This is a transcript of David Kuo's podcast with David Page, the chairman of Clapham House.
You can download this podcast here.
Editor's note: In our previous podcast with Peter Hargreaves, there was a competition to win a signed copy of Peter's latest book 'In For A Penny'. We asked "what does the 'K' in Peter K Hargreaves stand for?" The answer is 'Kendal'. The competition winner was John Crowther of Glasgow. Congratulations John -- the book's in the post!
David:
This is Money Talk, the weekly investment podcast from the Motley Fool. I'm David Kuo, and today, with my carving knife at the ready, and my chef's hat cocked on the side of my head, I'm delighted to welcome David Page, executive chairman of Clapham House (LSE: CPH), which owns Gourmet Burger Kitchen, Tootsies and The Real Greek. Welcome to the Motley Fool, David.
DavidP:
Hello.
David:
You and I happen to share the same name, don't we?
DavidP:
We do, yes, well we have the same first name.
David:
We have the same first name.
DavidP:
It means "beloved".
David:
I know it means "beloved", I only found that out the other day. Now I should mention, before we start this podcast, that Clapham House is in its closed period -- you have results out tomorrow, which means that there's a lot of sensitive information which we can't talk about.
DavidP:
That's right, yes.
David:
But we can talk about other things, and I want to know, before establishing Clapham House, you were the boss at PizzaExpress, but how did you start off in the restaurant business?
DavidP:
I was a primary school teacher, and while at college I washed dishes at a PizzaExpress, which was the eighth in the business, eighth in the chain, and it was the first franchise, and then I taught for a little bit, and the guy who employed me, way back in the '70s, asked me if I wanted to open his second franchise for him and with him, and offered me double the money I was earning as a teacher, so that wasn't very difficult, and then I followed the career path of a lot of people who worked for PizzaExpress in the early days, in that you worked as an employee for a number of years, manager of a restaurant, manager of a couple of restaurants, and then you saw that the franchisees were making quite a bit of money, so you thought, hmm, perhaps I should become a franchisee, which is what I did, I became a franchisee in 1981 in Chiswick with £6,000 of saved money, and I think a second mortgage, or a third mortgage, and then in the '80s myself and a few partners built up the largest franchise group.
David:
So how many in that group altogether?
DavidP:
At one point we were at 14.
David:
Good grief!
DavidP:
Mainly M4 and south, and mainly towns beginning with 'B', because that made it easier for us to look for sites. We did then go on to Croydon and Chiswick.
David:
You moved to 'C' then, did you?
DavidP:
We moved to C, yes. But we never really got beyond C, we started at B and then got Bromley, Beckenham, Basingstoke, Bath, Bristol.
David:
They're quite far apart, aren't they, all those places?
DavidP:
Well, they all began with B.
David:
You didn't look at Bangor then at all, did you?
DavidP:
No, I've never been to Bangor – is that a song? I've been to Blaenau Ffestiniog, that's a B, I've been there a few times.
David:
Now I read once that you were expelled from grammar school – is that right?
DavidP:
That's correct, yes.
David:
Why was that?
DavidP:
My friend lived next door, and it was a hot summer, and he had a swimming pool, so the temptation to walk a few hundred yards past the school on a hot day was enormous. The problem was that, from the top floor of the sixth form block, the masters could see us hanging around the pool with girls, smoking – not smoking girls! – well I don't know whether the girls might have been smoking, I don't know! So that irritated them, a lot.
David:
OK. Now, before you started at PizzaExpress, you were also a cartographer, weren't you?
DavidP:
Yes I was, yes.
David:
And how did that job go?
DavidP:
I was sacked.
David:
You were sacked?
DavidP:
It was the Civil Service, and what did they call it? – after a year you have to become established, that's right, so they took me in a little room, and said, "You really don't want to be established, do you?", and I said, "Well, not really, no", and that was the end of that.
David:
So do you believe, or do you think that people who eventually become entrepreneurs and businesspeople, have to have that sort of maverick streak about them? – the fact that they do rebel against establishments?
DavidP:
Or they're completely unemployable, so fate decrees that they can't really work for anybody else, so eventually they will have to work for themselves. Tim Martin springs to mind! I'm sure he'd agree, he wouldn't like to work for anybody else.
David:
So as far as the restaurant business is concerned …
DavidP:
Gordon Brown – he doesn't work for anybody else.
David:
No, but he's not a maverick, is he?
DavidP:
No, so, who knows?
David:
No, he's just a huge destroyer of wealth.
DavidP:
How can you say that? – I think he's a marvellous person.
David:
Do you?
DavidP:
Yeah.
David:
Honestly?
DavidP:
He's got hidden qualities.
David:
Yeah, except that they haven't been found yet.
DavidP:
But you know, people need patience, give him another term.
David:
I don't think the economy can stand another term of Gordon Brown! But anyway, can we just go back to the restaurant business? – what exactly makes a successful restaurant?
DavidP:
I'm not sure, because I have friends and employees who are first generation in this country, and then many times have said to me, "Why do people eat out? – they can cook it cheaper at home."
David:
But they can't cook – a lot of people no longer have the …
DavidP:
These people come from very good backgrounds, and their mother cooks at home, and they say, "Why won't people" - these are people who own restaurants, and sometimes it takes them a generation or two to work out why people are actually eating out.
David:
What is the answer?
DavidP:
I think English homes are really tedious and boring, so restaurants are a lot more fun, whereas perhaps say in Sri Lanka or China, the home environment, where a lot of people come round and eat and communally, is like a small restaurant anyway, whereas the stuffiness of western culture, having a family meal round the table, has died, and in my growing up days, it was a time for the parents to impose discipline on the children, made it even more unpopular.
David:
So do you believe that restaurants have a natural shelf life? – I mean, I remember the days of the Golden Egg, and things like Pizzaland and the Wimpey, the Spudulikes – do you believe that restaurants outlive their normal time, they just fade and die away, and then a new breed of restaurants start to crop up on the high streets?
DavidP:
Yeah, Philip Kaye, the founder of the Golden Egg, still owns a number of the restaurants that were the Golden Egg, but they're now something else, he's changed them, he's rebranded them sometimes two or three times.
David:
Philip Kaye's an interesting one, because you once called him, was it, "the father of the restaurant business" – the father of the restaurant trade? Is that correct?
DavidP:
Yeah, now the grandfather.
David:
The grandfather of the restaurant business!
DavidP:
He'll be ringing me up, if he hears this! Great-grandfather.
David:
But the thing is, he apart from being very well-established in the restaurant business, he's also spawned his two children, Adam and Samuel, and also Jonathan, and Jonathan runs Prezzo now, I mean do you have to almost be a Kaye in order to be successful in the restaurant trade?
DavidP:
Sites are everything, location is everything in restaurants, if you have a good concept and a good brand and a good price, you can actually fail if you choose the wrong locations. I mean, there's a recent brand that is very good, and they went from four to nine sites, and the sites, five to nine, were bad, and it would have brought down a public company, but because they're a private company, they sold off the bad sites and they retrenched, and they're back at four and doing very well again. And the Kayes sort of realised that property and site location is everything.
David:
But Philip Kaye's an interesting one, because I mean Philip Kaye now runs the Richoux Group. When you have a look at something like the Richoux Group, it's only worth around £4 million, and yet at the other end of the scale you have something like Whitbread, which is worth £1.4 billion – now, for an investor who's looking at the restaurant trade, how do they go about evaluating these types of businesses, and say which is the better investment? Would you go for the Whitbread, or would you go for Richoux which is run by somebody like Philip Kaye himself?
DavidP:
If you want to make lots of money, you never invest in large companies really, you'd invest for a dividend presumably, if you want to double or treble your worth, you would have to invest in smaller companies.
David:
But I remember somebody once saying that, if they could only invest in one restaurant group, the one that they would choose would be McDonald's, simply because it is the biggest, and therefore if you're buying into that, then you are buying into a very established business that will just carry on. I mean, McDonald's had a lot of trouble a little while back, and yet they've just reinvented themselves by turning into a huge salad bar.
DavidP:
Yes, that's right, they've had a terrible two or three years in 2003, 4, 5, 6, but the economy's gone with them, and they used that time to refresh their stores. PizzaExpress is a very good analogy as well in that we went from £50 million cash profit to about £43 I think, various events made our London restaurants minus 10% in 2001/2002, but then about ten days after it was taken private, like-for-likes started improving again, so the guys who bought it in, I can't remember – was it 2002, or 2003? – were either very brave, or they knew that like-for-likes would turn round in the second week that they bought it, so restaurants are exposed to the national economy, or if they're opening in London, they're exposed to the London economy. Going back to Philip Kaye, in one you're investing in an individual, but if you want to invest in Whitbread, you're investing in hopefully a pretty solid, or stolid, performance, won't be stellar.
David:
So which one would you go for? – would you go for something …
DavidP:
Well, you have to balance your portfolio, don't you, presumably?
David:
So why do so many restaurants fail then? – because if you have a look at the statistics, people who start a restaurant generally never go past the third year, because they just collapse – why is that?
DavidP:
The same with pub tenants, most people go to restaurants, most people go to pubs, and they look at the publican in the busy pub and the restaurateur having trouble serving hundreds of millions of customers, and think, "This is really easy – I could do this".
David:
And the margins are very healthy, aren't they?
DavidP:
Well, they usually don't know about margins, a lot of people don't know about margins versus turnover or cost.
David:
They must think, if I make a hamburger at home, it would only cost me, what – 50p?
DavidP:
Absolutely.
David:
And outside they're charging me £7 - £8 for a hamburger.
DavidP:
Outrageous! – I could make a fortune on that! And then they open and then they go bust, because they don't make any money!
David:
And why don't they make any money?
DavidP:
Because of all the costs involved in this country, I won't talk about Gordon Brown again, but there are enormous costs, add-on costs, apart from the cost of the food. Historically in this country, say 30 years ago, by rule of thumb, if you bought something for a pound, it usually costs the owner, pub or café owner, 28p.
David:
Right, that's four times, isn't it?
DavidP:
Yeah, in food cost, and also it would have cost them about 28p in labour to get it to you, so 56, and then there would be lots of other costs, like property costs, paper, light, heat and things like that, and so historically you were very lucky if you made 15p on that pound.
David:
Good grief!
DavidP:
But as a customer, you're thinking – as you've just said – "That Pizza cost 28p! – I'm being ripped off!", so very inexperienced people go and open restaurants on that basis, and presumably charge 56p for the pizza, because they're so naïve, and thinking they're doing the customer a really good favour, they have queues round the block, and then they go bust, because they haven't thought of all the other costs.
David:
You touched on cafes just a few minutes ago, now do you think that sometimes, here in Britain, that people tend to go for fads? – they have a look at say the coffee trade, they look at Starbucks and they think that's going very well, and then suddenly there's this plethora of coffee shops that open on the High Street. Now on Friday, Coffee Republic went into administration, I mean they called in the administrators because they said they couldn't make a go of it, so is that part of the danger here? – people see things and they think, "Oh, everybody's going for dim sum at the moment, so let's go and open a dim sum restaurant", without thinking?
DavidP:
But the margins are enormous on coffee, they're bigger than anything else.
David:
Right.
DavidP:
And what people have had to do over the last two or three years, although a couple of people have got a stranglehold on the market in the UK, eventually this market is developing in that people will want a bit more choice other than the preserved food that you get in the big chains, and so Villandry, for instance, has just opened in High Holborn, which is effectively offering the customer bigger choice when they go in these places, but the basis is the margin you get on the coffee and the tea, and they would like it if you always ordered a coffee and a tea, rather than one of those fruit juices and a cake. I mean at PizzaExpress, if somebody came in and had a margarita, a Coke and a coffee, we would be very very happy in terms of margin, and if somebody came in and had a Neptune, a glass of wine, and not have a coffee, we'd be very unhappy in terms of margin.
David:
In that case, I wouldn't be a very good customer, because I would actually go in and have the Neptune and ask for a glass of water.
DavidP:
Well that's because you're very posh and very mean!
David:
In fact, I would even ask for tap water!
DavidP:
Exactly, you are one of our really favourite customers!
David:
Being in the restaurant trade over the last 20 years or more, how have you seen the restaurant business …
DavidP:
30 years.
David:
… 30 years, yes – how have you actually seen the taste of the British consumer change over that 30 years?
DavidP:
Amazing.
David:
Have we become more sophisticated?
DavidP:
Yes, I remember in '76, this lady came in, and she'd been born in the building that we were occupying as PizzaExpress, so she came in and told us this, so we asked her to come for a meal with her friends, and they were sitting down, and after she'd got her pizza, she had the simplest pizza, she'd beckon me over and said, "I'm sorry to say this, but there's some grass on my pizza", so I said, "It's oregano", and she said, "Well, I don't know what it is, but I don't want grass on my pizza", so we cooked her another one without oregano, and most of the people who came in, of course, in the '70s, wanted chips on the side and ketchup.
David:
What – alongside the pizza?
DavidP:
Yeah.
David:
And did you give it to them?
DavidP:
No, we asked them to go somewhere else – McDonald's? Burger King? – and they did, they left us.
David:
So you don't always believe that the customer is always right? – if the customer wants chips with his pizza?
DavidP:
You can't start a new concept if you believe the customer's right, because otherwise the customer wouldn't know what's going on, would they? So you can't start new concepts or new foods if you believe the customer's always right.
David:
Yeah. So how is the recession at the moment affecting, do you think, restaurant businesses on the whole?
DavidP:
Well, McDonald's say that they're doing really well because they've rebranded the stores, they're doing really well because they're really cheap! – and it's somewhere you can go out the rain, or the heat, they have air conditioning too, they're very smart these days. But all the expensive restaurants are suffering really, it's just price point.
David:
So how are the restaurants going to turn this around? – I saw a report out today from Moneysupermarket, and it said that four out of ten people wouldn't eat in a restaurant unless they had some kind of voucher to go into the restaurant.
DavidP:
But this isn't voucher or discounting, it's deflation. The whole UK economy has been deflating for 18 months, you can now buy the shirt you're wearing for 40% …
David:
This is a Ralph Lauren.
DavidP:
I saw them being given away down North End Road market the other day, if you bought something else.
David:
No, but this is still a genuine Ralph Lauren.
DavidP:
I wouldn't know that, I'm sure it is, but you've been had. This is a serious point – there's deflation has been happening for 18 months, and will carry on happening for 18 months, more independents will go bust, more less secure finance people will go bust, more people who've borrowed a lot of money two or three years ago to pay into acquisitions will go bust. There's going to be a bigger clear out, and it happens every time there's a recession, people go bust quicker than they normally do, even through their own incompetence. And then when the recession ends, there'll be less people around, less traders around, and trade will pick up, which is what happened to us at PizzaExpress – we were very fortunate in that we had a really big recession from '89 to '93, and then it was like now, it felt like Armageddon, and come '93, when we floated, there were less competitors, and we could buy sites really cheaply.
David:
So how long do you think the recession will go on for, then?
DavidP:
Another couple of years.
David:
Two years? – some people are predicting an end to the recession maybe at the end of this year, but you don't think that's going to happen?
DavidP:
Well, that's what they were saying last year.
David:
Right, but going back to the point about these discount vouchers, I was reading about a company, it was called the Individual Restaurant Company, now they own brands such as Piccolino, now what they said was they refused adamantly to have discount vouchers, because they said it devalues the business.
DavidP:
Chez Gérard are the same, yeah.
David:
So who is right – who is going to survive the recession? – the one who maintains the price levels at a reasonably high status? – or the ones that are going to cut the prices and offer these discount vouchers to bring in the footfalls?
DavidP:
I think the people who are novices perhaps to restaurant operations – this has been going on in the States for 20 years, and we tend to follow the patterns that occur in the States. Those companies that don't discount may have their own reasons not to discount, in that they really do have to preserve various things for their covenant, and there's a lot of people who have put a lot of money, who are having to make quite difficult decisions about preserving their margins, who knows what their covenants are?
David:
Before we end this podcast, I have one final question, which is one of my pet subjects, and that is, tipping in restaurants – are you a fan of tipping in restaurants? – or are you one of those people who believes that I already pay my workers a decent wage, I don't really want the customers to give them a tip?
DavidP:
What's your opinion, before I say what mine is? – I don't want to have my head bitten off!
David:
You're not going to get your head bitten off! My feeling is that you shouldn't be paying the workers anyway, and they should all be working …
DavidP:
I agree, we shouldn't pay the workers anything! I agree, do you know you're the first bloke I've ever met who agrees with me – I don't think people should be paid at all, they should work for love.
David:
No, the thing is, the waiters in restaurants should be made to work for tips, so that the better the service they provide, the higher the level.
DavidP:
Yes, I completely agree, I bought my first house on tips, because I was a brilliant waiter. I didn't start being a brilliant waiter, but I soon learnt that if you did A, B, C, D, E, F, G, your tips would be enormous, and we have waiters currently who are making, well I can't say what they're making, but as I say I bought my first house after saving my tips for 18 months, that was a long time ago, houses didn't cost as much as they do now, but there are waiters who I know have earned hundreds and hundreds of pounds a week.
David:
Yeah, I mean if somebody put a sign up in a restaurant and said, "We do not pay our waiters at all", right, and they rely on your tips, I think the waiters would work a lot harder. You wouldn't get the surly waiter.
DavidP:
But that has happened over the years on the continent.
David:
And it's been around in America for …
DavidP:
Yeah, waiters actually buy their station, stations are auctioned at the beginning of a shift, but the restaurant doesn't pay the waiter anything, or waitress. Stations are auctioned, because the waiters know that when they're buying something, they're buying an asset for seven hours, and they can make a fortune.
David:
Because it also improves the back end of the restaurant itself, because it forces …
DavidP:
My father would completely disagree with you, because he's a socialist – he would say that it's for wages to be regulated by both the employer and the government. I'm afraid to say I disagree with him and I agree with you, in that if you want good service, like everything, you have to pay for it, and our business is, we don't interfere with the tips at all, it's entirely between the customer and the waiter, and that's how it should be, and we pay them the minimum wage or above if they've had long service. I can't remember, in my day, we either used to live on our wages and save or tips or vice-versa, I can't remember which one it was. I think we saved our wages, that's right, we lived on our tips, and paid our mortgage and everything, and we saved every penny of our wages.
David:
Should we go back to that?
DavidP:
Lots of people are doing it now.
David:
And that should be the way it is. Before I end this podcast, I like to sort of tap your brain and ask you, what do you think is going to be the next big thing in the restaurant trade? We've seen Thai food come and, in some cases, go; we've seen Indian food almost to saturation point; Chinese food – what do you think is going to be the next big thing as far as the restaurant business is concerned?
DavidP:
Well, it's got to have theatre, you've got to be able to stay in there for half an hour and not spend more than £10 a head, and the food's got to be good, obviously.
David:
But that's loss making as far as the restaurant is concerned?
DavidP:
Well no, it's not, I know a few concepts at the moment where they're between £4 and £6 a head plus a drink, and they will grow very quickly, and they are, as you say, they're in not fish and chips, they're in food from around the world, from various countries, but they're prepared with theatre, the food's prepared with theatre, the food's great quality, they've got the service style right, and they've got all the costs right, and they operate out of smaller units so they keep the property costs, they're using every square foot of the place all the time.
David:
Almost sounds like sushi or teppanyaki, does it?
DavidP:
Well, it's prepared as you order, so it's lovely and fresh, and it doesn't really matter – almost every country around the world has got a good cuisine, and if you present it well, and you get your costs right, it will be a success. Who would suggest that 20 years ago you would have some Namibian chicken peri-peri sauce, that only sold chicken, and it would be successful?
David:
And it's called Nando's.
DavidP:
People would have laughed, and it's the most successful business in the UK in the last 15, 20 years.
David:
Is it because people just want to try new tastes and new flavours?
DavidP:
Well, talking about Nando's, spicy, delicious chicken – they say, ha ha (I've had it – it's lovely), but the price point, nicely decorated, great price point, family meal pricing, as well as eating on your own, so it's got everything, it's got white meat, so it's not threatening, and other things will come up that are similar.
David:
Yeah, well thank you very much for coming in today, David. Now, you may not know this, but I end each podcast with a quote, and today's quote comes from Alfred E Newman, OK? – tell me what you think about this quote. He says, "We are living in a world today where lemonade is made from artificial flavours and furniture polish is made from real lemons" – I'm glad to hear that The Real Greek actually still uses real food and the Gourmet Burger kitchen serves one of the most delicious burgers I've ever eaten, and Tootsies is very good also. So I wish you every success during this recession, I'm sure you'll ride out the recession without any problems at all, but it is going to be a difficult time for everybody.
DavidP:
It is, yeah.
David:
So, thank you very much for coming in today, David.
DavidP:
Thank you.
David:
Now, if you have a comment about today's show, you can post it on the Money Talk blog, which you can find at fool.co.uk/podcast, and if you have a suggestion about future topics, you can email me here at moneytalk@fool.co.uk. Have a great week, and bon appetit!
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