Adventurous Investor

March 26, 2010 6:00 pm

David Stevenson: Why the farm shop idea is ripe for cultivation

Irecently talked to an experienced professional investor who had just opened the latest statements from the managers of his venture capital trusts (VCTs) and enterprise investment schemes (EISs). He calculated that, four years after investing more than £20,000 in various funds, his investments were worth just under £12,000 plus a few dividend cheques. “If I see another VCT saying it will get 110p back for every 100p, I’ll kill them!” he muttered. “I realise I only pay 70p after tax relief, but what’s so great about a 10 per cent return over five years?”

If VCTs are bad – and I have to say there are some exceptions, including funds from Ventus and Downing – then EISs can be much worse. In my experience, they tend to be much riskier, charge more in upfront and ongoing fees, and frequently invest in stuff that’s dull in the extreme. This is a pity because EISs were set up to encourage private investors to back bright, young businesses and get some tax relief as well (not the other way around).

But, every now and again, an entrepreneurial personality reminds you why it can be worth investing in an EIS. Gordon Leatherdale, and his latest venture – Countrywide Farm Shops – is one such example.

His business proposition is that farm shops can become like garden centres – out-of-town citadels of high-end consumerism.

Now that the Stevenson family has acquired an allotment, I’ve found myself visiting my local garden centres with some regularity. As I walk around my vast local emporium, I’m constantly astonished by: a) the number of people there; b) the sheer range of stuff on sale; and c) the money I spend (the centre does an amazing breakfast special).

If I were a young economist, I’d be proposing a research paper on garden centres and why they are ‘the future’! Big operators, such as Tesco, are clearly drawn to a sector that is aspirational and offers the opportunity for the multi-sell. I have made good money out of investing in listed garden-centre groups that have been taken over by Tesco – and I can see this model transferring to the farm shop sector.

We currently have a few farm shops in my neck of the woods but they’re a bit dismal and basic (although my better half insists the vegetables taste fresher). Now Gordon Leatherdale has come up with a plan to help farm shops scale up and turn into mini-retail malls. He’s already built, through another EIS, the UK’s first chain of farm shops in the south, comprising four establishments called The Country Food and Dining Group, which is currently fund raising.

But last year, Gordon decided to set up his own company and is now trying to raise money for this business via an EIS structure.

Before we get to the upside, it’s worth stating all the obvious risks. Farm shops are arguably lowly capitalised, badly run and owned by amateurs for a reason – consumers prefer to buy their stuff at Tesco and Waitrose. Gordon’s original company may also have “first-mover” advantage and snap up all the good sites.

Even so, there are two ways that his new venture – brand name undecided – could make money.

First, it could increase existing revenues by investing capital to broaden the range of products sold – for example, procuring local-made foods, adding butcher and baker franchises, and opening country catering establishments selling home-made foods at fat margins. Profit margins should move up to 10-15 per cent if consumers can be encouraged to savour all this local fare. Second, investment in this extra capacity should also increase the capital value of the freehold site over time, especially as the planning rules for this type of land usually allow some fairly major changes.

It’s still high risk and totally dependent on Gordon. But could it work? I’d say it has got a better chance than most EISs I’ve seen, as it is a single-company strategy with a clear focus on a recipe that appeals . . . a bit like those garden-centre breakfasts.

adventurous@ft.com

Wholesome returns

To understand how Gordon Leatherdale’s farm-shop EIS could work, you need to look at the numbers in detail. He forecasts that the shops can turnover around £2m per establishment and achieve profit margins (based on earnings before interest, tax, depreciation and amortisation) of 10 per cent – or closer to 15 per cent if higher-margin catering turnover is strong.

To do this, he needs to spend £1m to £1.4m per site, including the purchase price, redevelopment costs and work on brand-building. But if he can get four sites at a total cost of £6m, and achieve the target sales of £8m, he will have a business with profits of £800,000 a year – plus the chance to sell out to a bigger buyer for around two times sales (assuming similar multiples to garden centre takeovers).

It’s an adventurous but appealing investment – especially if he can come up with a clever brand name that implies wholesomeness and localness!

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