Fool's Eye View

[ March 28, 2000 ]

Too Many Cooks...

By Maynard Paton (TMFMayn)

Carburton Street, London -- When I write about companies in the restaurant and pub sector, I always bang on about looking for those operators that comply with certain specific sector investment "rules". The full rules, as such, are in The Motley Fool's Industry Focus 2000, where a complete and in-depth analysis of this particular industry can be found. The publication also contains coverage of 13 other sectors, and plenty of great stock ideas too, all for the very reasonable price of £17.50.

So, just to give Foolish readers a taste for the restaurant industry, I'll lay out one of the key criteria that I always like to look for -- simplicity. Certainly, simplicity is probably a "must have" for most investments: the fact that you understand the business you are buying into. But for the restaurant and pub sector, with restaurants strongly emphasised here, simplicity is a must.

I base the "simple restaurant" mantra on the successful diners of years gone by. As I mentioned in a recent feature covering embryonic restaurateur BGR (LSE: BGR), whenever an investor considers the restaurant trade, all thoughts to turn to "the next McDonald's (NYSE: MCD)".

The key to McDonald's success was sticking to their knitting, and having just one dining "concept" -- hamburgers and fries. Keeping the menu limited, and thus simple, is good news for any restaurant operator. You create economies of scale through larger purchases of fewer ingredients, you're not left with unwanted stock in the freezer and the cooks have an easier time in the kitchens, leading to a consistent offering on the tables. Look at the success of PizzaExpress (LSE: PIZ), who have followed this golden rule in the "casual dining on pizza" sub-sector.

Anyway, one company that does not follow the "keep it simple, stupid" rule of restaurateurs is City Centre Restaurants (LSE: CTC), a company that dished up full year results this morning. In fact, City Centre is the antithesis of PizzaExpress. Where PizzaExpress have concentrated on just the one concept for the last 35 years, and are gingerly trying to establish another, City Centre have seven different types of restaurant chain on the go at the moment. And they're all are completely different restaurant formats. Under the City Centre umbrella at present are Caffe Uno (Italian cafes), Garfunkel's (general), Wok Wok (Oriental), Chiquito's (Mexican), Est Est Est (Italian), Frankie & Benny's (American) and Deep Pan Pizza (Pizza).

Having so many brands, management eventually dropped the ball in 1998. A poor performance by Deep Pan Pizza, which in turn lead to a costly aborted disposal, an expensive restructuring and rebranding exercise, and a continuing disposal of an American roadside dining concept, hindered profits the year before last. City Centre shares have collapsed from a 160p peak reached in 1998 to 55p today.

In fact, the company appears to be realising its "overflow of concepts" problem with the 1999 figures released today. The group comment: "We have made substantial progress in repositioning our business to provide a clear focus on our principal brands. The strategic decision... to focus on fewer brands has, in a short period of time, produced considerable benefits."

But the words "focus on fewer brands" has a hollow ring. Venues under the Rick Shaw name have been absorbed under the Wok Wok or Chiquito's name, and Nachos outlets have been consumed by the Est Est Est brand. But excluding the roadside diners, City Centre have seven brands left. And that's still too many. With the year "characterised by an abnormal amount of activity in restructuring and refurbishment", the company lost a total of 1,800 trading days though the temporary closure of restaurants.

With all the restaurant conversions and so forth, getting a grip on the financials is tricky. One important ratio is very vaguely commented upon: "Positive like-for-like sales and profit growth (excluding Deep Pan Pizza)" is one of the results "highlights". City Centre are keen to point out that Deep Pan Pizza had a 4.3% like-for-like sales gain in the first few months of 2000, but that has to be put into context of an approximate 6% decline last year. Without knowing the growing acceptance of each of the expanding brands through the like-for-like sales figures, an investor has to be very cautious.

With turnover rising 11% to £205m, pre-exceptional profits increasing 12% to £20.4m and City Centre, at 55p standing on just 7 times today's earnings per share, the company could tempt a few "value" diners. But with all the talk of brand focus, the company rounds off today's results release with this ominous statement. "We retain the flexibility of exploring other opportunities for growth so as to keep abreast of changes in the market place". Any more brands and profit-starved shareholders of City Centre could be enduring further bouts of indigestion.

Any feedback on this feature can be directed to the Fool's Eye View discussion board.

Related Links
• The Motley Fool Industry Focus 2000
• BGR Fish!es for success