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I have been aware of CAKE ever since it floated about 2.5 years ago - despite the high falutin’ name, Readers probably know this better as the Patisserie Valerie Coffee and yummy Cake shops. It has always struck me as a strong Growth Story that really relies on the rollout of new Shops and it has impressive Management with Luke Johnson who did Pizza Express driving it. For ages it has just been too expensive for me on a Forward P/E up around the high 20s but recently it has been in a downtrend (funnily enough I have seen many IPOs do this - they start off very strong then after maybe a year or so they start to go off the boil, even though the Business probably hasn’t changed at all) and it is starting to look much better value - especially after a recent very strong Trading Update.
I don’t hold CAKE and I have too many Stocks anyway but I wanted to do a deeper look at them and I thought that writing a Blog would keep me off the streets and force me to really dig deep into what the story is here. Reading the recent Update on the morning it came out was what got me very interested again as they are clearly doing a lot of things right.
When CAKE first listed (back in May 2014 at a Placing Price of 170p and a Market Capitalisation of £170m) I had not heard of them and thought they were pretty much a London thing - then not long afterwards I was out in Henley on a lovely Summer day and we happened to trip over a Patisserie Valerie shop in the street up from the Bridge. However, it was late in the day and to be honest I wasn’t all that impressed. The shop seemed sort of old and tired (ok, to be fair it was in Henley and a lot of the shops are pretty old buildings and stuff) but the big problem was that they had almost sold out of Cakes - so the main ‘raison d’etre’ for the Brand was not really there to impress me. We had a couple of Cakes and they were very nice - maybe too creamy, too sweet and too big but that sort of suits the Obese times we live in !! It was really busy though to be fair.
Then many months later I stumbled over a much smaller Shop in Swindon in that Shopping Centre where the old Railway Works used to be (Swindon is my home town so I apologise for too much detail here !!) and was quite impressed. It really was very small but had a lovely Cake counter and lots of choice and a few Tables out in the thoroughfare - it was clean and modern and shiny and I came away with a much better opinion of the Consumer Offer.
Please note, for ease and speed I have copied many chunks of Text from the Company Website. This is easy to spot because it reads like a Marketing Brochure…..
These Risks are expanded in more detail further down the Blog and some other less important Risks are covered as well.
Patisserie Holdings plc is a leading UK branded café and casual dining group offering cakes, pastries, snacks, meals and hot and cold drinks from over 180 stores and Flour Power City Bakery in the UK.
It currently operates under five differentiated brands – Patisserie Valerie, Druckers – Vienna Patisserie, Philpotts, Baker & Spice and Flour Power City, offering broad customer appeal, flexibility and outstanding roll-out potential. The Patisserie Valerie and Druckers shops look very similar and share similar websites - the other businesses look more differentiated and I have put in brief explanations of each one below.
The Company operates a vertically integrated business model, with all products made in-house at seven bakeries and delivered fresh daily. Products are sold primarily through stores and also a growing online channel.
Philpotts looks more of a Sandwich-Café kind of place - it was established in 1985 in Chester. The staff hand prepare all of the food each day from individual sandwiches & salads to complete meeting and events catering options.
With locations throughout the UK (from a quick look they seem to be mostly Midlands and Northern based apart from a couple in Bristol), Philpotts are able to cater for meetings and events, morning noon & night, whether it be a breakfast meeting, lunch meeting or evening reception. They do delivery within a 10 mile radius of any Shops. Clicking through the options under ‘Our Food’ on the website, there is a wide choice of Sandwiches and Salad stuff and the Prices don’t look too bad at all. God I’m starving…..
Baker & Spice
Baker & Spice first opened the doors of their little bakery and food retail shop in Walton Street in 1995 and have stuck to the simple principle of making almost everything they sell fresh on a daily basis. They claim to offer an original selection of cakes, pastries, breads and cookies served in a unique atmosphere. There are now 5 shops - Belgravia, Brighton, Maida Vale, Chelsea and Selfridges (I‘m assuming this is a concession store inside Selfridges !!). The Cakes and stuff here look more ‘rustic’ and traditional British (or American maybe) - none of your Patisserie fancy cakes here !!
Flour Power City
Flour Power City is pretty similar to Baker & Spice - more rustic and traditional Bakery. It seems to have an ‘organic’ angle. Flour Power City specialise in a range of artisan-made English and European breads, many of which have been adapted from traditional farmhouse recipes.
They started out in 1999 in Hoxton and then 4 years later relocated to Lewisham. A team of more than 40 bakers and pastry chefs creates speciality organic breads, sourdoughs, pastries and cakes that are enjoyed by thousands of customers every week. They supply more than 80 Farmers Markets around London and the Home Counties. They claim to supply all the best coffee shops, delicatessens, speciality food retailers, and even in some of the top Michelin starred restaurants.
Additional Products at the Patisserie Shops
I notice on the Retail Website that they offer Function Rooms in the following places - Soho, Spitalfields, Nottingham, Reading, Edinburgh, York, Manchester, Bristol, Leeds, Peterborough, Kingston, Covent Garden, Gloucester, Sutton, Southend, Hove, Edgware Road, Norwich, Cheltenham, and York.
They also do a Wedding Cake service - I have never been involved in such things (dodged a few Bullets !!) but the prices look pretty reasonable to me and you can order online and then pick up from a Patisserie Valerie Shop.
Similar to the Wedding stuff, they do some called ‘Celebration Cakes’ which look multi-purpose for stuff like Birthdays, Christenings, Leaving School, Big Win on a Stock, etc. etc. - this time they can be collected or delivered. I love the slider where you can choose a Cake from 6” to 20” (obviously the 6” would be too small - I doubt The Donald ever has such a problem) and it updates the Prices. The cakes look wonderful - it’s like all the Cakes in the ‘Technical Challenge’ from every series of ‘Great British Bake-off’. You can customise these cakes yourself as well - that’s pretty impressive really.
You can also order boxes of Cake Slices (similar to the Cakes in the shops) and these can be delivered or collected.
On the website there is a Table Booking thing where you can select a Shop for Cream Tea or something. I think the Website is generally a bit average (the colours are well dull) but I clicked on the Windsor Shop (or “Restaurant” in their words) and it seems easy enough to book a Table.
One thing I do like is that whenever I Google their different Brands, they all come up straight away at the top of the listings.
The Group's executive management team, led by Luke Johnson (Executive Chairman), Paul May (Chief Executive Officer) and Chris Marsh (Finance Director), has overseen a period of consistent growth from eight stores in 2006 to more than 180 today. The first Patisserie Valerie café was opened on Frith Street in London’s Soho district in 1926 by Belgian-born Madame Valerie, whose vision was to introduce continental patisserie products to the UK. During the Second World War, the Frith Street premises were destroyed by bombing and Madame Valerie subsequently re-established a new Patisserie Valerie café nearby on Old Compton Street, where her legacy continues to this day.
Risk Capital Partners, the London-based private equity firm, co-founded in 2001 by Luke Johnson and Ben Redmond, backed the acquisition of Patisserie Valerie in 2006. At the time it had eight sites in Central London. The company subsequently acquired Druckers - Vienna Patisserie in 2007, Baker & Spice in 2009, Flour Power City Bakery in 2013 and Philpotts in 2014.
The Company Website can be found here:
The Retail-facing Website for Patisserie Valerie can be found here - make sure you have eaten before looking at this !!
Druckers Vienna Patisserie can be found here (note it‘s pretty much the same as the Patisserie Valerie one, which makes sense really, but just as ugly):
Philpotts is here:
Baker & Spice is here:
Flour Power City is here:
Maison Blanc rumours
There was a rumour kicking around back in mid January about CAKE tying up with Maison Blanc - looks a good fit if the price is right etc. but obviously adds in some Risk.
This is from the 2015 Annual Report:
“Increased prices of key commodities and operating costs - The Group spends considerable time tracking the commodity prices of a number of products namely coffee, dairy, fruit, packaging, cocoa and wheat items, an increase in which could erode the Group’s gross profit margin. Where possible we enter into supply agreements for certain periods of time depending upon the market. We do not commit to volumes but lengths of agreement which guarantees prices. This way the Group is able to reduce the risk to inflationary pressure.”
“Economic environment - In common with other restaurant businesses, the Group relies on continuing levels of disposable income within the UK market place and a decline in the UK economy would have an impact on turnover. However, due to the nature of our product and market position as an upmarket patisserie, having this unique position helps to mitigate the economic market place.”
In addition, I see the Risks as follows:
By far the largest part of the Group are the Patisserie shops of Patisserie Valerie and Druckers. I figure that these are in competition with a wide range of Coffee Outlets which we find in increasing numbers in Retail High Streets, Shopping Centres and the new larger Shopping Mall type places (Westfield, Bicester Outlet Village, that sort of thing).
I have had many discussions on Twitter about this whole Coffee Market thing and I find it all quite nuts really - the Major Chains seem to have Shops everywhere but are planning yet more. So I guess some more specialist ‘Café’ type places which offer fancy French style Cakes might be able to find some space to trade nicely (so far they seem to have but the big interest for me here is that I think CAKE has the potential to roll-out loads and loads of new Stores and this can drive growth).
Just off the top of my bonce I can think of the following names in the Coffee Shop space - Costa, Café Nero, Starbucks, Caffe Ritazza, and if we go down market a little (this could be very relevant if the UK does find Brexit causing an Economic Slowdown in the next couple of years), then Greggs even do Coffee in a bit way. There must be places in the UK where Coffee outlets are saturated - for instance just down the Road near me we have 2 Costa Coffees and there are probably only another 20 small Shops at the most - it is more a thoroughfare than a ‘High Street’ and surely that’s plenty of Coffee even for heavy caffeine users (apologies for some repetition there but it is an important point so I am leaving it in).
In addition there are others like Café Rouge that offer more of a ‘restaurant’ sort of feel but could easily take customers off Patisserie Valerie etc. I found this hunk of text in the 2015 Annual Report which goes precisely to this issue:
“The Group operates in a highly competitive market putting pressure on margin and turnover growth. However, we continuously strive to be positioned between restaurants and coffee shops and having this diversity in our offerings, all day dining, an online channel and bespoke cake facilities ensures we are safeguarded in terms of margins and turnover.”
As a defence (a ‘Moat’) I get the impression the Patisserie Shops are more up market and tend to be in more wealthy locations - I am sure they have a lot of appeal to the aspiring Middle Classes !! I suspect this kind of defence applies to the Bakers as well - they are very much Brands aimed at wealthier customers and are in ‘posh’ locations.
I get the impression these ‘Artisanal’ Bakers are gaining popularity but I don’t know if there are many Chains in this field. My suspicion is that many are smaller operations with perhaps just a few Bakeries at the most - it is very possible that this becomes a good Growth Driver for the Group in coming years.
I would guess the Philpotts Sandwich and Salads kind of business has a lot more competition than the other CAKE Brands and appears to be more ‘down market’ - by which I mean it is aimed lower than the other Brands which are more for the affluent middle classes. Indeed, even Ian Beale on Eastenders does this type of catering for the Weddings they have in the Square every other week. On that subject, my mates saw Ian Beale in a restaurant in Marlow the other day…..
Chris Marsh (no relation to Jodie Marsh from what I understand).
146 - 56 Sarehole Road (need to be careful with that spelling I can tell you !!)
NOMAD (Nominated Adviser) and Broker
88 Wood Street
5 Upper St Martin’s Lane
One London Wall
20 Colmore Circus
120 Edmund Street
Capita Asset Service
34 Beckenham Road
You can find the Annual Reports and all RNS announcements here - you need to click on the relevant year at the top:
Reading through these People and their Summaries it certainly looks like a team that has a lot of relevant experience and involvement in small listed businesses:
Luke Johnson - more information
The involvement of Luke Johnson here is one of the key factors that has provoked my interest in CAKE. With odd examples where things have not gone quite to plan, his overall business career seems to have had many successes and he is a rare example of an Entrepreneur who really can claim to have achieved good things over and over again. He writes a column in the Sunday Times, appears on various Business and Current Affairs programmes, has written several books, is former Chairman of Channel 4 Television and has many charitable interests. Blimey, I feel knackered just writing about what he does - where on earth does he get the time?
In addition to CAKE, his current Business involvements include:
Among his Charitable stuff, an obvious standout is his chairmanship of The Institute of Cancer Research one of the world’s leading cancer laboratories.
The following link is to a Website that is clearly a promotional showcase for Luke himself - worth a look with a particular focus on the businesses he is or has been involved with (oh, and the book page is worth a look - Howard Hughes book is particularly excellent):
I have totally struggled with this section. Apart from Luke Johnson’s stake, it is not easy to track down what the other Directors hold. Anyway, by accident whilst filling out the next small section on ‘Recent Director Dealing‘, I tripped over these numbers from 17th June 2015 (quite a while back). On this basis, please note these numbers may be inaccurate:
Recent Director Dealing
Back on 17th June 2015 (ok, hardly ’Recent’) there were some Share Sells by the Directors as per this link:
Pretty clear from this list that Luke Johnson has huge ‘skin in the game’:
This list comes from the Company Website and can be found here:
However, please note it is out of date. I have had a quick look through several ‘Holdings in Company’ RNSs and come up with the following changes (please note, this is not a definitive list, I have just looked through fast for a view of changes - suffice to say there are some Big Boys involved and Luke Johnson is clearly the biggest holder):
Right, that’s it for Part 1. The Deuxième partie should be out fairly soon (probably next week) and will contain Sections on:
OK, grab yourself a big piece and get Researching - for background music, stick on “Can I have another…..piece of Chocolate CAKE?……”
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