At the table with... Luke Johnson

28th September 2011, 3:55pm

Serial investor Luke Johnson made his name in the 90s, growing PizzaExpress from 12 restaurants to over 250 and taking the share price from 40p to a staggering 900p. Roll forward 12 years and he’s the chairman of Risk Capital Partners, a company providing financial support and guidance to a real mix of entrepreneurs. Luke seems to enjoy his jack of-all-trades approach to investment but it’s obvious that the restaurant industry is where he feels most comfortable and grounded. Clare Riley went to meet the man once described as “tough as nails with a reputation to match”

You originally started out studying medicine – what made you interested in business?
I was having a series of rather riotous parties at university with a friend of mine called Hugh Osmond. The gentleman in charge of discipline at my college in Oxford said I'd be sent down if we continued holding these affairs. So we then came up with the idea of switching it to a venue like a nightclub. Hugh came up with the idea of charging on the door and suddenly our parties became a business and really it became a success from the first night. We were running three nights a week in certain places while I was an undergraduate and I think it gave me a taste for business, starting something up and of course the excitement of the hospitality industry. I quickly realised that as I got older drinks-led businesses are probably more suited to younger people and I then got involved in various different small independent restaurants through my 20s and the turning point came when I took control of PizzaExpress in 1992/93.

How would you describe your management style?
These days I'm definitely considered very hands-off. I'm essentially a non-executive to a fair degree in most of the restaurant businesses I'm involved in. I provide capital, experience and connections but really I work alongside the chief executive or managing director and their team who work full-time exclusively engaged with one business building it. What I do is provide interim funding, advice, counselling, stewardship and attempt to add value where I can. Obviously I get quite involved with financial issues so banking, other forms of funding, leasing etc. I guess having spent 20 odd years in the restaurant business across quite a different range of styles and brands, you get a feel for what margins should be. And of course I've come across quite a lot of different situations which recur because to a degree, there's nothing new under the sun. Having been involved in  the openings of hundreds of restaurants in the UK, you build up a feel for what's right and what isn't such a good idea.

The list of businesses you've invested in is certainly diverse. Just a few are: restaurants, dentistry, car bodywork repairs, greyhound racing tracks, fresh fish and parcel delivery. How do you know how to run a business in all these different sectors?
Well you don't necessarily. You have to hire a partner with full-time management who have domain knowledge i.e. they are experts. Some areas I know a lot more than others. So some of the aspects of GRA (greyhound track owner) for example are about food and drink. But in some of the businesses, I'm not going to tell my partners who their customers should be or what the specifications of their products should be or recommend a capital expenditure budget. The one industry where I do feel I have a fair degree of experience, knowledge and a track record, is restaurants. And so there, even though I might not be full-time in the business, I would hope I have more input. If it's unnecessary then that's fine. I'm not looking for a job so to speak. I just hope to contribute where it's useful.

You seem to derive enjoyment from still being involved in restaurants.
Well yes of course. I mean we're all looking for a role and a purpose in life. And if there's a contribution I can make such as finding a site or negotiating with the landlord then I will. I had lunch today with a landlord for a perspective site that we're taking for one of the groups because he wanted a bit of reassurance and I think I've given him that. That's a typical role that I play. That's where you can help make a difference. What you have to do, is keep the people who's full-time job it is motivated, so that they have a sense of proprietorship. It's not my job to go round picking holes. I will give them feedback according to what experience I have and if I think things aren't right. I only want to partner with good people who are essentially entrepreneurs in their own right and know what they're doing.

What do you think is the key to making money?
That's a very big question with a thousand different answers. The simple one is, give your customers a great time, at a price that enables you to make a margin. Clearly it's a lot more complicated than that. It's about investing wisely, recruiting partners and managers who know what they're doing. Getting the property element is right. That's very important. It's obviously about outstanding service and hospitality. It's about engaging with customers and having the right food and drink at the right price points. You have to ensure that customers come back and that there's loyalty to drive repeat business. It's about spending sensible amounts of money on openings. Your openings cost must be realistic in terms of what profit you can generate. Ultimately, it may or may not be about selling the company for capital gain. It's about trying to create enduring classics rather than getting carried away with some flash in the pan, trendy new concept that may not have much of a life. For me it's about serving the mainstream. I'm not interested in the one-off business. Complicated fine dining, for example, I've done with The Ivy and The Caprice and they can be wonderful but it's harder to grow that kind of business and there's a much more limited market. I like servicing the mid-market best. They've got spending power but it's a national potential rather than a limited esoteric pocket. I'm not a food snob.

Obviously you're most well-known in our sector for your involvement with PizzaExpress? How do you reflect on that time?
Well, it was a while ago and one is never allowed to forget it. But, you know, it was great fun. I still keep in touch with some of the guys from there. I certainly learnt a lot and of course I made a little bit of money. I think it helped build my reputation and the experience was well worthwhile from my perspective. I think it was a very formative period in my career and it taught me that the restaurant and hospitality industry can be really enjoyable as well as very profitable. It's a great combination. Obviously, the restaurant industry faces its challenges now with consumer spending and food inflation, but I still think there's potential. It's probably tougher than in the early 1990s. But on the other hand, the market is bigger and people go out to eat more now. They're prepared to spend more money than they were so there's compensations.

Was PizzaExpress the making of you?
Perhaps, yes. It was certainly the transformation of me at the age of 30 when I had an overdraft to suddenly be jointly in charge of this iconic business that had fantastic potential. Opening 150-odd restaurants, gave me huge confidence and experience that enabled me to get involved with Strada, Giraffe and now Patisserie Valerie. I think the credibility was invaluable.

Did you have a gut instinct for how huge PizzaExpress would become?
Yes I think one did. We knew that it was a great opportunity with an outstanding offering. There were so many clever aspects to PizzaExpress, that certainly during the early 90s, made it the only gain in town in that segment. Now obviously there are other, what I would regard, better operators like Strada and Rocket who offer a better product. And I happen to think that PizzaExpress is going to have to up its game because in my opinion I don't think it's offering great value. Unless you've got one of their hundreds of millions of vouchers that they seem to spray everywhere. But at the time, it was special. It's too big now and that's a shame. In that period when we were trying to buy PizzaExpress and we took control of it and then started to roll it out, everything came together. We had a great team of people, a brilliant formula that was rather unexploited, and frankly we were pretty lucky because the recession had just hit. We negotiated in the second half of 1992 to buy it and by 1993 the recession was over. Much more clearly than this time. This recession has seen a sluggish recovery. In 1993 it was dogs out the traps and there was a really sharp upturn in demand, which was terrific and PizzaExpress was really well poised to take advantage of that.

How has the industry changed over the years?
I think there are plenty of bad operators out there still offering poor service and inadequate meals but generally speaking there's a lot more choice and the quality is higher. It's ferociously more competitive and it's not as easy as it was. People are much more discerning and sophisticated about eating out than they were. They are fussier and you have to deal with that. In the internet age, people are much more able to complain and highlight problems so you've got to work harder to get it right.

What's your opinion of social media and review websites as an operator?
They are important. But I think what's more important is that you try and give every single customer that comes in a great time. The truth is that, like most businesses, restaurants are a repeat business and if you give them a poor experience they won't come back. They may even repeat that online, which might damage you further. But actually, even if no one ever went online rating your restaurant, you'd still grow over time if you gave your customers a terrifi c time. Clearly through twitter and Facebook you can grow faster, but only if you also use traditional marketing methods of various sorts to communicate and build relationships with your regulars.

What kind of impact has the internet had on our industry?
I think the great thing about eating out and the hospitality industry is that you can't eat out online. Normal retail such as furniture, clothing, and groceries you can and so this is the challenge facing hundreds of retailers with thousands of shops. As business migrates to the digital universe, what are they going to do with all that real estate? For the restaurant industry we're an experiential industry. People go out to socialise and to try new things in person. That's really important. I think we are pretty well-protected from the internet and I'll go so far to say that actually we can take advantage of it to market and to recruit. That's when it's helpful. Admittedly, you can also get into these discounting wars but that's not because of the internet. You could do the same in newspapers.

There's been a lot of heavy discounting in the restaurant sector in terms of 2for1 vouchering. What do you make of it all and is it a strategy you would employ?
Interestingly - and I won't name names – the company I'm involved with which is doing the best, doesn't do discounting ever. I think if you can avoid it then that's terrifi c. I think if you use it you have to be very discerning. If you get your customers addicted to discounting, you end up with an overpriced menu that everyone is getting at a huge saving. You either have people that aren't paying enough or people that are paying too much. That's just terrible.

What does that do to customer loyalty?
It's awful. You end up with hit and run customers. On some of these new marketing sites such as Groupon where you do a deal with them, you offer deep discounts and you serve a lot of customers who, frankly, you're making very little money from, and they don't come back. They're there because it's cheap. I think you're de-valuing your offering and you simply look like busy fools. They are other ways to market, promote and talk to the world about what you're offering. I think discounting is simple to do and it's the obvious thing to do but that doesn't necessarily make it the best thing to do. You may well have a full restaurant of discount customers but your regulars can't get a look in and won't come back. Your regulars would be paying full price and so discounting is just bad business. When we first took control of PizzaExpress in the 90s, Deep Pan Pizza and Pizzaland were both big enough but by the end of the 90s they were out of business. I think that was largely because of a discounting war. Pizzas are a high margin product so there's great temptation to discount. It's a slippery slope.

Do you think the government does enough to help British businesses?
No. And I think one of the main things I'd like to see is a cut in the rate of VAT for the restaurant trade. I'd like to see it at 10%. It's a lower rate than we have in every other European country, except Denmark I think. Many of them it's 10% or less. It's given a tremendous boost to the industry in France and they've just cut it in Ireland. We're an important contributor to the tourist market and we're a huge employer. We're already paying enormous amounts of tax in areas such as alcohol and National Insurance. I think we deserve a break. The fact is we compete against the supermarkets who pay no VAT on any of their food.  I think it's unfair competition from the likes of Tesco. We should be helped.

You've always been very critical of unnecessary government legislation. How restrictive is red tape in this country?
For companies who can't afford a HR department, this is a real problem area, especially in a labour-intensive business such as restaurants. We are much more vulnerable to getting claims that are unreasonable and I think the system in this country is flawed to say the least. I am very concerned, frankly, by the gargantuan Companies Act that has been brought in during the last year or two. It was the largest piece of legislation ever passed in British parliament and I think it ludicrously overburdens businesses. The last government was very bad for business. They got away with placing more and more difficulties in front of people who wanted to start a company. Now, we are facing the consequences and I worry whether or not the MPs are even listening.

What do you see as the biggest challenges facing our sector?
Weak consumer spending is tough but I think a huge challenge is getting landlords to be realistic. Because there is a restricted supply of A3 and A4 sites and we're not suffering in the way of retail, landlords are still making the most of pretty buoyant demand for restaurant sites. I remember 10 to 15 years ago, a successful restaurant would hope to make three or four times as much profit out of a branch as they paid in rent. These days very often it's the same and that to me is completely wrong because a restaurant is hiring people, paying national insurance etc and the landlord is just collecting a quarterly rent. That's inappropriate. Rents are too high. I hope that resolves itself over time. As many more other retailers shut down, hopefully some of that space, if the planners are sensible, will be devoted to A3 and then there will be a lot more capacity and demand will not increase that much from operators. In which case rents will have to fall.

Do you enjoy eating out and if so do you have any favourite haunts?
Yes I do. I like to try new places because obviously I want to see what the cutting edge is. I'm not, if the truth be told, a Michelin-starred, white tablecloth kind of guy. I'm much more informal, simple and casual. I quite like grazing restaurants and I'm very keen on Lebanese food and tapas. I like popular places because if they're working, then I want to know why. I like places with great service, and if the staff are charming you know it's a well-run restaurant.

Who do you admire either in the industry or wider business world?
Certainly in the industry I admire the people I work with particularly. Russel Joffe at Giraffe is one of the best restaurateurs I have ever worked with. I'm also enjoying working with James Horler at 3Sixty Restaurants and Paul May at Patisserie Valerie, who is one of the best managers I've ever worked with. I like people who I've worked with in the past such as David Page. He's great fun. Who else do I really rate? I think the Kaye family are very clever. They've probably made more money out of the restaurant industry than anyone else in the last few decades. And although their restaurants aren't necessarily places I would eat in, they tick the box for a lot of people. I think they're a pretty ingenious group and it's remarkable. What they don't do is invent new things. They do great copies for the most part and they're not trying to be experimental. But they're very good on the property side. In terms of restaurateurs, it's hard not to respect what Jamie Oliver has been achieving in the last couple of years especially with his Jamie's Italian. How much of that is him or his team I don't know but he is the principle owner of the brand and all credit to him for finding the right people. He's a clever guy. I still think we have a lot of very good high-end restaurateurs in this country like Gordon Ramsay and Heston Blumenthal. They are great showmen and the idea abroad that 25 years ago we would have chefs on TV, and having cookery books published all over the world as bestsellers, is inconceivable.

When you look back on your career what do you see as your proudest achievements?
I think I was very proud of how, as a team, we created Strada from scratch and made it a big success. I've been very, very pleased with what we've achieved with Patisserie Valerie. We've taken it from six branches and now across the group, although they're not all branded Patisserie Valerie, we have 75. The team who run that business with me have done a fantastic job. I guess I'm always most excited by what I'm doing now. I'm the guy who lives for today and the future rather than gloating about the past. I am very proud about what happened at PizzaExpress, but it was a long time ago. I'm focusing on the here and now.

*Luke Johnson's new book, 'Start it up: Why running your own business is easier than you think', is now available to order from all good bookshops.