Copyright: David Lawson – April 2001Home Page
Vows have now been renewed a third time. The couple are back in action with Big Yellow to exploit self-storage, which is the new rock-and-roll. Vetch insists this longevity goes beyond two partners. Practically the whole team moved across from Edge, including former Edge executives James Gibson, Adrian Lee, Stephen Homer and chairman David White, so it is more like a family affair. ‘Everyone has a stake in the business, there are no office politics and we all get along,’ he says.
Investors have little interest in cosy relationships, however. The bottom line is what counts, and BigYellow is likely to retain a splash of red when its first full-year figures since floating on the alternative investment market emerge next month. Nor can they expect profits next year, or the year after. Who needs dotcoms when you can lose money on property?
It is tempting to suppose Vetch and Burks are aiming to repeat their feat at Edge, floated in 1996 via a £5.8m reverse takeover and sold to rivals Grantchester for £128m barely two years later. Such assumptions could be a mistake. Self-storage, like retail warehousing, was imported from the US, but has barely begun to show the same potential. ‘There are 390 stores in Los Angeles, more than the whole of Europe,’ says Vetch. It will take another decade to become a significant sub-sector, despite the emergence of a clutch of other operators like Safestore, Access and Abbey. ‘People forget that retail warehousing had been growing for 15 years before we cashed in,’ he says.
This is why none of the big names like PRICOA, TR Property, Schroder and Merrill Lynch which backed the float has cut and run. Unlike dotcoms, losses were expected. ‘Every store we open will be a loss-maker for at least the first year,’ says Vetch. And as the company is only half way to its target of 50, there is plenty of red ink still to flow. Once open, however, these stores rapidly start to pour money back into the coffers. BY’s Staples Corner site makes £1m a year. When full, this will double, and all the signs are that well-located stores can reach more than 90% occupancy within a year or two. Then the income can be ratcheted up. Last year BY raised prices on its older stores by 8%.
So when will the funds start to notice and begin to gobble up the sector? ‘Never,’ says Vetch. ‘Self-storage is too management intensive.’ These big boxes appear to be self-sustaining cash machines, with the minimal cost of a handful of staff set against multiple customers paying monthly fees. But most of BY’s people are at head office training, inspecting, retraining and reinspecting.
‘This business is about service. It has to be just right or customers will go somewhere else,’ says Vetch. If that sounds like running a shop or hotel, it is meant to. Burks and Vetch exchanged Edge for BY because they wanted to move into a modern business model based on service and earnings rather than bricks and mortar.
‘Edge wasn’t a company; it was a collection of assets. We could not fail to succeed by selling them during that frantic period of demand,’ he says. ‘Now I could not tell you the value of any store or our net asset value. But I could tell you how much each one earns.’
Some could be worth more as an alternative use like retail warehousing but this property is not for turning. That would be pointless, as each sale would diminish earnings. A seamless chain is seen as crucial. One major multi-national just took space in a range of BY stores after inspecting only one. Most property companies would die for such a deal but branding continues to elude all but serviced offices. It is not surprising that this earnings-driven sector is where Vetch sees the closest parallel to self-storage.
Ironically, bricks and mortar have continued to play a central role. Vetch admits that expansion has been slower than anticipated because getting the right buildings in the right place has been difficult. ‘The big difference for Mark Dixon at Regus is that he does not have to provide his own real estate,’ says Vetch. Big Yellow generally has to build its own assets because the firm thinks big. A 100,000 sq ft building costs little more to run than one half that size but produces twice the income. BY also requires the best addresses, as it concentrates on top-slice customers. ‘You can’t fill a 100,000 sq ft building on a back street,’ says Vetch.
Putting a giant yellow box on a prominent street is a recipe guaranteed to give planners chronic indigestion, which is why progress has been slower than expected. Burks and Vetch are not scared of a scrap: they fought 22 appeals and won 19 at Edge. But they admit underestimating the difficulty putting what is essentially a B8 use on industrial sites. Now the old skills are being refocused and development is back on track. A dozen stores are open, another 10 on site and 50 should be open within three years. Why 50? ‘It seemed like a good figure at the time,’ says Vetch. ‘Half inside London and half outside.’
What happens when they are all up and running is unclear. Vetch insists he is not among those desperate to desert the stock market, saying he ‘quite enjoy being involved in a listed company.’ He and Burks are different characters but neither enjoys management. They left Citygrove because it had turned into a ‘boring sausage machine’. They dissolved Edge because ‘it had nowhere to go other than becoming a conventional property company.’
The partnership has not changed even though Vetch is now a chief executive while Burks is property and construction director. ‘Someone has to work on strategy,’ says Vetch, dismissing any change of status. They own 27% of the company with another 8% held by the rest of the management. No-one is anticipating selling out this early but mergers seem inevitable in the sector to create players with critical mass. Shurgard is in the same top-slice market as Big Yellow and has the strength of international backers like Deutsche Bank and CSFB. It raised £160m a couple of years ago to spearhead a European assault but has yet to spend freely in the UK. Access also has a giant backer in Security Capital, although the US investor’s European intentions have become blurred as its home economy weakens. Philip Lewis expertly engineered takeovers at Colliers Erdman Conrad Ritblat before moving to Safestore. Mentmore/Birkby was also moulded by mergers. Who takes over whom is a moot point. A debt-free, fast-expanding outfit like Big Yellow is bound to attract interest as self-storage begins to show up on investors’ radar screens. The key could be when it all starts to get boring again.
Headquarters – Bagshot, Surrey
Chairman – David White
Chief Executive – Nicholas Vetch
Property and Construction – Philip Burks
Finance director – James Gibson
Operations duirector – Adrian Lee
Sales director – Stephen Homer
Half-year Sept 2000 Sept 99
Turnover £1.7m £0.44m
Operating loss £1.4m £0.57m
Pre-tax loss £0.85m £0.72m
Net Current Assets £21.3m £4.3m
Stores committed 19 (target 50 by 2003)
Prospective net store space 1.1m sq ft
Market value £127mShare price 132.5p (floated at £1)