No Pain No Gain: Wake up and smell the potential at Coffee Republic

The coffee may be splendid but the aroma that has surrounded Coffee Republic for much of its time as a quoted company has not been particularly pleasant for investors.

But it appears that a shareholders' revolt could be heralding a change in the group's fortunes. Although these are early days – and there is many a slip 'twixt cup and lip – the signs are that new management is getting to grips with the chain's problems and that the coffee and deli retailer is now moving in the right direction.

CR has been a bitter disappointment to many since it arrived on the stock market a decade or so ago. Since then, losses have been a continuing feature, cash injections have been undertaken, and takeover approaches have been spurned.

The first outlet was established in 1994 when brother and sister Bobby and Sahar Hashemi decided that London lacked sophisticated coffee houses. They were among the pioneers of US-style coffee bars in this country but, like many a trailblazer, they found the going tough. Their business grew quickly, but competition from Starbucks and others took its toll.

Bobby Hashemi, a former investment banker, decided to step down as executive chairman in October 2006, with opposition to his reign increasing. Two shareholders, then accounting for around a quarter of CR's capital, conducted an acrimonious and stirring campaign. It seems likely that Hashemi jumped before he was pushed.

Discontented shareholder Peter Breach took over as chairman, with fellow conspirator Steven Bartlett, who gathered support through an internet chatroom, becoming chief executive. They must have realised that they faced an uphill struggle.

The company is a stranger to the dividend list, and in the past four years alone has suffered losses of more than £7m. In the last half year, the first accounting period with the rebels in charge, there was something of an improvement, with the loss cut from £1.3m to £895,000. CR remained in a negative asset position at the interim stage. Not a satisfactory state of affairs.

But there are mitigating influences. The gap could easily be eliminated, and the company says its bankers are supportive. Even so, another cash call could be on the menu following placings that produced around £1.6m last year.

Before his departure, Hashemi was switching the chain's emphasis from company-owned outlets to franchises. This process has continued. Of the 80-plus domestic outlets, more than 40 are now franchised. An intriguing link has been established with Cineworld to develop a presence in each of its 73 cinemas. And a deal has been forged with Greene King, the brewer and pub owner.

And CR is also developing overseas. It is now represented in eight countries and is keen to spread its presence. The franchise model, through the granting of a master franchise for a country, seems ideal for international expansion.

Breach believes that in spite of CR's modest size – it is capitalised at about £13m – overseas growth could be considerable, particularly in Asia. Economic expansion in the East, he says, "does not suffer from the high level of regulation which applies to the West".

At one time, the franchise industry had a decidedly downmarket image. But times change, and today a host of leading names has adopted the franchise approach. The number of franchisees, often recruited from middle management, is growing rapidly. Myhome International, the residential cleaning to car valeting group, is thought to have the largest army of franchisees – more than 800 – in this country.

As I've said, I am seeking recruits for the No Pain, No Gain portfolio, and CR could be an interesting addition. The shares, at about 2.1p, are in the penny-dreadful category and obviously highly speculative. They are certainly outside the widows and orphans orbit.

The portfolio is not afraid to take the odd gamble, and over time CR could prove to be a rewarding investment. But I am in no rush to take the plunge. Coffee Republic, with its drink and food offerings, could be a casualty of the belt-tightening that seems an inevitable consequence of the credit crunch that has so alarmingly been created by madcap bankers.

Eating-out shares have already taken a battering. But coffees bars and suchlike are low-ticket retailers and should avoid any serious injury from consumers cutting back their spending. After all, a cup of coffee and a sandwich hardly rate as luxuries.

cash@independent.co.uk

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