The rise of the big coffee shop chains is bad news for independent cafes. Big brand companies squeeze out smaller rivals by monopolising the best locations and driving up rents, as Naji Makarem found out.
 They say one in ten businesses go bust within the first year. That won't be me, I tell myself, not allowing a drop of doubt to seep into my consciousness. How could it be? I have a fantastic idea, and it's made for the UK market. Not to mention that I have a year and a half of intensive MBA training behind me, and backing from a venture capitalist.
They also say being an entrepreneur is more terrifying than having a bayonet miss you by two inches in your underground hideaway in World War II. (Or at least that was one entrepreneur's account that I heard on my first day at business school). But I thought I could handle it. My dream was romantic, I admit, but surely there is space in as rich and vibrant a city as London for a little creativity and romance? Driven by a dream of creating an alternative tea-cafe, I began walking down the thin line between self-employment and unemployment.
On paper it looked perfect. I had created a strategy map for the brand, to help align business decisions with the overall values and principles of the company. All information would be transparent, giving each and every team member the same status as a CEO. Team members would have the power to introduce new products, decorate the space as they saw fit, and even sack their manager if they chose to. The manager's role was transformed from ’command and control freak' to trainer and facilitator. Beyond the basic salary, profits were to be shared based on the number of hours worked, irrespective of position. A website would give team members flexibility over working hours, and offer people a chance to share successful ideas, such as a new sandwich recipe. In other words I had created, to the best of my abilities, a truly decentralised and democratic organisation, with empowered employees as partners at the centre of the organisation.
We were not planning to be a profit-maximising island within an ocean of customers, far from it. We hoped to give back to the community by buying as many products from the community as possible, from the interior decor to the food and drinks. With the launch planned for London, we sourced jams from a couple who made seasoned preserves from their studio, bread from a local family bakery and teas from a family-owned importer of fair-trade teas. We planned to extend our roots into the community by offering shelf space for local artisans, a refreshing change from the 50 pence Chinese mugs sold for a tenner at the big-brand cafes. We wanted to use the cafe to hold talks about issues of local and global concern.
As I began plugging the numbers into cash-flow projections, one figure in particular stood out from the rest: rent. Even assuming that all our sofas and chairs were filled with customers, paying the rent was going to be impossible. Our concept needed to be tweaked. First, forget sharing profits with employees; shareholders needed a return on their investment, and with rents between £50,000 and £80,000 a year on a busy street, there would be nothing left to share. Sofas were replaced by stools and chairs; full-time employees on over £5.50 per hour were replaced by part-timers on £4.50 an hour; building a web-site for flexible shifts and sharing ideas was certainly out of the window; and the community artisan shelf space was replaced by more profitable brand-building mugs and tea-pots.
Our most optimistic scenario was now profitable, but only just. Any dip in sales and we were in the red again. So still on paper we sold out completely, and sourced all our products from the cheapest suppliers. Not surprisingly they were the large brands manufacturing their products on the other side of the planet with cheap labour. It still wasn't enough. So we raised the prices on all our products and put them in line with leading branded operators.
I thought that the business would now be feasible, despite ripping the romance out of it. But I was wrong. Although sales estimates at the peak of optimism did show a return on investment worthy of investors' time and money, more realistic and volatile sales assumptions did not generate a positive ’net present value'. In other words, although we would have made a profit according to our realistic estimates, it would not have been enough to meet the minimum required return for investors. The risk was too high for the expected returns.
After six months of hard work, I lay back on my chair, facing the light blue screen of my computer, and sent the toughest email of my life: a note to my financial backers explaining that I had found the business plan to be unfeasible. The moment I clicked ’send' my dreams were officially over.
As I stared at the forecasts in disbelief, that disproportionate figure continued to smack me in my face. Rents in London had made a mockery of my dreams and romance. Over the past few months I had watched the power of rents slowly erode the creativity and humanity out of my business plan, and eventually drive the entire concept into the ground.
Since that day even the large cafe chains have shown profit warnings, and talk of consolidation is rampant in the media. But these huge chains are as much to blame for over-valued rents as the system that allows rents to climb beyond a small entrepreneur's reach. The past seven years have seen a race by the leading chains to open as many coffee shops as possible in key locations, in a bid to generate brand recognition. These chains have been out-bidding each other on every block worthy of a cafe, often sacrificing profitability for brand awareness. Their game-plan is simple: if a chain can make money on half its branches, it can lose money on the other half. That would be better than seeing their competitors make a profit and build a rival brand. This was the thinking behind the aggressive and unsustainable expansion in the cafe sector over the past few years, and is one of the root causes of excessive retail rents in London.
Reasonable rents are a necessary ingredient for a vibrant and equitable society. My experience put me face to face with the systemic mechanisms that make London's retail landscape bland and soulless. This is a problem facing most countries, where governments have chosen to allow markets a free rein. The winners are landlords, making unfair profit from the market's irrational exuberance in a frenzy of competition, and the few retail champions with pockets deep enough to ride the wave. The losers are employees and customers not to mention would-be entrepreneurs.
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