Loch Fyne: Mark Derry

He was determined to build the first, quality chain of seafood restaurants in the UK and with 23 restaurants and several years of profit under his belt he tells us how

Today isn’t one of Mark Derry’s best. It’s the day after the US journal Science published the latest findings into the safety of farmed Scottish salmon, and the national media are all over the story.

The last thing he heard on the radio the night before was a report from the shores of Loch Fyne about the dioxin levels in farmed salmon. Now Derry is sat at his desk with a pile of the day’s newspapers, each with its own story about the potential hazards of eating Scottish farmed salmon.

He has already done four radio interviews, trying to explain the difference between the Freedom Food accredited salmon he uses and other varieties of farmed salmon. As I arrive he is taking another call about the subject.

“This is a real threat for us,” says Derry. “To communicate what we do in terms of the quality of the product, the care and our environmental position is hard without spending a fortune. And it’s out of our hands, other than spending every cent we make publicising that…and even then they aren’t going to believe it.”

The problem lies in what Derry calls the “broad brush” of the debate. Yes, there are questions over intensive salmon farming, not least the practices that produce it. But the salmon, used in the restaurant is a different product altogether, produced by a different process.

As the head of a business that has 23 fish restaurants selling, among other things, smoked Scottish salmon, and inextricably linked with Scottish seafood, he acknowledges a lot is at stake.

“People believe that we may get dragged down with it, but it really isn’t our fault and not true,” he says.

But is this likely? Probably not. By the time this feature has been written and sent to the printers, the scare has disappeared from the news headlines. I phone him to check the month’s figures and they are on budget. What’s more the same report was published two years ago in the press and it had little effect on the business that time around.

Tackling growth

It was food scare of a different kind that gave Mark Derry the idea for a chain of fish restaurants in the first place. Having sold up his first venture 1997, a chain of gastropubs, he was looking for his next project in the hospitality industry. In what he calls “the post BSE market for foods”, Derry and his business partner, and now property director, Ian Glyn saw the scope for a chain of seafood restaurants.

While hunting for sites they came upon Loch Fyne Oysters, then a supplier of seafood to restaurants and hotels in London. The company wanted to expand its business by putting more products into restaurants. After dabbling with a restaurant on the shores of Loch Fyne and two more in Nottingham and Peterborough, Loch Fyne Oysters wanted to develop the business with a management team who could take on the task of building up a larger group. For Derry and Glyn it was the opportunity they were waiting for – good properties, a ready-made brand and an in-built supply chain that they could rely on as they built the business. The deal was done and the Loch Fyne restaurant chain was born – or rather, reborn.

Six years on and it’s clear the relationship with Loch Fyne Oysters is one of the factors that has helped the Loch Fyne restaurant chain become such a strong business so quickly, and it’s not just down to the brand it offered.

“I think we would have succeeded if we had been called something different, but we wouldn’t have reached the level we have done,” says Derry. “Controlling the supply of seafood is absolutely critical and means dealing with a spot market. If there’s a big catch of mackerel it’s cheap that day and if it’s small then it will cost more. With someone else between us and the sea, they can absorb the ups and downs and we get a consistent margin.”

If this surety of supply and cost has been one factor that has allowed Derry to grow the business so smoothly, the other has to be the strength of the management team.

Derry himself is a former Whitbread man. After working in the relatively entrepreneurial part of that business, launching new concepts for bars and restaurants, he worked as marketing director for TGI Fridays, part of a team responsible for turning it around when it was losing money.

His operations director also used to work for Whitbread, and the next three people he hired were former food and drink industry executives as well. His finance director, Helen Melvin, who he brought in three years ago is from Cadbury Schweppes and Glyn, his property director, is the same man who helped him build up his previously successful gastropub chain.

Add to that the business acumen of the company’s chairman Jeremy Hardie, the former chairman of WH Smith, and you have the kind of management team that would have any venture capitalist squealing with delight.

A question of control

Not that there’s any chance of Derry bringing a VC into the equation. Having raised nearly £8m in three funding rounds of private money, he is delighted to have avoided selling out wholesale to the VC sector, with its “unrealistic expectations”, and quietly gone about building his business without giving too much away to his investors.

But even the most ambitious VC would be impressed at the breathtaking speed and success at which Derry has taken Loch Fyne from virtually nothing to a £25m turnover business in four years.

“There have really been two stages. We raised private funding of £1.4m including our own money and that built the first three restaurants. On the basis of that we went on to raise a further £3.5m in a public offer – when we raised the money we were the biggest EIS fundraising at that time. Our prospectus said we had about 20 restaurants and turned over about £1m per restaurant. If you look at what we have done that is where we are,” he says.

Some might call this a breakneck, high-risk growth strategy – in 2001 alone Loch Fyne went from four to 15 restaurants and the memory of this still makes the FD wince – but Derry begs to differ.

“I would say my approach is medium risk,” he says. “We never perceived it as high risk because we thought we had a product we could deliver. We didn’t have the problems everybody else has because we controlled the supply and the menu. We use one set of architects, one or two sets of builders and keep a tight control of costs. We were confident because the first restaurant in Cambridge took £1m a year from day one and made money on two thirds of that, so there was quite a lot of head room.”

Derry concedes that 11 new openings in one year “was nightmarish”, but says that’s the nature of the business. Property deals are an unknown quantity, they can take three months or they can take two years. Loch Fyne’s just happened to come through in the same year. And after all, he points out, the whole point about being in a multi-unit businesses is to be able to spread your risk.

Future growth

Having the restaurants is one thing, making sure they all perform is another. And when you look closely behind the management that has achieved this growth, it’s clear that Derry and his team keep a vice-like grip on costs and performance.

“I started off with the attitude that I wanted to see all the figures I saw at Whitbread, but of course, the trick is to work out what you need,” says Derry.

Spinning around his laptop he shows a spreadsheet with the weekly management figures containing a detailed report on each restaurant. It includes revenues, covers and spend per head is mapped against budget as well as actual and year-on-year figures. Derry gets the overnight takings sent each day to his mobile phone.

“Covers and spend are key to us and we want covers to go up. We often find, for example, although we have the same number of total covers per day, lunchtime covers might be down and evening covers might be up. If that happens we think, right, we’ll run a lunchtime promotion at £9.95, and we can run them immediately because the specials are on blackboards,” he says.

Derry says that in a relatively tough market this information is vital because it allows the management more time to react.

“If things are going pear-shaped you know much quicker. The faster you get decent quality information, the greater chance you have of acting on it. The quality of the information here is as good as you will get anywhere,” claims Derry.

With the toughest stage of growth now passed, Derry says the business is “over the hump” and generating cash. This will be used to grow the business, albeit at a slower pace – next year there are plans for just four or five new restaurants. The most important part of Derry’s future strategy is now diversification and moving the reliance away from the Loch Fyne restaurant brand.

“Originally we thought we would go with a single growth strategy. But it became clear to us that there will come a time when we hit a wall with one brand,” he says.

It may be on a different scale, but Derry says he has learnt from the likes of Pizza Express, a company that has grown its restaurant chain extremely successfully, but found themselves in a place where the only way for the main business is sideways or down and now they have had to start from scratch with a new brand.

So last year the excess cash went into the acquisition of Le Petit Blanc, a small restaurant chain with links to celebrity chef Raymond Blanc, which had ended up in the hands of administrators. “It was a good acquisition. We have done work on it, redeveloped sites, reorganised the management and consolidated the back office function. In six months we have made money.”

From a base of just four Petit Blanc units, the plan is to grow them in tandem with Loch Fyne.

“It has given us a second string to our bow along with a better property strategy in that there are certain types of property that work for one brand, but don’t work for another,” he says.

When talking to Derry, it becomes clear he still feels he has a long way to go with the business. He admits he has become more attached to the chain then he had originally expected and for now, at least, an exit or flotation is not on the immediate agenda.

“Having got EIS investment you have to either offer tradable shares or a cash return. The caveat is that we will maximise the value to investors and so we won’t do it this year or next if the market is crap,” says Derry. “When the market conditions are right we will prepare ourselves for a float. If we do that and attract an acquisitive company we would consider it.”

And given Derry’s current success with Loch Fyne there’s sure to be no shortage of buyers.

LOCH FYNE AT A GLANCE

1997 Derry comes up with concept for chain seafood restaurant

1998 He does deal to buy three Loch Fyne Restaurants from then owners, Loch Fyne Oysters

1999 Raises private funding of ?1.4m to build first three restaurants

2000 Raises ?3.5m in public offer to fund new openings

2001 Loch Fyne goes from four to15 restaurants

2003 Reaches ?25m turnover and 23 restaurants in the UK

2004 Seven new restaurant openings planned and a turnover of ?30m is targeted

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