What is Tesco doing buying restaurant chain Giraffe?

14th March 2013

Financial journalist Tony Levene considers what Tesco’s purchase of Giraffe means for the overall strategy and the supermarket wars.

“Even some fans concede the world food repertoire leave much to be desired and the service is ever more hit-and-miss.”  That quote might sound like a judgement on Tesco, Britain’s biggest retailer, even if the world food has improved substantially,  at least in some stores.

It’s not.  Those lines come from the latest Harden’s UK Restaurant Survey entry on Giraffe, the restaurant chain.  Harden readers give the eateries 5 (it’s the lowest mark) for food, 4 for service and a depressing 5 for ambiance.

But from now on, any confusion will be understandable, following Tesco’s £48.6m purchase of the child friendly restaurant group from private equity.  This now appears to be part of  a new thread in the retailer’s strategy – paying small sums to acquire non-core assets.  The deal follows its purchase of a 49 per cent stake in coffee chain Harris & Hoole, and a deal to acquire upmarket Euphorium Bakery.

Investors in the retailer, which takes around one pound of every eight spent in the UK, must wonder what is going on. They have seen their shares hit 442p in April 2010, fall to 304p by June 2012, and recover to a current 377p.  Despite the recent upswing, it has dramatically underperformed the wider market.  The Giraffe acquisition has created interest – as did some of the negative anti-Tesco coverage for Harris + Hoole – but on their own, these purchases are hardly a game changer in the struggle against Sainsburys, the war on Waitrose, or the aggression on Asda.

The Giraffe chain made £4m profits in its most recent full year (2011-12) on sales of £40m.  Tesco’s most recent results show annual global sales topping £72bn. And there is a danger that Giraffe’s core audience of yummy mummies and their well-heeled offspring will find somewhere else – it never pays to underestimate potential anti-Tesco feeling – the horsemeat scandal was just icing on the negative cake.  Hampstead, Kensington High Street, Royal Festival Hall and Holland Park Avenue are just some of the upscale Giraffe locations in London.

Will they want to spend the £41 per head that Harden claims is the cost of a three course meal, wine, coffee and service in a restaurant that could sit cheek by jowl with the Krispie Kreme display in some of Tesco’s larger stores?  Maybe, if they get free parking at the same time.

The retailer obviously believes the strategy will work.  Kevin Grace, Group Commercial Director at Tesco said: “We have the opportunity to develop some of the space in our larger stores to create retail destinations that offer customers even more choice. Giraffe is hugely popular with a wide range of ages and particularly families – we think our customers will love it.”

He continues: “The acquisition forms part of Tesco’s strategy to develop the space in some of its larger stores and create even more compelling retail destinations where customers can meet, eat and drink, as well as shop.”

It already has a deal with Costa for coffee shops in some larger stores so this will add to the Tesco list – my local Tesco large store has a Costa but a nearby standalone Costa seems to attract more  consumers with time to kill reading the paper or surfing online.  Doing this is in a Tesco is perhaps not the most attractive locale.

Reading between the lines of the Tesco statement, the store needs something to fill up the gaping, zero or low profit spaces in its enormous Tesco Extra outlets where its range of non-food items has been hit by online (and specialist) retailers.

Assuming, however, that Giraffe works, what does it mean for Tesco shareholders?

Put into context, the £48.6m purchase price is roughly a quarter of worldwide daily turnover, about 40 per cent of one day’s sales in the UK.  It is not a big idea in the way that Clubcard revolutionised group sales.  But neither is it a risk such as setting up the Fresh’n’Easy chain in the United States.  This has swallowed up a billion or so after five years in operation and still to show a profit – it is hoped it will go into the black in 2014.

Even if Tesco doubles or trebles profits at Giraffe, it will barely register – Giraffe will have to be profitable at its current rate for 250 years to make up for the Fresh’n’Easy losses.

Instead, think of Tesco as a tobacco company without the toxic product.  Tobacco companies used to spend a fortune on advertising, market research, product development and all the other facets investors expect.  Legislation, regulation and health awareness over the past four decades or so has changed all that. Instead, cigarette firms do little more than manage for decline in sales in developed countries and push the product at relatively low cost in other locations.  It has proved remarkably profitable with the sector a superstar since the end of the dotcom boom.

Tesco has now reached the level where the main options are either managing for decline or managing for something new.  Assuming the latter, the strategy now seems to be to accept that the concreting over of Britain with superstores is going nowhere – while the carpet-bombing of areas with Metro and Express local store formats cannot go that much further.  In some areas, there are up to four Tesco local outlets within a square mile or so – and the opposition including Sainsbury’s and Waitrose have muscled in on this game.  Morrisons has just announced it will join them.

So Tesco finds itself with a lot of spare space in its large stores and a lot of cash but with no ground breaking model – little has come so far of its move into retail banking. A solution could be for Tesco to seek growth (or at least prevent decline) by turning itself into a mix of investment bank, private equity investment trust, and property owner.

It has loads of easy to develop space in retail parks.  Some of this will become Giraffe outlets. If it can offload a part of each superstore into a Giraffe and earn the profit margins these restaurants have so far reported, it could be a more profitable use of those square metres than leaving it to low margin non-food –  its F & F clothes brand has failed to set the world alight in the same way as Primark or rival Asda’s George.  If it can then use that model many times over, it could solve its surplus space problem.

This could be what Tesco is really doing – although if its stated ambition of using Giraffe to ensure customers stay on site longer and spend more works, then it gains twice over.

As Apple’s gravitational share price collapse since it became the biggest stock market firm in the world early last autumn shows, nothing is forever in finance.

The pressures on Tesco are such that its historical expansion model now has little traction.  Stakes in foodie brands such as Giraffe, Harris + Hoole and Euphorium may only be the start of this move to a portfolio strategy.  Expect other similar purchases – and remember that all these are concepts which so far no one can put online. The Guardian’s Zoe Williams even applauded the deal for being child centric.

Not even Silicon Valley/Roundabout has found a way of delivering coffee shops or restaurants for better off mums to chat with their friends via a broadband connection.

24 thoughts on “What is Tesco doing buying restaurant chain Giraffe?”

  1. forbin says:

    good god , do you think people will think that if the GDP is so much higher under these new figures , that maybe they’ll start asking who was benefiting from all this increased wealth ?

    anyone at all ?

    Or will they just shrug their shoulders and go back to watching east corridale…. with out a though as to why things are not going well for them ?

    no doubt the media will just blindly accept anything the HMG says, they are after all just scribbers and copy ‘n’ paste artists ….


    1. Anonymous says:

      Hi Forbin

      Changes which represent actual changes in the economy I am all in favour of. However the R&D changes which are the major one this time beg the question why they were not done this way before and that is before we arrive at the double-counting critique of this part of the move.

  2. dutch says:

    Imputed pension payments……..estimates of waccy baccy consumption……

    Mugabe will be laughing.

    1. Anonymous says:

      As you are a student Dutch you may have missed this from the late 80’s. I do not think that any of us realised it was a prescient view of future GDP trends at the time…


      1. Jim M. says:

        Another old client appears from the past!
        Very nice N. London girl. as I recall!

  3. Pavlaki says:

    I really can’t see how R&D can be counted in GDP! It is an expense, albeit an investment, and the expense is recovered when the new products that arise from R&D are sold. The benefit of R&D appear in the national accounts when new products and ideas are translated into sales and profit and, as you quite rightly point out, to include R&D now will lead to double accounting.

    Attempting to include the grey economy is a better idea and I have often wondered what the real GDP of Greece is as it is a country where the grey economy is substantial.

    Does the world have an international standard on what makes up GDP? An agreed set of rules on what is and isn’t included?

    1. forbin says:

      do we have international standards?

      peeks through the looking glass………

      When we use GDP ,’ HMG said in rather a scornful tone,
      ‘it means just what we choose it to mean — neither more nor less.


      “You don’t know how to manage Looking-glass GDP figures ,” the Unicorn remarked.
      “Make it up first, and measure it afterwards.”


  4. Jan says:

    If sewerage is included then I want to know why hot air isn’t?

    1. Pavlaki says:

      If sewerage and hot air were included in GDP then the Euro zone would be booming as their politicians are full off it (even more than ours!).

    2. Anonymous says:

      Hi Jan

      Some have wondered if it might be the steam in this bit.

      “Electricity, gas, steam & air conditioning output decreased by 8.8% in February 2014 compared with February 2013, with decreases in both of its subsectors.”

      So I guess all that hot air was more valuable last year when the weather was colder….

  5. Anonymous says:

    Hi Shaun,

    Some musical recommendations for today’s blog.

    Manic Street Preachers “If you tolerate this then your children will be next”

    And Dire Strait’s Industrial Disease – as a statistical journey into the absurd.

    1. Anonymous says:

      Hi ExpatInBG

      Ah yes Dire Straits, kind of sums up our economic position with the groups’s name doesn’t it? Also a bit like the Goodies comedy series they do not get much airplay these days if we exclude Money for Nothing. For those who do not know this song,here it is.


  6. Anonymous says:


    Why September for this revisionism? Scots vote result know by then perhaps?

  7. Just a thought says:

    Hi Shaun,

    Does it imply a blatant admission that UK PLC became a banana Kingdom??? I wonder if the referendum promise to leave the “Zerozone” is to join the Russian Federation instead.

    1. Anonymous says:

      Hi Justathought

      These “improvements” are part of a move which is being pushed by the World Bank and will accordingly be world wide. So perhaps it would be better to say that soon we will all be banana republics/kingdoms.

  8. Noo 2 Economics says:

    I wonder if the UK GDP predictions in the recently released World Economic Outlook include these revisions? If not, it looks like they’re going to have to admit to being too pessimistic about UK GDP again, only this time in relation to the boost the new way of counting will give to the GDP numbers!

    1. Anonymous says:

      Hi Noo2

      No the IMF predictions do not include the revisions and they will have even more problems with the numbers from Nigeria after the 89% rise in nominal GDP..

  9. Paul C says:

    I now get the relevance of yesterday’s Nigeria story. Indeed a few per cent extra to GDP could provide that “feel-good” factor for election time. The coalition has rescued us from the abyss, look at all the credit flowing and asset rises. Are we all not feeling better now?

    I have direct experience of innovation and government funding. Didn’t you know that quangos can make innovation? R&D can is being invested all the time. The Technology Strategy Board is making R&D investments all day long with Q.E. funding. The Q.E. is being turned into useful and countable GDP increases, It’s quite simple really, print some money, find some crazy idea’s SME’s, give them the printed money, they do some crazy laboratory work and that seed corn investment is multiplied by their own sweat and tears and the sum total gets added to GDP.

    As a recipient in an innovation voucher, I can confirm it works. We have invented some really cool stuff, a house that doesn’t cost anything to heat. No one has bought the house yet but when they do all of that R&D investment will pay back and doubly. In the mean-time don’t worry we can count this work as GDP growth anyway.

    You couldn’t have written a better fiction novel. The next installment will involve displacing UK students with foreign bodies and their alien money contributions will be counted as GDP increases as well but that is for another film franchise.


  10. Kentish Mike says:

    Relax guys – the Ministry of Truth is just updating the statistical measures.

    Just learn the newspeak: GDP => how much richer you are.

    Sit back and drink some victory gin. We’re winning.

  11. Anonymous says:

    Hello, Shaun. The video of Dire Straits singing “Industrial Disease” is awesome.

    According to the Consumer Price Indices Technical Manual 2014: “Expenditure on illegal transactions is included in the scope but excluded from the coverage.” This is in spite of the 2004 ILO CPI Manual recommending that illegal transactions be included. This strikes me as very sensible. However the ONS resolves to measure narcotics and prostitution services, I really hope it doesn’t lead to pressure to include such things in the CPI, as long as they remain illegal This could happen since generally a direct measure of any volume series is inferior to an indirect measure obtained by deflating the value series by a specification price index.

    Andrew Baldwin

  12. forbin says:

    Robert S,

    calm down and have some popcorn …..

    just remember that you have choices in the little things in life , like which coffee to have or what channel to watch but in the real world and big issues you will have no choice at all

    you’re a spectator in the worlds wackyest freak show and we have front line seats ……

    and if asked to vote ( assuming you did not choose the right answer first time !! ) you will be given the choice to choose the colour of the Idiot who drive the car off the cliff….


  13. therrawbuzzin says:

    They are not alchemy, they are fraud, and I’m surprised you’re surprised, let alone outraged.

  14. Jim M. says:

    Hi Forbin (and hi Shaun)

    My non-economist’s head is fairly spinning!

    It is, of course, highly unlikely that I have understood this correctly, but does this:
    “The change from using the market value of assets to actuarial calculations will be made in Blue Book 2014.”

    signal that the mark-to-model stuff, which has held up so well in the banking sector, is about to be rolled-out to the broader economy?

    I may have to diversify my investments… popcorn is cornered… maybe “wacky baccy” is the way forward??

  15. Anonymous says:

    Hi JimM

    Yes you are correct to say that rather that using actual pension asset values then numbers will be churned through a model and then come out at a more convenient level. This is analogous in a way to what the ECB did with peripheral euro area bonds when the prices fell heavily. Strangely now they are much higher some Euro area central banks are pushing to use the actual prices!

    There is a lot which could be said about these pension models but “Oh Well..” by Fleetwood Mac seems appropriate.

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