thirty new pizza restaurants are expected to open in the UK and Ireland in this current financial year. Although Page wouldn't be drawn on any rollout numbers beyond that, he did address one concern. That concern is that as the overall estate increases, so the number of additional restaurants gradually has less and less impact on overall profits. Page revealed that the company hadn't really optimised its profit potential in the past, but had recently changed the financial profile of any new outlet:
"What we've concentrated on over the last eighteen months is opening the right restaurants, that will perhaps contribute quicker over a shorter timespan. We always used to do half immediate contributors, half slow burners that might take three or four years (to contribute). It's the quality of the openings, not the number that will have an effect on profits. We don't want to get fixated about numbers. In fact, new restaurants are peripheral for 18 months. If we stopped opening them, margins would zoom upwards because they depress margins massively."
Destroy the opposition
Although there appears to be no trouble in opening additional sites, 1999 saw the company's like-for-like sales growth slow dramatically. The latest annual statement showed that current like-for-like sales growth was now back on track and Page explained the actions taken to address the earlier decline:
"Our like-for-likes are now 10% because twelve or eighteen months ago, we were having mild hysterics as our like-for-like sales were just 1%. There was a big oversupply eighteen months ago, when [competing] units hitting the High Street reached their peak. We couldn't work out whether it was their efficiency, our inefficiency, or just a sheer weight of numbers. We couldn't wait to find out. We had to do something about it."
One initiative was a change to the menu, "a fairly major revamp" according to Tomlinson. But this "massive innovation" has to be put into perspective -- only a handful of new dishes were introduced, with no new kitchen hardware needed and only a minimal number of additional ingredients. Given the recent change, there doesn't appear to be too much of a hurry for further enhancements. Tomlinson implied that the company, as it had done traditionally, would probably keep to a menu that proved to be successful. "If it ain't broke, don't fix it," he remarked.
As well as the menu change, a lot of the management's focus had been directed at rival operators. Page spoke frankly about his attempts to "destroy the opposition":
"We froze prices for eighteen months... to put the squeeze on our competitors. We put the wages up by quite a lot. This, of course, puts pressure on competitors, because we get the best staff. The only way we could do it [improve like-for-like sales growth] was by working on the platforms of our business and trying to destroy the opposition. Because it is a war of attrition. Business is warfare. Not only do you have to make your business more efficient, but half of your life must be spent making life very difficult for other operators."
Page neatly summed up the brutal strategy: "Know your enemy, kick him to death and all of the customers will come to you."
And very significantly, Page put into context the recent 10% like-for-like sales growth performance that has resulted from these actions: "It's the highest underlying rate we've ever had since flotation, because we've had the improvements of the [acquired] franchisees which have been really distorting [in the past]."
In Part 2: David Page discusses Café Pasta, the possibility of acquisitions, and PizzaExpress's plans for international growth.
