A very liquid investment

My father was never one to dispense advice lightly, but on the odd occasion that he allowed himself the extravagance he would put forward a gem. Aside from his sage counsel on marriage, his other chestnut was: ôSon, if you are ever going to invest your money in anything, make damn sure that it is something you know a lot about.ö So here I am writing about investing in bars, a subject that I think I know an awful lot about. In fact, I would imagine my dad would be rather proud of all the comprehensive research I have done on the subject. With the high density of expat professionals in Asia, owning a bar sounds like the ideal investment for many potential entrepreneurs and bonus-laden investment bankers. Unfortunately owning a bar is not always about rooms filled with friendly conversation, pulling a few pints and people enjoying themselves. There is definitely more to the enterprise once you step behind the counter. ôOwning your own food and beverage outlet can be hugely rewarding in many ways, but be aware that owning your own bar is a little like a relationship,ö says Mark Leahy, a partner in the Singapore-based McCraic Holdings, owners of BQ, Molly MaloneÆs, Father FlanaganÆs and Dharma Kebabs. ôA successful business needs constant love, attention and care. ItÆs a long term commitment and if you neglect it, it can quickly lose its charm.ö It is important to be realistic about the amount of work involved in running your own business, especially a bar, pub or restaurant. People think owning a bar is all about sipping cocktails, enjoying the craic with friends, but they often overlook the amount of hours that are involved in creating the idea for the bar, setting it up, stocking it and organizing and managing staff. ôRunning a bar isnÆt easy û there are a lot of potential pitfalls to owning one,ö says Lawrence Morgan, owner of Jem in Hong KongÆs illustrious Lan Kwai Fong district. One of the primary stumbling blocks in owning a bar is lax cost control, and that all begins with the propertyÆs lease agreement. In Hong Kong, leases on commercial property are classically six-year agreements with a three-year rent review. Unfortunately, with soaring property values, bar proprietors who negotiated favourable leases three years ago are now seeing their landlords ask for another 40% or more when their review comes up. ôGiven the steep rise in property values and subsequent rental increases, a lot of bar owners are beginning to look at the numbers and realize that it just wonÆt work anymore,ö says Morgan. ôGetting the right lease and limiting the maximum increase at the three year review stage was absolutely critical for us; having that enables us to project our cost over the longer term.ö A lot of people want to own a bar for lifestyle reasons. They love the romantic notion of having a place for themselves and their friends to prop up the bar and enjoy a few pints after a hard dayÆs work. However, at the end of the day, it is a business and needs to be treated as such. A successful bar can be in the black within the first six months, and can go on to recover the initial investment within three to five years. However, like most new businesses, the statistics arenÆt in favour of the start-up. First off, youÆd better make sure you have a good, and trustworthy manager. ôFive bankers invested in the business in 1997,ö says Leahy. ôOne of them, Colin MacDonald, who had been working at HSBC, decided to walk away from his day job to concentrate full time on our business in 1999. That level of commitment and involvement has been an absolute critical success factor. Like any other business, we need a hands-on approach to the business itself and a comprehensive understanding of our customer base.ö That commitment has translated into a solid money making entity. McCraic Holdings has grown pretty much organically from the first outlet in 1997 to five today û an additional partner was brought on in 2001. With relatively little fresh capital the company has paid dividends to the shareholders. But before getting started on creating your dream bar, the first decision that a prospective bar owner needs to make is what kind of establishment they are looking to own. Two of the more popular options for prospective bar owners are the pub-themed bar and the trendier concept style bar. Aside from design, clientele and the quality of the wine lists, both require two very different business models and approaches. The en-vogue style tends to be a bit more linked to the in-crowd of the day, which is attracted to a barÆs newness and freshness. These businesses usually take on a number of different guises, such as wine bars, cocktail lounges, or smaller intimate nightclubs, and have a short lifecycle of around two to three years before they need to be reenergised and re-opened. However, they also have a propensity to achieve high returns over a very short period of time, before the ôcrowdö moves on. Hong KongÆs Hollywood Road is a prime example of this style of bar û they create a buzz early on, but are likely to close shop in a few years and be reopened as an entirely new venture. Pub philosophy can hence be divided into two main styles: the trendy contemporary bar cited above; or the ælocalÆ pub that tends to have lower start-up costs and is inclined to see normalised returns over a longer term. ôA decent portfolio of food and beverage businesses should have a mix of both types of business,ö says Leahy. However, there are exceptions: ôWhat we are aiming for with Jem, is something of a hybrid, not necessarily the latest hip and trendy place to be, but still a laid back lounge style environment for people to come and chat and not have to shout over the loud music. I am optimistic that is something that will have a longer life and wonÆt tire out,ö says Morgan. ôWe want to be a place for people to relax after work.ö But be warned: opening bars is no cakewalk and you have to find the right location. It can be a very pleasurable thing, but as investments go, it is one of the more high risk, although obviously highly liquid.