She was right. But since its debut in 1989, the chain has had mixed fortunes, changing hands three times and proving a disastrous investment for Whitbread, the leisure group that bought it from its founders for £133m in 1996 and sold it six years later in a package with the Bella Pasta chain for only £25m.
Now the current owner, the private-equity firm L&G Ventures, is planning to bring the two brands back to the stock market with an expected valuation of between £200m and £300m — about 10 times what Whitbread got for them.
Many observers wonder what has gone on to justify the price tag. Have the private-equity owners transformed the restaurants or merely indulged in some clever financial engineering? Whitbread bought Cafe Rouge from founders Jones and Roger Myers, following up the deal a few months later by buying Brightreasons, another restaurant group, for £46m. Whitbread was keen to expand Brightreasons’ Bella Pasta chain but, despite spending almost £200m to buy the two businesses, and investing more money to expand them, the groups languished.
Jones and Myers were encouraged to increase sales rather than profits, so they opened up as many new sites as possible. Having surrendered ownership and control, they eventually left to pursue other projects.
Meanwhile, the business faltered as Bella Pasta struggled to compete with the more successful chains such as Pizza Express and Ask Central. By 2002, Whitbread had had enough.
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A strategic review concluded that brands with no international potential should be axed and that summer Cafe Rouge and the renamed Bella Italia were offloaded for £25m to ECI, a private-equity firm, which backed a management team led by Findlay Scott, a turnround specialist.
Under ECI’s ownership, earnings before interest, tax, depreciation and amortisation (ebitda) trebled from £4.2m in 2002 to £13m in 2004.
Richard Chapman, a partner at ECI, said that being a small part of a large conglomerate had done the business no favours at all.
Whitbread’s size gave it great purchasing power — but it was not always buying the things customers wanted. For example, Chapman said Whitbread had negotiated a great deal to put Australian wine into its thousands of pubs and restaurants, but that was not necessarily what customers expected from a French-style brasserie. It was a similar story with the choice of coffee, and both were changed by the new owner.
“It’s hard to say what that does to your sales but the customer coming in and having a glass of French red wine has a better experience and that’s the reason they come back,” said Chapman.
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He said the management team was able to focus on things that would have got lost in Whitbread’s system, such as some
20 empty sites on which Cafe Rouge was still paying rent — an insignificant cost inside a £3 billion conglomerate but critical to a standalone operation.
Other changes included outsourcing the payroll and cutting back on other head-office overheads, rejigging the menu to allow customers to order lunch at any time of day and installing better IT systems.
In January 2005, the holding company, Tragus, was bought by rival firm L&G Ventures, part of Legal & General, for about £100m. It backed a new management team, led by Tragus chief executive Graham Turner, who had previously run Unique Pub Company, a tenanted pub group.
Under L&G Ventures, the results were equally dramatic. Ebitda climbed from £13m to £22m in the year to May 2006, with further growth expected this year. Its earnings now eclipse the amount Whitbread recouped from its disposal and that performance has prompted Tragus to start working on plans for a flotation with its advisers — Citigroup, Close Brothers and Panmure Gordon.
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Like Chapman, Turner said there had been no one thing that had driven the increase in earnings but pointed to a number of simple initiatives, such as tightening up the service and using available space as efficiently as possible.
One of the biggest gains has come from building on ECI’s work on the menu and ensuring that both the chains are open for longer hours.
“About 9% of our Cafe Rouge business is in the morning,” said Turner. “We are known as a brand that people can use through the day, whereas a pizza restaurant doesn’t open before midday. At Cafe Rouge, you can go in and have just a coffee or a croque monsieur or steak and chips. It’s very flexible, and that’s why it’s a growth brand.”
Turner is attempting a similar trick with Bella Italia; that outlet lends itself less readily to all-day trading, but there are signs that such a strategy might work. Seating areas have been redesigned to encourage people to pop in for just a coffee, while the menu has been expanded to include “grill” items to distinguish it from the crowded pizza-pasta market.
Analysts remain sceptical about how much growth there is to be had. Greg Feehely of the stockbroker Altium Securities said: “I’m not convinced Cafe Rouge and Bella Italia are brands of the future.” The perception in some quarters, especially in Cafe Rouge’s heartland inside the M25, is that the brand is past its sell-by date.
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Turner disagrees, suggesting that there is more to come. “There’s a lot left in the tank. There are 86 Cafe Rouges in Britain. Bluntly, I can’t see why we can’t take that to 200. It’s got that kind of broad appeal.”