"People don’t want a knife, they want THE knife," Howard Saunders, founder of retail analysts Echochamber told delegates at the British Retail Consortium's annual symposium last month. He was talking about Cut Brooklyn, a small company located in one of the hippest quarters of New York City. The business is run by one guy, out of his workshop, where he produces a single product: authentic, hand-crafted knives. The prices vary, but generally, they range from an eye-watering $300 (£198.92) to $600 a knife. A limited supply is made each week, and they sell. Fast.
Cut Brooklyn is just one of many similarly niche companies which have popped up in Brooklyn since, in Mr Saunders' words, the "apocalypse" in retail caused by the financial crisis. And what they all have in common, according to Mr Saunders, is that they make just one thing, and they make it well.
The point of Mr Saunders’ speech was to explain to the audience - many of them senior management from large retail chains - that since the financial crisis, ordinary people are looking for more than just value in what they buy. Now, they're more interested in values. This trend, he said, is starting to spread to the UK as consumers want to spend money with retailers they can trust. They are increasingly becoming more interested in supporting their local community than large tax-dodging multinationals. And with food in particular this is even more the case - from independent meatball makers, father and son butchers to bakeries and chocolatiers, ordinary people want to buy locally sourced, high-quality food - and are willing to pay a little more for it. In fact, Mr Saunders believes gourmet food is going to regenerate the UK high street and is the only thing capable of doing so.
"People want to feel like they are at the centre of the universe for 10 seconds before they return to their miserable lives," he said. "They want something special that was hand-made with value and is part of a community. Ordinary people want the best. Don't assume customers are ordinary and want ordinary things."
This is bad news for the likes of Unilever, Diageo, SABMiller and Associated British Foods, but it’s good news for the multitude of independent producers in the UK, trying to make it in a highly competitive marketplace dominated by the big guys. These companies tend to be privately owned, so closed to outside investment, but one of them, Scottish craft beer producer BrewDog, has opened its doors to the public through the relatively new internet financing phenomenon of crowdfunding.
The brewery was founded in 2007 by two 24-year-olds, bored of the industrially brewed lagers and ales that dominated the UK market. They started by brewing small batches, filling bottles by hand to sell at local markets. The beers quickly grew popular and the company expanded. In 2009, when banks were less willing to lend cash, BrewDog opted for what was then an obscure form of borrowing called crowdfunding, which not only allowed the company to raise £750,000, but allowed fans to get more connected with it. In the first tranche of the so-called 'Equity for Punks' offer, more than 1,000 people invested and in that year, BrewDog grew 200 per cent - pretty impressive in a recession. Since then it has launched more craft beers and opened swathes of bars across the UK and in Stockholm, Sweden. A second tranche of crowd funding in 2011 raised just over £2.2m and brought in 5,000 new investors, helping to fund a state of the art eco-brewery.
Now, though, BrewDog has launched a third offering with a target to raise £4m by January 2014, with 42,105 new 'B' shares up for grabs at £95 each. The funds will be used to expand the brewery to double production, open a micro brewery and academy in London and to open bottle shops in the capital selling and stocking both BrewDog bottles and craft beer from around the world. There are also plans to open more bars in the UK and internationally, namely New Dehli, Sao Paulo and Tokyo.
In return, investors get a lifetime discount in all BrewDog Bars and on BrewDog beer, first access on limited release ranges and can vote at the annual general meeting on how the company is run. So far, the offering has raised £2m and the closing date for investment is 22 January 2014.
If all the shares are sold, that would bring the total number of shares in issue through all three tranches to roughly 135,365. Based on the current share price of £95 and the latest set of results where earnings after tax totalled £437,113, that would suggest a PE ratio of 29 - not all that expensive considering the growth profile. In 2012, for instance, BrewDog was the fastest growing food and drink company in the UK - it grew revenues by 80 per cent to £10.7m and pre-tax profit totalled £485,936, up 15 per cent. The business employs over 180 people, operates 11 craft beer bars in the UK and ships beer to 38 different countries.
This year, BrewDog expects sales to total £20m, a growth rate the likes of drinks giants Diageo and SABMiller can only dream of. But this kind of investment is not for the faint-hearted. The shares are highly illiquid and you won't be able to sell them until 2015. At that point, BrewDog will value the shares "on the same basis" that they were valued at the time of the offering. Because they're not traded on the open market, selling them could be tricky if no one wants to buy them. The company also warns "it could also prove difficult to get reliable information about the value of the shares or the extent of risks to which they are exposed". Worst-case scenario is that BrewDog is unsuccessful and shareholders lose all their money, though that could be true for any listed company too.
But, if you’re a beer connoisseur, buying shares could be a great way to get a lifetime discount on the beverage and be part of the company that makes it. It could also add a bit of diversification to your portfolio given the growing trend towards craft beers, and should the company go public, or sell out to a multi-national (in the same way the founders of smoothie-maker Innocent sold out to Coca-Cola), shareholders might be in for a handsome windfall. There's also the feel-good factor to consider: buying BrewDog shares means you're supporting young British entrepreneurs, which in a small way will contribute to economic growth.
