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Not quite two decades after she acquired the rights to Bridgehead Coffee for $30,000, CEO Tracey Clark is selling the 19-store Ottawa chain to The Second Cup of Toronto for $6 million in cash and $3.5 million in shares. If Bridgehead meets certain earnings targets over the next two years, the purchase price will climb to $11 million.
“We took (Second Cup) stock because we’re taking a bet on joining forces,” Clark said Thursday in an interview. Bridgehead and Second Cup will operate as independent brands, reporting to a new parent company, Aegis Brands. Aegis intends to acquire more speciality coffee mini-chains that serve niches well enough to thrive in a very tough industry.
The impetus for Thursday’s announced deal, expected to close before yearend, came from Clark herself. The 55-year-old entrepreneur approached Second Cup early last year about collaborating on a Bridgehead expansion into Toronto. While the specialty coffee shop business is one of the most competitive there is, Bridgehead has a certain cachet: it is well known for its determination to pay coffee growers a fair price for what they produced, and for making its own baked goods and foods with locally grown and made ingredients.
Indeed, Clark initially set up her business with the idea that the bigger Bridgehead grew, the more coffee it would be able to order from farmers around the globe.
“My first naive little business plan was to add five to seven shops in each of five to seven cities by 2007,” she said. “We always anticipated we would go national. That was the dream.”
But things got a little complicated along the way. Clark added a central kitchen and bakery, then a coffee roasting operation on Preston Street famous enough to offer public tours. That, and going from zero to 19 stores, consumed a lot of time and capital. The national rollout had to wait.
Even now, it may be at least another year before Toronto will see its first Bridgehead outlet. In the meantime, Bridgehead is still moving ahead with new outlets over the next 13 months in the Ottawa airport and Carleton University. Clark said she hopes to also expand into Sandy Hill, though the time line for this is less clear. Clark will stay on as a senior Bridgehead executive, along with colleagues such as Kate Burnett, the chief operating officer, Ian Clark (director of coffee) and Cliff Hansen (company roastmaster). “I’ll stay here as long as I’m happy,” Clark said.
Once the deal closes next month, there’ll be more detailed strategizing with her new owner, such as where new outlets should go and under what brand name. There are risks for both Second Cup and Bridgehead in this new alliance.
For instance, Second Cup is a clear casualty in the coffee shop war being waged aggressively by giants such as Starbucks. Second Cup, since 2011, lost 85 per cent of its market value as revenue slid and the company posted net losses from 2012 through to 2017.
This is what prompted the firm last month to revise corporate strategy. It now favours a structure that encourages multiple niche brands and mini-chains such as Bridgehead, which will be the first acquisition under Aegis Brands.
Bridgehead, for its part, is joining an organization that enjoys substantially smaller market value per store. Consider that Second Cup operates 246 stores across Canada while the company’s shares on Thursday carried a value of $27 million. This works out to $110,000 per store.
Each of Bridgehead’s 19 outlets, in sharp contrast, is valued at $500,000 even under the more conservative interpretation of Thursday’s deal as a $9.5-million transaction.
All of this suggests Bridgehead has done a much better job of generating revenue or earnings, probably both.
Will Aegis be tempted to trim costs by consolidating Second Cup and Bridgehead supply chains? Perhaps one day, but not for the moment. Certainly Aegis Brands CEO Steven Pelton on Thursday made a very big deal about buying a specialty coffee retailer with “a deep sense of purpose” and “strong roots in its community”. Any move to undercut that would be counter-productive — especially when Bridgehead has already established it knows how to survive in the ultra-competitive world of coffee retailing.
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