Wake up and smell the coffee

Gerry Ford delivered an extremely effective wake up call to the City and investors last week. Frustrated by an ailing share price, it emerged that the Caffe Nero founder had approached his non-executive directors with a preliminary plan to take the business private. Ford was not prepared to sit back and watch a growing disconnect between the City’s valuation of the company and its true worth. The message was clear: do you want to continue to benefit from this story or not? If not, Ford and his fellow directors will. With a background in private equity, including a stint with Apax Partners, if there is anyone who can put together a buyout in record time, it is the Californian. Fundamentally Caffe Nero is one of the best performing companies (certainly with the best coffee) in one of the most compelling growth areas of the (growing) eating and drinking-out market. Coffee is not a fad. It is here to stay – like eating out, it is just something that us Britons “do” now. According to the latest research less than 30% of the UK market is with branded bars. Ford believes that Nero can take its 280 stores up to 500 in the UK quite comfortably. Based on current site openings, that is more than five years of site expansion. Nero’s peers, Starbucks and Costa Coffee, which are arguably inferior, have exploited the growth in coffee in international markets. Starbucks is of course the 500lb gorilla in this space, with 11,538 stores worldwide, while Costa, which is newer to international development, is focusing on the growth markets of China and India. Although Nero is smaller, there is little doubt that international expansion is next. The Gulf is thought to be the location of its first overseas foray although Ford and his fellow executives believe they can take on Starbucks in its own backyard by opening the concept in the States. The rewards for winning in such a big market are immense. Starbucks has over 8,000 locations in the US. The shares, which were at one time about 18p each, climbed to over 250p before coming back down to 180p this summer. It’s thought that investors were spooked by the surprising notion that consumers do not drink hot coffees during heatwaves. Caffe Nero may also have been a victim of profit-taking. Of course, Ford and his fellow directors will be accused of trying to take the company private “on the cheap” but what are they supposed to do? The City needs to wake up. Coffee is not a fad – it is big and it is growing. And in this compelling market, the annual research undertaken by Allegra shows that consumers continually rate Caffe Nero the best. It has the best management and its prospects both in the UK and overseas are excellent.