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Sometimes you have to tear up the business plan to expand, as bagel shop entrepreneur Danielle Downing tells Teresa Poole

There comes a point in the early life of most new enterprises when its founder sits back, dusts off the business plan, and does a comprehensive rewrite of at least part of the original business model.

There comes a point in the early life of most new enterprises when its founder sits back, dusts off the business plan, and does a comprehensive rewrite of at least part of the original business model.

For Danielle Downing, the creator of the Bagel Street mini-chain of bagel delicatessen outlets, this entrepreneurial pause for breath came in 2001. Three London outlets had opened - in Hampstead, Soho and the City - and a dedicated bakery had been set up to bake the company's bagels. But the sums did not add up.

"We are a typical entrepreneurial story," says Downing. "You write your business plan, raise your money, start the business, and then you get so involved that you don't have time to re-evaluate what's working and what's not working - because you get called at 4.30 in the morning to drive a bagel delivery van!" About a year and a half after the first unit opened, Downing did a rethink. "I realised that the Soho outlet just didn't work. It was too small and in the wrong location." Nor did the model of a dedicated centralised bakery make sense. "The overhead was too much for the business that we had." So Soho was closed (a financially painful move) and the bakery sold (which provided cash for a new outlet near the London Eye). Bagel production was outsourced to the company that had purchased the bakery, which also took on Bagel Street's team of master bagel bakers.

"That marked the end of the start-up phase," says Downing. "A lot of entrepreneurs don't have the flexibility or vision or something; they get stuck with their business plan. I was able to change it." The London Eye outlet "was a success from the time we opened it".

Reworking the original business recipe is often an essential step in making the transition from the start-up phase to real growth. Sean McLaughlin, a corporate finance partner at Baker Tilly, the accountancy firm, says entrepreneurs "need to be tough and pragmatic". He adds: "A lot of the time it will be lonely and bloody hard work. They also need to be able to step back and say, well this was part of my original dream but it doesn't really work, so I'm prepared to go back to the drawing board and reassess what I am trying to build."

Simon Barnes, Director of The Entrepreneurship Centre at Imperial College's Tanaka Business School, concurs. "If you look at the majority of businesses, three years after their launch they are nothing like the original business plan." When investors assess entrepreneurs they want to see "the willingness not only to be flexible, but to adapt very quickly".

The Bagel Street concept started in autumn 1998 when Downing quit her well-paid job as an investment banker in London with Salomon Brothers. American-born, she knew that across the Atlantic bagels were a popular, healthy fast-food alternative which had seen spectacular growth (from two to 30 bagels per person per year) over the previous 10 years. Could this be her way into the highly competitive, but often troubled, UK coffee shop sector? The Brits at that point were munching through a meagre 2.8 bagels per person per year "so any business analysis was that it could expand in some fashion," she says.

Start-up finance of around £1.2m was raised from friends, family and former banking clients and the first three outlets were open by April 2000. With rival operators, such as Bagel Factory, Ixxy's Bagels and Oi! Bagel, Bagel Street wanted a slot at the premium end of the market. "We're a niche retail food operator. All we do is bagels and all we do is deli-style, so it is all customised," says 39-year-old Downing.

Around the time she was disposing of the Soho unit and the bakery, Downing put more of her own money into the business rather than dilute her majority stake by seeking further funding. "I had to remortgage my house." It was a good decision, she says. "After selling the bakery we were breaking even." By the end of 2001, as the company moved from start-up to growth, it needed something to mark it out from the competition. Heathrow airport was identified by Downing as the best potential location - an ambitious goal given that Bagel Street was still a small operation, led by a founder who was still putting in 80-hour weeks. "Heathrow wanted premium, niche operators," she says.

Bagel Street was short-listed for the tender process, competing against the likes of Compass, and won on its second attempt. Its Terminal 3 air-side shop opened over the June 2002 Golden Jubilee weekend and Bagel Street discovered the joys of a captive customer audience. "Our first day, we went through 50kg of cream cheese. That's a lot of cream cheese!" The Terminal 3 unit is the highest selling bagel shop in the whole of England, serving 10,000 bagels a week.

Operating inside a secure airport meant a sharp learning curve. "For the next six months I spent all my time in Heathrow," says Downing. "You can't deliver your product to your shop yourself, every product has to go to a [central] consolidator. They take it through an X-ray process and then they deliver it to you. So your supply chain gets much longer, and you work in a very confined space. We've become a much more sophisticated operation as a result of working within Heathrow, with much higher standards that we then apply to our other shops." The Heathrow outlet boosted the company's profile and the next Bagel Street opened last October in the Brent Cross shopping centre in North London, where the company saw off high-profile competition in the tender process.

With 70 people working for the company, 100,000 bagels sold a month, and a forecast turnover of £4.5m for 2004, Bagel Street is now poised for more sustained growth. The number of outlets will go from five to eight by the middle of this year, with openings in Fenchurch Street Station, Tower Bridge and Belsize Park. The plan is for six to 10 more stores during the second half of this year if suitable locations can be found.

Expansion outside the M25 is on hold, but Downing is confident that she can use the company's own cashflow to establish a profitable chain. She is mindful of the experience of other food chains that seemed to concentrate more on a fast roll-out of outlets than on building a profitable base.

Bagel Street has from the start tried to cater both for the takeaway customer and those who want somewhere congenial to sit and eat. But the outlets are facing ever-increasing competition. Pret A Manger, the sandwich supremo, is opting for a cosier atmosphere for its shop interiors, including soft leather benches, to boost the eat-in share of the business. It is a delicate balance for any food operator. Coffee republic has ditched its comfortable sofas, in an attempt to rid its shops of long-stay, low-spending, slow-drinking customers. Bagel street has an alternative tactic for persuading customers in some of its branches to keep chewing through bagels; soft chairs are sparse, but equipped children's play areas are there for the buggy brigade.

"I want to make sure every shop we open is profitable," says Downing. "From the day we open, within two weeks we have all our margins under control. It's taken a bit of time, but we have a nice business now."

'I've got used to the red tape... I hire others to deal with it'

In October 2000, an exasperated Danielle Downing likened British business red tape to the regulatory overkill she had encountered during her six years in Moscow.

In a witty rant published in The Wall Street Journal, she lamented: "It is not that Moscow is better than you think; London is worse than you might expect." Take, for instance, the visits of one local council's Odour Nuisance Officer; he was repeatedly sent to sniff out whether any unpleasant smells were emanating from one of her shops. (They were not.) Before opening a unit, Downing needed at least 10 different licences, at a total cost of about £2,000 and up to 40 hours a week of her time.

It was a scenario familiar to many start-up entrepreneurs. So after all the efforts of the Blair government to help small businesses, has Downing's red-tape burden lightened? She grimaces. "I think I've got better at dealing with it - I hire other people to deal with it, or just avoid it." William Sargent, chairman of the Small Business Council, says the mindset of the people writing the legislation, and the consultation process, has improved but it will take longer to translate to local authority level. "One can influence the DTI and the Treasury to improve their regulatory approach, but I'm not completely convinced that this has filtered through to the local authority regulatory environment at all yet."

Bagel Street's latest irritation concerns the licence for pavement tables outside the Hampstead shop in North London. It used to be less than £100 per table per year. "Now they send me the new invoice - and it's £250 per table. No warning. No consultation." What can she do? "Decide if I still want tables outside or not." Says Ms Downing: "I've given up fighting. I focus on battles that I can win, like getting good shops and getting good people."