Company description: Premium bars operator
Nightcap is newly established to take advantage of significant changes taking place in the premium bars segment and more generally in UK hospitality. Management is confident that it can seize an exceptional opportunity to acquire and grow ‘drinks-led’ hospitality concepts focused on the social experience of consumers. As its first step in implementing its strategy Nightcap will acquire LCC.
‘Behind the iconic red LCC door is a light beckoning you down to the party below! Here’s our bar inspired by our appreciation of trendy tattoo parlours and influenced by our love of rum. Sip delicious award-winning cocktails among walls adorned with colourful contemporary artwork & shelves decked in all the eclectic rum antiques! This basement bar is an after work, hair-down, ties-off celebration of consequence-free drinking for an “up for it” crowd. The soundtrack of your youth echoes loudly through the speaker, so don’t be surprised to find yourself singing along!’
The LCC website introduction to its bar in Shaftesbury Avenue, which opened in 2012, epitomises the experiential destination-led offering that Nightcap is targeting. It is the antithesis of mass-produced hospitality with its emphasis on price as favoured by the likes of Revolution Bars and Wetherspoons, and is instead in tune with a shift in consumer taste towards a more discerning, personalised proposition. Indeed, each of LCC’s 10 bars, even in relatively close proximity (seven are in central London), is styled individually, multiplying the opportunity for social experience and interaction sought by its focus market, (mainly female) millennials.
However, a common theme is an intimate, basement location (capacity of up to c 120) with no outside distraction, ie daylight, to encourage dwell time. While peak trading is from 7pm to 10pm, the challenge, evidently addressed by LCC, is to retain the guest who would otherwise move on to a night club (in normal conditions its venues are open broadly until 2am). Happy Hour of 4pm to 7pm with 2–4–1 cocktails for £12 compounds this goal, as does an all-day menu, which drives efficiencies.
The experiential offering and branding are expanded through masterclass courses (£40 per person) on signature company cocktails with the provision of an LCC certificate and a kitchen cocktails book (quarantinis) and ‘LCC’ radio to allow the re-creation at home of the company’s experience.
The growing significance of branding, for example in terms of drinks and music, was recognised early by LCC’s co-founder and creative director, JJ Goodman, who is credited with revolutionising London’s cocktail scene over the past decade or more. Regarded as one of the leading mixologists and bartenders (a former world champion, no less), importantly, he remains at the heart of LCC under Nightcap as LCC’s Head Bartender.
Exhibit 1: Nightcap – overview
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Nightcap is confident that LCC’s proven 10-year record across London and, since 2018, provincially (Bristol) and the simplicity of its model (small, low-profile sites) should allow rapid and efficient expansion. With an average site cost of £339,000 and having consistently achieved bumper returns on investment (75% at site EBITDA level after three years), the company’s medium-term aim of 40 outlets in major UK cities looks reasonable. Thereafter, up to 120 LCC sites may be on the cards.
Notwithstanding execution risk, the opportunity for expansion appears unusually favourable, ironically as a consequence of the longstanding severity of trading conditions, which were compounded by the advent of COVID-19. Structural difficulties had long bedevilled UK hospitality as a result of excess capacity, the frequency of ‘me too’ product, rising costs and narrow margins. Economic and political uncertainty following the result of the EU referendum in 2016 only made matters worse as the erosion of consumer confidence led to an increase in vacant retail space being rented out to restaurant and bar operators on historically cheap debt finance. Stagnation in sales and inflationary pressures (notably, business rates, the National Living Wage and food imports thanks to sterling weakness) have proved an especially sorry mix for restaurant groups, which were already highly indebted. High-profile chains entering administration or credit agreements in 2018 and 2019 included Jamie’s Italian, Carluccio’s, Gaucho and Gourmet Burger Kitchen.
Happily for a well-funded operator such as Nightcap with cash and tradeable equity, this sorry tale appears to have led to a rather more benign environment which its management believes is likely to continue for a number of years:
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Enhanced availability of sites: As a result of the aforementioned pressures and landlords’ wish to ensure occupancy, the aggressive renegotiation of the terms of existing leases has often yielded material rent reductions. Also, even if LCC is not considering turnover rents, it is widely expected that the performance element of rent, ie linked to tenant operator turnover, will increase, thereby reducing base rents. Overall, in the longer term this could well empower tenants, with potential one-way tenant breaks and downward rent reviews.
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Reduction in competition: Market consensus of 20–30% fewer hospitality businesses as a consequence of the economic fallout necessarily works in favour of survivors. In any case there is at present no direct peer (basement bars) for LCC in management’s view and existing operators are likely to be preoccupied with repositioning their estate rather than expanding.
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Availability of talented staff: The prospect of a ready supply of well-qualified people from closed businesses should be of particular benefit to LCC as it majors on guest service.
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Shift in consumer habits: Away from night clubs (11% fewer venues in 2019, per Alix Partners) to party bars.
Notwithstanding continued uncertainty about the timing of a return to trading normality, the promising news of the development of vaccines should accelerate the reopening of UK hospitality and in particular, LCC’s intended rollout.
Expansion aside, organic growth prospects for LCC appear very positive in view of the popularity of its core ingredient. Cocktails have long been the star of the drinks on-trade with the industry association CGA reporting last year that cocktails ‘continue to go from strength to strength’ and specifically up 6% y-o-y in Q120. According to Diageo, in 2019 spirits were growing ahead of beer and wine, accounting for almost one in three of total alcohol market serves.
Cocktails also enjoy:
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Strong margins: Consumers pay up for the theatre created by the bartenders who prepare beautiful cocktails, made with a few ingredients, fancy eclectic glassware and garnishes to finish. LCC’s most popular cocktails are priced between £9 and £12.
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Broad appeal: Popular with the increasingly discerning millennial consumer as well as the novice, for whom presentation and taste may alone suffice (notwithstanding the demonstrable flair and expertise of LCC bartenders).
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Flexibility: Appropriate at almost any occasion and at any time of the afternoon and evening.
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An element of show: This suits LCC’s target millennials’ desire for social interaction and experience.
LCC trade has continued to show its mettle despite continuing coronavirus restrictions. In August and September following the phased re-opening in July, LLC reports like-for-like sales up 8% y-o-y.. This is impressive as it is in the face of the Rule of Six and the start of the 10pm curfew and of course was not flattered by the government’s Eat Out to Help Out scheme throughout August which did not apply to alcohol. A high spend per head was still achieved with a simplified menu delivered via table service. LCC’s demographic remained enthusiastic about social engagement in a safe setting, while arguably feeling more confident about COVID-19 than other groups in society. On reopening on 2 December after the second national lockdown, LCC’s London venues are offering a substantial meal to accompany alcoholic drinks in accordance with COVID restrictions.
A by-product of restrictions has been a material paring of costs including supplier prices through bulk ordering for a simplified menu, a move from monthly to hourly pay, the renegotiation of property leases and at head office.
Nightcap has stated its ambition to acquire, re-capitalise and develop or re-position drinks-led concepts across the UK. We may assume these to have similar characteristics to the LCC model, as described, and the potential for economies of scale in terms of increased purchasing power and other operational and head office synergies.