News & Views

Could ownership be an alternative way to engage with customers?

by Contagious Contributor
When UK Burrito chain Chilango recently invited customers to invest in the brand, the take up was impressive. Luke Lang, co-founder and director of equity crowdfunding site Crowdcube, which is hosting Chilango’s ‘Burrito Bond’, explores the world of mini bonds and asks if they could offer an alternative route for customer engagement.

Last month a chain of London-based Mexican restaurants invited its customers to ‘buy into’ the business – in the true sense of the word.

UK department store John Lewis has done it, and cult brands like King of Shaves, Hotel Chocolat, Naked Wines and even boutique hotel chain, Mr & Mrs Smith, have also launched bonds of their own.

The success of so-called retail bonds (typically worth £50m and listed on the London Stock Exchange), has now led to the emergence of the mini bond – a way for companies to raise money by inviting customers to invest as much or as little as they like in a business for an agreed period of time (generally worth just £50 and unlisted).  

Chilango, the Mexican restaurant chain, was one of the first to launch its mini bond, called appropriately enough the Burrito Bond – the first crowdfunded mini bond, which combines mini bonds with crowdfunding. The firm raised over £1 million, with a week still to run, and plans to spend the money on expanding its chain of restaurants across the capital.

So apart from the cash injection and generating some headlines, what is Chilango’s team looking to achieve by getting involved in the mini bonds market? According to the company, it is all about letting customers and fans help shape its future. Eric Partaker, the co-founder, believes ‘having a direct connection with our guests has been in our brand ethos from day one’.

The nirvana of customer engagement

But surely every business wants to build a closer relationship with its customers, so what does a mini bond offer that’s different? Perhaps inviting people to invest directly into the business and allowing them to share in its success with some form of financial rewards is the way forward?

Mini-bonds do tend to attract passionate customers. Take celebrity chef Hugh Fearnley-Whittingstall’s River Cottage restaurant, which recently launched its River Cottage Bond, raising £1m ($1.7m) in just two days. The company has a following of loyal customers built up over several years and this has paid off. River Cottage bond investors put in amount from £500 ($850) in return for 7% interest per annum, and they also receive 10% off River Cottage’s Canteens and free River Cottage membership.

Hotel Chocolat, the high street chocolatier, launched its second three-year Chocolate Bond, for which investors will be paid more than 7% in cash coupons, chocolate or vouchers that can be redeemed in-store. Chilango investors get a five-year bond yielding 8% a year, plus free burrito vouchers, or those putting in £10,000+ receive a free Burrito every week for the life of the bond.

But as with any investment, there is no guarantee of a return, so why would customers take the risk? And why would companies be prepared to offer this risk to hard-won and valued customers?  

In simple terms, mini-bonds allow every day investors to buy into a company for an affordable sum. As most bonds pay around 7-8%, this compares favourably to banks return of less than 2% interest on savings in the UK. They also offer companies the opportunity to secure growth finance and expansion capital without having to go to the usual suspects like banks or venture capitalists.

For the customer there is also the added attraction of this being a more direct and easy to understand form of investment, avoiding the need to get involved in complicated share deals, investment portfolios or even having to register as a regular investor on crowdfunding sites or other platforms like Trillionfund.  It also gives the individual a greater sense of ownership by acquiring equity in a business they admire, combined with the feeling that they are helping it on its way. 

But ultimately it means brands like food outlets, restaurant chains and retailers, which have high numbers of customers going through their doors, can engage more effectively with loyal customers, but in a very different way.  

Chilango, for example, raised awareness of the Burrito Bond early on among customers and signposted them to the Crowdcube website to find out more. The first thing visitors see when they go on the Chilango website is a cool edgy video featuring founder Eric Partaker, a former Skype employee. When the Jockey Club needed £45m ($76m) for a new grandstand at Cheltenham race course, they went straight to a loyal customer base with a bond to help pay for it – racing punters came in their droves to help raise £15m ($25m) in just three weeks.

Mini-bonds may not be right for all companies, however. Experience shows that consumer-facing businesses, typically restaurants and retailers, which have a large customer and potential reach, are well placed to benefit from this form of engagement.

Brands also need to be confident that their customers will want to invest in the business in the first place. It is not as simple as putting a bond document together and sending it out in the hope that investors will dig deep. It is a two-way process that needs companies to survey their customers first. Well-known brands like John Lewis, Hotel Chocolat or King of Shaves are more familiar with their loyal customer base than a newer brand that is still trying to establish itself.

There are also the benefits, freebies and incentives brands are prepared to offer in return – money-off vouchers, giveaways and discounts. This is an important aspect that can help the investor feel they are getting something special.

We are starting to see a revolution in the way brands – from fine wines to burritos – raise money while engaging with customers in a very different way. According to Capita Registrars, the mini-bonds market could rise to £8bn by the end of 2017. This is a huge opportunity for both established and up and coming brands to move one step closer to their customers. 

It's an interesting opportunity for both established and up and coming brands to consider in their efforts to get closer to their customers.