The Second Cup Ltd. is getting a corporate makeover.
The Canadian coffee chain announced Friday that it is changing its parent company’s name to Aegis Brands Inc. as it seeks a fresh start and hopes to make acquisitions to bolster its café business. (The company’s cafes will continue to operate under the Second Cup name.)
Second Cup was in crisis just a few years ago, with some franchisees criticizing management and declaring bankruptcy, a chief executive who characterized the business as “a ship that had lost its way” and a subsequent management shakeup as the chairman acknowledged the company had “not achieved its plans” for recovery.
In his first interview since becoming CEO in May, Steven Pelton enjoyed the luxury of talking about something else, largely owing to a deal that predates him. In August, 2017, the Serruya family of Yogen Fruz fame erased $8-million in Second Cup debt in exchange for a 29-per-cent equity stake in the company.
“The health of Second Cup is good," Mr. Pelton said during a discussion at the company’s offices in Mississauga, Ont. “It’s got its own niche in the market. Of course, we want to be bigger and we always want to be better.”
After the retirement of interim CEO Garry MacDonald, Mr. Pelton was brought on to lead an “ambitious new phase of growth,” chairman Michael Bregman said at the time.
But the chain is tiny compared with competitors, with just 252 stores, down from almost 400 at its peak in the 1990s. Its stock trades at about $1.40 a share.
With barely a trickle of cash flow from operations and a market capitalization of less than $30-million, Second Cup is hardly in a position to make any big splashes on the acquisition front.
Although it was a pioneer in Canada’s café industry, it has been eclipsed by food-service giants such as McDonald’s and Tim Hortons, which combined have more than 20 times the number of locations. Mr. Pelton said the brand’s strength is in “specialty coffee,” but even in the niche of upscale brews and cozy cafés, it has less than a fifth of the footprint.
“Second Cup is still having some challenges with franchisees, and they just haven’t evolved that brand,” said Robert Carter, an industry adviser with consultancy Straton Hunter. Canadians consume roughly four billion cups of coffee a year, he said, up from three billion five years ago, and most of that growth is in specialty beverages such as espresso-based and iced drinks. Second Cup is not attracting young people, who are the biggest consumers in that niche. “They continue to flounder in a segment that is growing overall.”
The company has been closing underperforming locations, which has contributed to continuing declines in systemwide sales.
Revenue in the most recent quarter was $6.5-million, with a net loss of $616,000, down from a net profit of $133,000 in the same period last year. The company had $13.8-million in cash and cash equivalents as of June 29. (It reports third-quarter earnings Friday.)
“We’re not concerned with raising the money for the initial acquisitions,” Mr. Pelton said. “If we ever have to take on debt, it’s going to be at a very responsible rate, a very low multiple of our earnings. We’re going to grow as we can. We’re not going to get ambitious and get ourselves in trouble. … We have cash in the bank, so the financing is down the road. But yes, we have had the conversations.”
He said the company will be looking for small businesses in the food-service and beverage sectors that have “grown to the end of their ability or geographic range.” Mr. Pelton was formerly the CEO of casual restaurant chain the Landing Group, in which Recipe Unlimited Corp. (then Cara Operations) acquired a 55-per-cent interest in late 2014, before buying the rest of the company the following June.
“Operators that have two to 20 units – that’s where the growth in the market is,” Mr. Carter said. “Small to medium restaurant chains are driving growth. I hear more and more operators saying they are going to create an incubator style to bring in small emerging brands and create a platform for them to grow. … The [price] of these smaller-unit-size restaurant chains is going to increase. Consolidation is growing dramatically in both the Canadian and U.S. markets.”
The company’s name change will take effect after the company’s next annual general meeting, in May. Aegis Brands will own the Second Cup cafés and intends to add more to its portfolio. Mr. Pelton will be CEO of Aegis and will remain president of Second Cup.
Second Cup has already looked at other business opportunities beyond coffee. Last year, it announced a joint venture with National Access Cannabis Corp. to open cannabis dispensaries and is in the process of converting two cafés in Alberta to this model.
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