Peter's Perspective
6th March 2015 by Peter Churchouse

My Top 5 WORST Investments… Part 2

This Friday I’m bringing you Number 2 on my all time 5 Worst Investments.

My big mistake?

Ignoring My Own Advice!

Over the years I have routinely advised my children to never make investments in the food and beverage industry (F&B).

It’s a tremendously difficult and fickle industry.

I watched how hard it was for my uncle and aunt to make a living from their restaurant.

I have seen how much of the food and booze somehow walks out the back door of less than well run establishments.

And I’ve seen many friends and acquaintances from my early days in consultancy and banking eagerly pump money into the next new great bar or restaurant. With predictable results.

The restaurant and bar scene in large financial centres like Hong Kong can be extremely lively.

Take Tokyo back in 1989 for example. The amount of money that passed through my hands (on business trips) into such establishments was absurd.

Today, whilst not quite at those extremes, there’s still a huge amount of money flowing through the ‘hot’ bars and restaurants of Hong Kong, London and New York.

The temptation to own a financial interest in that kind of business is clear.

And let’s be honest, there’s more than a touch of ego that drives these “investments”.

People like the idea of being a part owner of a bar or restaurant.

The whole ‘Humphrey Bogart in Casablanca’ aspect. There’s a bit of glamour to it, especially in major financial centres. “Investors” can show off to their mates a bit.

And let’s be clear: people raising money from investment bankers are well aware of this fact!

A few years ago, the owner of a great bar & restaurant that I spent a lot of time (and money) in approached me one evening with one of those great deals.

He had locked in an agreement to take on five, yes five, F&B outlets in the largest office development in town.

The building was the home to just about every major bank, law and accounting firm in the city.

Around 25,000 highly paid people worked in this development with thousands more in buildings next door. The building was THE office development in town.

What could possibly go wrong?

As it turned out, pretty much everything.

A consortium of like-minded investors was put together to share in this hot opportunity. Johnny, the leading partner knew his onions about running a restaurant and bar.

I had spent many hours and a lot of money in his!

I liked him. His numbers, spreadsheets and plans made sense. On paper at least…

My kids immediately reminded me of my advice to them. Don’t invest in bars and restaurants!

Did I listen? No. And I should have because the whole venture disintegrated… expensively.

The facilities were all well designed. They were built within budget and broadly on time. So far so good.

But then the troubles started.

Any restaurant takes a certain amount of time to get “bedded in” – to get its customer base established. There was no facebook or twitter back then. And something going “viral” was still a medical problem.

Breaking even on operations could take quite a long time.

This consortium had raised enough money for the capital works but not really enough for the working capital.

We did not have enough cash in the bank to cover this ramping up period.

But it got much worse.

The contractor who had done the fit out of the facilities was an affiliate of the owner of the whole office development. And funnily enough was one of only two or three companies approved by the building owner to do such work.

As a very long established contractor, and as an affiliate of the landlord, it seemed to make sense to use them.

Wrong.

The contractor built most of the fire services and sprinkler systems in contravention of local building codes.

How could someone with thirty years experience of building in this market make such basic mistakes?

Government building authorities insisted that four of the five facilities had to be closed down for months of remedial work.

A substantial new capex program was required.

There was absolutely no recourse on the contractor. What was done, was done.

To add insult to injury the Asian financial crisis erupted a few weeks after the first facility was opened. The F&B industry across the whole city took a big hit. Our establishments included.

As with my Worst Investment #1, my loss was total.

Don’t get me wrong, the retail F&B industry can be profitable.

But where I work in Hong Kong, I can’t tell you just how many bars and restaurants open with great fanfare, only to quietly disappear 6 to 12 months later.

I see new places open and close every week.

All that shareholder equity is written down to zero… and the process repeats as investors pour money into the next ‘great concept’.

[Bennett, who runs our operations here at Churchouse Publishing, even showed me a local twitter page which is amusingly dedicated to “Charting the downfall of Hong Kong’s faddy new restos and bars, before they close down, reboot and bring you their STUNNING NEW CONCEPT.”]

My advice? When looking to invest in bars or restaurants, approach with extreme caution.

There are so many intangibles that determine your success or failure.

  • How good are the operators?
  • Will licensing and regulations get in the way?
  • If it does well, will the landlord simply jack up the rent by 50%? This happens ALL the time in Hong Kong.
  • Why is one bar packed on a friday night but the one next door completely empty?

As with all investments, your friends will happily tell you about the ones that did well… but you rarely hear about the many that didn’t… no more so than in the F&B business!

My advice? If you want a piece of the F&B business, go buy shares in McDonalds!

Good investing,

Peter


Peter Churchouse Peter Churchouse is a widely respected analyst and commentator on financial markets with well over 3 decades residing in Asia. He spent over 15 years as Asia Strategist and Head of Research for Morgan Stanley as well as running a hedge fund. He shares his knowledge, insight and investment recommendations through his subscription publication The Churchouse Letter, along with his free newsletter Peter’s Perspective.
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