Bobby Hashemi and his sister Sahar founded coffee bar operator Coffee Republic in 1995 while both taking time off from their respective careers as investment banker and solicitor. The first store opened in Mayfair thanks to a £100,000 bank loan secured by the DTI Small Firms Loan Guarantee Scheme.

Despite claiming to be ‘clueless’ and ‘making all the classic mistakes’, the duo looked to have tapped into a winning idea. When the first store broke even within nine months, they felt confident enough to expand and raised £600,000 through an angel investor to fund the opening of a further five bars.

Expanding everywhere

After listing on the London Stock Exchange in 1997, the business grew exponentially. From 1998 to 2001, the number of stores increased from six to 82. But at the height of the business, both Bobby and Sahar felt it was time to move on.

‘I didn’t find the experience as much fun as it used to be and I thought my job as an entrepreneur was done,’ says Bobby. ‘I felt it was time to bring in a professional management team to steadily grow the company in the UK and Europe. We needed operational people. The strategy was set; it was all about implementation.’

In March 2001, Bobby left his post as chief executive and became a non-executive director and Sahar stepped down from the board. In his place, the company appointed Peter Morris, a former UK managing director of Walt Disney, who had also been responsible for the 120 Disney stores operating throughout Europe.

An unprofitable business

Annual turnover had reached £21 million (a 68 per cent increase from the previous year) and pre-tax losses had stabilised at £2.4 million. ‘The City was more interested in how fast we could expand rather than how profitable we were,’ recalls Hashemi, who admits the company has never been profitable as a Plc.

Hashemi spent a year relaxing and travelling, and counters criticism that was later levelled at him that he ‘sold out’. He states that he did sell some of his shares but there was no issue with fellow shareholders over his departure.

‘Everything was smooth when I stepped down. It was very amicable. It was seen as competent to bring in an executive with experience,’ he affirms.

The wrong person for the job

Competent it may have been, but the new management spelt disaster for the company when the rush to expand backfired. Coffee Republic acquired Good Beans in late 2001 for £1.2 million. This may have added 19 bars to the portfolio, but they had to be refitted to the Coffee Republic format.

By 2002, the company had increased turnover by 32 per cent to £27.8 million but pre-tax losses ballooned to £7.5 million, net funds had disappeared and in its place was net debt of £2.5 million. Unsurprisingly the shares plummeted to 5.75p.

It was then that Hashemi made an unexpected return to what was essentially a failing business, as executive chairman. Financial director William Scott left and Morris only remained for a short while after.

Ignoring the competition

‘I had no choice but to return, as the board requested I come back in. Unfortunately my choice of person to run the company was not right and the business suffered because of this. Still, I had no reservations about going back. After all, I helped create the company and someone had to sort out the mess,’ he argues.

The dramatic fall in the company’s fortunes was, according to Hashemi, due to bad cashflow management.

‘It’s annoying and sad,’ he says. ‘It’s a basic criteria to have 12-month forward cashflow projections. The cash went down because proper due diligence was not made on the acquisitions regarding creditors. It all cost more than management expected and they were acting as if they had unlimited banking facilities. As a result, we’ve been fighting on the back foot ever since. Retiring early was a mistake.’

Another fault was the previous board’s failure to recognise the strength of the competition and to react to it. Hashemi admits that ‘as an entrepreneur you need to get blinkers on to focus and sometimes you forget to look around you. We had come up against big competitors with deep pockets.’

Paying the price

His first priority was to sort out the business’ finances and renegotiate banking terms. Once this was done, the next step was to ruthlessly downsize.

‘To me it was black and white. Any bars that were not generating a profit or had no prospects had to be closed down,’ he affirms.

The restructuring is now almost complete. From its peak of 105 bars, the company intends to run no more than 47, and currently operates 55.

Hashemi admits the company grew too aggressively. ‘At the time, there was a real scrabble for property and we acquired sites that in hindsight were not viable.’

The company also rejected an approach by rival Caffé Nero (which recently surrendered its six per cent shareholding in Coffee Republic). It was felt the offer would not represent value to the shareholders and Hashemi confides that there was never a final offer, intimating that Caffé Nero may not have paid what the market was expecting.

Reinventing the business model

Not only has Hashemi gambled on turning the company round, he is also looking to fundamentally change the business concept. Known for its ‘cosy sofa culture’, the new-look Coffee Republic is also trying to make money from people with little time who prefer lunch standing up. For this reason Hashemi has launched a Deli Republic format. He is looking to differentiate the business by offering fresh made-to-order foods, as well as serving hot dishes.

Deli Republic is currently at a trial stage. After raising £2 million of a hoped-for £2.4 million via a placing late last year, the concept has been rolled out to five sites, but no decision will be made on a full rollout until mid-2005. Still, the signs are encouraging, as its last interim results showed sales at the Delis were up by 30 per cent. For the year to March, the company slashed pre-tax losses from £9.8 million to £1.7 million and its albatross – the debt it has carried – has looked less daunting, having dropped by £1 million to £2.5 million.

Hashemi believes that, with further costcutting, the company should reach break-even in 2006. ‘We’ve been through all the growing pains,’ he claims. ‘It’s now time to create a new future.’ But for all his enthusiasm, the company still has an uphill struggle ahead.