Our Man In Paris:
Brew It Yourself
by Richard Maxwell
Five years ago Paul Chantler and Thor Gudmundsson started their own pub in Paris, The Frog & Rosbif, micro-brewing real ale and offering homesick Brits and brave Frenchmen a chance to drink real bitter. They now have two pubs in Paris (The Frog & Princess being the newest) and are opening a third in Toulouse. I had a chance to discuss the genesis of their pubs in Paris with Paul recently.
Paul, 32, read Philosophy and Theology at Oxford, spent three years working for ICI Agrochemicals based in the UK and then decided that he would benefit from a formal business training, so he applied for a place at Insead, near Fontainebleau, on the basis of its reputation as the best international business school in Europe. "As with university degrees," Paul asserts, "not all MBAs have the same worth, so it made sense to try for the top."
At Insead he met Thor Gudmundsson, with whom he now runs a thriving business in France. Thor, who, as his name suggests, is Icelandic, was educated at the London School of Economics and Sciences-Po (Institut d'Etudes Politiques) in Paris before joining Nomura, a Japanese investment bank, where he worked for several years.
They took a number of courses within the Entrepreneurship Faculty, including one entitled 'New Ventures' which started them off down the road which eventually was to lead to the creation of their micro-breweries. The course was taught through a mixture of case studies, lectures, and group projects. Central to the latter was the research and writing of a business plan for a new venture. Thor & Paul found themselves working together on this piece of course-work, and started generating ideas for business opportunities that they might be able to explore in their project.
"We came up with all sorts of ideas, two of which were related - why you couldn't get proper British beer in Paris, and why there seemed to be relatively few good bars or pubs in the city." After a bit of thought, they decided that researching the answers to these questions would make a fun and interesting basis for their project. "At the very least, going round Paris drinking in as many bars as we could find and trying to understand why some of them worked whilst others were empty, seemed more appealing than sitting in front of a computer all day, analysing industry statistics for some new widget-producing scheme."
The atmosphere in their pubs is cheerful, friendly and all the staff are native English speakers. The décor is deliberately light and open, with little relation to the various dingy Victorian establishments that Parisians believe are traditional British public houses. "We decided to create destination pubs: somewhere sufficiently attractive for people to make an effort to go there - taking the metro for example. Obviously the fact that British pub-goers were likely to be scattered all over Paris was a factor, but not the only one. We sell entertainment, really: pleasure and satisfaction - that's what customer service is about, and our concept was based on that because it's an approach that was remarkable by its absence from many of the places we visited in Paris."
You didn't have any great desire to go in to brewing as such?
Oh no. It was only much later that we started to look at that side of things.
What about the British beers on sale in a lot of Paris pubs?
At that time there were only a small handful of Irish pubs in Paris; they sold Kronenbourg or Heineken lager and Guinness. So there weren't really any British beers sold in Paris.
Why didn't you just import bitter from England?
Partly because we were concerned about our ability to provide sufficiently high product quality - real ale does not generally travel well; partly because we could see that the fact of brewing our own beer in the pub would give us a special marketing proposition, and partly because we thought that it could be a lot of fun.
Researching and writing the project took up most of the next few months, during which time our ideas gradually crystallized and the concept of an English brew-pub in the centre of Paris called 'The Frog & Rosbif' began to emerge. The project was accepted, in fact it got good marks and is now used as the basis for an Insead case study of its own. As the opportunity seemed real enough, we decided to try and turn our piece of coursework into reality. In any case, neither of us had other jobs to go to! After Thor and I left Insead we took our business plan and went to learn brewing in the UK. We started with a brewer in Worcester and then moved down to Hove, to work with David Bruce who started the Firkin pubs years ago, and his Head brewer, Colin Summers. This experience confirmed to us that brewing our own was a realistic option. Then we came back to Paris and started looking for a site and tightening up our market research.
How did you go about that?
First of all by re-checking all the assumptions made in the original business plan, especially those that related to potential sales volumes. We spent a lot of time in places such as Kitty O'Shea's, which was the market leader at that time. Typically, we'd sit at one end of the bar nursing a pint and counting the number of drinks going over the bar. We'd also note the numbers of customers present, the number of staff on duty, the pricing and promotional policy and so on. This went on for several months through the Autumn and Winter of 1992. We tried to cross-check our information by talking to distributors, collecting anecdotal information from contacts within the industry, looking up financial reports filed at the Greffe etc. Then we got stuck into the costs - staff, taxes, social security contributions, building, materials, brewing equipment and brewery operating charges, financial costs and so on. And, of course, working out the margins we could realistically hope to achieve.
How did you decide what the pub would be like?
The real starting point is a detailed, considered definition of the basic concept. For us, our concept is about more than just food and beverage retailing - we consider that we are in the Hospitality business in its broadest sense. There's nothing earth-shatteringly brilliant about this insight, but it's one of those things that is much easier to talk about than it is to deliver. Once we started thinking about the cafés and existing pubs in France, we realised that very few of them set out to sell their customers more than just food and drink -- little emphasis was placed on originality, conviviality, and service -- and yet these things had emerged time and again in our market research as things that are important to potential customers. For us, the competition is not just the other speciality bars in Paris, but all the other things which young people do with their spare time and money -- the cinema, restaurants, TV, holidays, clothes, clubs etc. We constantly need to find out what people want from us; it's one of the reasons that we encourage them to complain if they are not happy about something. Although we started off just thinking about selling beer, when we looked harder at the concept we found that it is far broader than we had at first imagined.
Raising the cash
"One of the problems we encountered is that French High Street banks do not have a strong culture of financing new business. They seem to be run according to very fixed ratios and criteria for lending. Also, perhaps because of their rigid hierarchical structure, we found it very difficult to get in contact with the decision-makers. We sometimes felt that our proposals were being refused through misunderstandings on the part of the Lending Officer who was presenting them to his committee. Furthermore, there doesn't appear to be the flexibility within the system to make loans at higher rates of interest to businesses which carry greater risk. Some banks simply refused to consider lending to anything in our sector, no matter what rate of interest we were prepared to pay. Finally, the response times are sometimes too long for a small business start-up - for example, we are currently still waiting for a response to a loan request made nine months ago!
"We had to be persistent. In some ways it is easier to raise Fr 20 million than the Fr 2 million we wanted. When you are looking for larger sums of money, you start to encounter people who have a different training and understand better what finance is about. To this extent, we were actually at a disadvantage in starting small, but that would probably apply equally in the UK. Another implication of this is that it is difficult to finance small but steady expansion - it's easier to get big money and make a great leap forward - although of course this is often a lot riskier, especially in the sort of business we're running. For us, it makes better sense to advance steadily by small increments, but at our levels of debt we find that we are dealing with people who do not really understand business expansion finance."
What about the big brewers?
Financially they are not really interested in investing in us - we sell almost entirely our own beers now. Some, notably Guinness, have programmes in place for encouraging people to create pubs in their own image, but these often lack authenticity, and as the market becomes more developed, so customers are beginning to be able to differentiate between superficially-similar products. As in the development of any market, greater maturity brings with it greater customer discrimination - which is why we try so hard to differentiate ourselves and to develop a recognised brand with a good reputation. One medium-sized UK brewer has recently opened a so-called English pub in Paris and by all accounts is learning the hard way that a reputation in England counts for nothing over here.
The Social Chapter is the French Trojan Horse
"There's a basic difference which is at root cultural, and, I think, a legacy of many years of State domination. Of all the Western industrialised nations, France has the highest percentage of GDP which goes to the Government - VAT is 20.6% instead of 17.5% in the UK, National Insurance charges are 45% instead of 10%, and Company Tax is nearly 37%, with no sliding scale. In addition, the administrative system is so cumbersome that one's 'back office' costs are probably double what they would be in the UK. The effect of all this is, of course, to make entrepreneurial activity in France fairly unattractive to people, which means that it doesn't have anything like the same social acceptance it does in some other countries."
Equal but not equitable
"The whole system still seems geared to centrally planning the economy and delivering an equal (as opposed to an equitable) division of wealth to everyone. And if there's no incentive to take risks, then of course no one will, and the economy will stagnate. As it is, the government is being forced into the vicious circle of raising taxes, which decreases the size of the tax base, increasing the demand for government cash, requiring raising taxes again.....and all the time the French become less and less able to compete freely in international markets. Hence the enthusiasm for an isolationist Europe with all their potential competitors bound by their own rules - the Social Chapter as Trojan Horse.
Is there a lack of capital?
Not necessarily. Capital is globally accessible today; and our equity base is pretty international, although our debt is French. I think that if you're sure you've done everything right - preparing your business plan and so on - and you really can't raise the money, that should be a pretty strong signal that there is probably something wrong with your business. That may change, however, inasmuch as investors will partly base their decision to invest on how easy it is to cash in their investment when they want to, which is always a problem with small businesses without stock market quotations. Also, of course, they will take into account the tax implications of capital gains in the countries in which they are investing. Overall, if you've got a good idea for a business, can convince people that you can make it work, and can offer them the prospect of a good rate of return on their investment, then you should be able to raise the equity you need.
Staff - a practical problem for French start-ups
"In the pub business, high staff turnover is one of the inherent difficulties. We spend quite a lot of time and effort training our people, but if they then leave we have to start all over again. It is difficult to compete with the UK on salary because the high French social security charges mean that it costs us as much to pay an experienced pub manager £18K here as it would to pay him £24K in Britain, where there's a good chance he'd get free accommodation as well -- lots of pubs there have been built with manager's flats and so on. Also, because our opening hours are longer than those in the UK, we are obliged to have more staff and managers, which increases the overall wage bill again. And of course the 35 hour working week will be catastrophic -- we'll probably end up cutting jobs, not creating them.
"Hiring & firing is especially difficult in France, which means that it is dangerous to take on staff unless you are certain that you need them and that you have the right person for the job. And there's a minimum wage, which means that even a part-time barman costs twice as much as he would in the UK. The government's argument seems to us a bit short-sighted - they worry that businesses will take advantage of cheap labour - of course they will, but the business will benefit, and if it does well this will mean more permanent jobs. The current situation scares employers away from expanding their workforce (hence 12.5% unemployment), thereby limiting the impetus for growth in the economy.
20 lines of data on a pay-slip
"On the administrative side, the system is so top-heavy it's unbelievable. It isn't merely that in the UK we would have double the after-tax profit because of different social charges, VAT, and Corporate tax. It's also the endless paperwork. On a French pay slip there are 20 lines of data to be filled in and forms to be sent separately to different offices and paid by separate cheques. This is lunacy -- in Britain you have four lines on a pay-slip - Gross Pay, Tax Deductible, Insurance Charges and Net Pay. You send the lot off to one office, with one cheque, and that's your government business done. We expect to turn over roughly Fr15m this year, including the new Frog & Rosbif in Toulouse, with about 30 full-time employees; this is hardly makes us an industrial giant, and yet we have to have a full-time accountant, a full-time book-keeper, a chartered accountant and an Auditor (comptable, assistant comptable, expert comptable, commissaire des comptes). Total administrative cost - Fr400k per annum!
State-financed disincentives
"France is in fact preventing its own small businesses from doing well - cross border competition is driving small French companies out of business because they have created and are maintaining a non-competitive system in the name of social justice. One of Lionel Jospin's major problems has been to keep some sort of incentive for those on assistance to return to work, and he has now sensibly decided that people on social security can keep their allowance on a degressive scale for a year so that it can once more become worth someone's while to take a job at the minimum wage. Perhaps small businesses will be able to start hiring again.
Why can't the French make their system work?
Because it's too intellectual, too abstract. Structurally great, but practically too cumbersome because the hierarchy has seized all responsibility for itself. No-one should be allowed to starve. But central government is only good at managing certain things. International businesses understand the disadvantages of over-centralisation - you get too many layers of management and then you can't react quickly to consumer demand, for example. And we are all consumers now. If people could only start their own businesses more easily, and run them with a prospect of really making some money and improving their position, they would be more willing to start at the bottom, knowing that they could make a future for themselves. It's not a question of leaving people in distress, it's a question of giving them the prospect of creating some value and wealth for themselves. As it is, if you get a job at the SMIC, you know you're at the bottom of the heap and likely to stay there. So why worry? Why not stay on the dole? It's totally demotivating.
And your future?
We are expanding into Toulouse, where the market is not quite the same - fewer Brits and tourists -- but we shall be close to the people at Aerospatiale, at Airbus Industrie, at the different universities and faculties, and of course the Stade Toulousian rugby club. The pub will be very similar to 'The Frog & Rosbif' in Paris, rather than its more sophisticated sister, 'The Frog & Princess' -- we are going for traditional simplicity. We're doing it as a joint venture with an Englishman based down there, which we're hoping will be the model for future growth too. At the moment we are looking out for suitable partners with whom to build and run pubs, and not just in France but internationally too. We provide, the concept and brand, obviously, but also a lot of know-how and experience of developing the pub concept to fit non-UK markets. Plus, we have good operational experience, training packages etc. -- and we'll even be doing the accounting for the new business. My guess is that we'll be pretty hands-on to begin with, but we don't mind doing the dirty work, and then, as our partner gets up to speed, we'll gradually become less involved. If it works, we'd like to open another one (or even several!) with him. As with the pubs we've already got, we're interested in building a business with a long-term future, strategic presence, and cash-generating potential.
Finding the Premises
"It took 9 months to find the premises. A restaurant on a good site had gone into liquidation and we approached the owners (through an agent) as soon as title reverted to them. When we were site-hunting for the Princess, we heard a rumour that there was a restaurant in trouble and approached the owner direct, so there we had no agent involved.
Had you any preference as to area?
Yes, for our first pub we wanted to be in the 2nd Arrondissement, but we'd thought we'd probably be nearer the Opéra. However, it's a great location, which is crucial.
Because we'd taken over existing restaurant premises we didn't have to get local authority permission to change the usage, which would certainly have taken time, and for the Rosbif we bought the licences off the liquidator. Getting liquor licences is a big problem in Paris.
Were the Ville de Paris or any government departments helpful?
No, not at all.
What about hygiene and sanitation regulations?
No problem, you have to keep the place pretty clean to brew well.
Did you go to any high street banks in the beginning?
Yes, all of them - we saw over 25.
What about investment banks?
We never went to an investment bank.
So who did you hit the jackpot with?
In the end we found fourteen people in France and the UK who between them were prepared to back us for £100,000. They weren't professional investors, just people who could invest a small amount. And our business plan was sound. Then we got French banks to match it, which gave us the amount we needed. We didn't draw salaries ourselves until the project was well under way and we could see that it was going to run. A classic start-up, really.
Were the British Embassy, the Consulate or the Franco-British Chamber of Commerce any help?
No.
Did you find banks, accountants, the tax office, lawyers or estate agents helpful?
Not really, maybe a couple of individuals, but no professionals.
And what was the most discouraging thing?
All of them.
The Frog & Rosbif
116 rue St. Denis
75002 ParisMetro: Etienne Marcel
Phone: 01 4236 3473
Opening Hours: 12:00-02:00
Happy Hour: 18:00-19:00 (25F / pt real ale)
If there's a group of you the "Big Jugs" are good value (for Paris) at what works out at 25F a pint. Quiz night on Sunday 9:30pm. The house beers are as follows:
