Bristol, 2002. Three friends open a tiny licensed café in an out of the way suburb following a £30,000 joint investment and a £20,000 bank loan. Its name is Lounge, and one of the main reasons for its inception is the fact that the trio – all in senior management positions at various Bristol restaurants – can’t find a decent bar to kick back in when they finish their shifts.
Hardly the most auspicious of starts, then, for a regional company that – just eight years later – turns over £11m a year and is grabbing attention across the UK for its unchecked success among its customer base, along with business practices that verge on the revolutionary.
Southville, west of central Bristol, is the site of the original Lounge. The 14 Lounges that followed are prefixed with a single word to stop the brand being perceived as a chain. Loungers is the name of the whole company, headed by managing director Alex Reilley, development director David Reid and operations director Jake Bishop.
As the brand started to expand – several more Lounges in Bristol, a unit in nearby Bath and sites as far afield as Cardiff, Plymouth and Birmingham – it soon became evident that the suburbs were largely untapped areas. In most large city suburbs you’ll find secondary retail parades with a mix of a few national retail brands and some independents, and this is Loungers’ bread and butter – it targets the areas outside city centres that most comparable operators ignore altogether.
Loungers focuses on nil-premium former retail units and applies for change of use. This means rental costs are extremely low: the mean rent across the group is 3.8 per cent of net turnover. The industry average is more like 10 per cent, often more.
An all-day approach
Food now accounts for 50 per cent of the group’s sales, but it wasn’t in the original Lounge’s business plan.
“We weren’t planning to serve food until we realised that the inaugural unit had already been fitted for a kitchen, including an extraction system,” recalls Reilley. “So we did breakfasts and burgers and a few nibbly bits. We just wanted to open a decent bar. If it hadn’t been shelled out for a kitchen I’m not sure I’d be sitting here now.”
Talk about serendipity. Loungers’ all-day menu of keenly priced and freshly cooked food was to become one of the most important elements of the business.
This all-day dining informality and flexibility is, in essence, the foundation for the brand’s success among its predominantly local customer base. The neighbourhood Lounge is an amenity, a venue for everything from a quick coffee right through to a meal out and drinks with friends; a Starbucks, local pub and casual restaurant all rolled into one.
Customers are served on a strictly first come, first served basis.
The menu revolves around freshly cooked, simple food. “It’s not rocket science, but it’s good, hearty accessible food. People like the irregularity of a Loungers burger, it shows there’s someone in the kitchen who knows how to cook,” says Reilley.
The group originally experimented with different food offers at different sites, but found that consistency was too hard to achieve. “We had no control. As we’ve grown as a business we’ve had to become more structured. The offer now has broad appeal so there is no need to tweak it for each site.”
Private equity and expansion
Loungers went through a lengthy – and eventually aborted – private equity process in 2008. “It started in May, when the main worry was food price inflation, and officially ended in November when the main concern was whether the banks had any money to lend anyone.”
When Reilley emerged from the deal the UK was officially in recession, but the bank was thankfully willing to lend some money for expansion. “We’ve always been built for recession. If you run a business for a decent amount of time you’re eventually going to go through it. Why leave yourself exposed and have to reposition your brand when the inevitable happens?”
Lots of sites on the market and an efficient operating and development model has enabled Loungers to expand quickly. The current aim is for 40 sites by the end of 2013. Location-wise, this should be achieved without going further north than Birmingham (where there are now two Loungers) and not venturing into London.
The pace of expansion is picking up – in the past 12 months the group has gone from 10 to 15 sites. Of the five that have opened three have been larger units so, while the portfolio has grown by only 50 per cent, revenue has increased by a staggering 85 per cent in less than a year, with current turnover in the region of £11m per annum.
To facilitate expansion, Reilley has invested a lot of money in the company’s operational structure. “We spent most of last year building the management infrastructure for an accelerated period of growth, it’s very difficult to apply a management structure retrospectively. But we’d never recruit anyone in head office that we’d have to sack in a recession.”
Bank debt is low. Fundamentally Loungers has expanded organically, save a £1.5m debt with RBS, a very comfortable level of debt for a company that now has total sales approaching £1m a month. The biggest challenge that Reilley, Reid and Bishop face is deciding how far they want to take their brand. The 40-site target is also the point where the trio will have to start thinking less entrepreneurially and become more corporate – this is a reality that Reilley isn’t altogether comfortable with.
“We talk about it a lot,” he explains. “We’re still trying to identify whether we want to make that leap. Or whether that’s the time to move on. We’ve been frugal in our approach. The three of us that own the business aren’t very materialistic, we don’t drive flash cars or buy expensive suits. We get a kick out of growing the business. People say we need to slow down and de-risk a bit, but at the moment we’re quite happy rolling the dice.”