By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The former Hard Rock Cafe (Nassau) franchise’s road to liquidation was marked by high utility costs, poor labour productivity, crime and the ongoing problems affecting downtown Bay Street.

Documents filed with the middle Florida federal court chronicle HRCC (Bahamas) unhappy decade as Hard Rock’s Nassau franchisee, detailing a tale all too familiar to many Bahamian businesses and entrepreneurs.

The papers, including e-mails dating back almost a decade, were released last week but are as relevant today as they were then, given how little has changed in terms of high crime levels, the ‘ease of doing business’, and the condition of downtown Nassau

They detail how:

• HRCC (Bahamas) repeatedly requested to close at night within a year of taking over the Hard Rock (Nassau) franchise’s operations in 2004 from a company controlled by its landlord, ex-MP Marvin Pinder.

Its principal, Keith Doyle, wrote in May 2007 how the owner of another restaurant near Hard Rock’s Charlotte Street location had been murdered.

He added that his own managers had been mugged, and had their cars stolen, while even his wife and her friends refused to come to downtown Nassau - preferring to drive to the relative safety of Atlantis.

While Hard Rock refused its franchisee’s plea on that occasion, it did accede to another closure request made in late 2011/early 2012. Crime fears, and the absence of cruise passengers in the evening, meant the Nassau franchise was incurring losses significant enough to sharply erode its daytime trading profits.

• Mr Doyle, in a November 2011 e-mail to senior Hard Rock International executives, set out why it was so hard to generate the cash flow and profits necessary to reinvest in the Nassau business.

Energy costs were said to be more than three times’ higher than for similarly-sized Hard Rock franchises in the US, for instance.

And, while Hard Rock Cafe (Nassau’s) projected 8-9 per cent rate of return was said to be in line with other franchises, Mr Doyle argued that its profits would be “wiped out” if a cafe or kitchen re-fit was required.

• Mr Doyle also slammed Bahamian commercial banks for failing to grant HRCC (Bahamas) a $100,000 overdraft facility, singling out Royal Bank of Canada (RBC) in particular, to whom he had offered “an abundance of security”.

Mr Doyle told Hard Rock International that without the overdraft, and revenues being insufficient, he did not have enough cash flow to finance the necessary inventory purchases.

• Work permits. Mr Doyle said Hard Rock Cafe (Nassau’s) Bahamian management were “not business builders” because they lacked international exposure and experience.

He acknowledged that Hard Rock International was “not impressed” with the Nassau franchise’s management, but said it was impossible to obtain work permits other than for the general manager post - the most senior position.

The documents provide an instructive tale to politicians on the obstacles to profitability facing many Bahamas-based businesses, and the urgent need for reform in numerous areas to improve the economy’s competitiveness.

What is particularly striking is how little the general economic and business environment has changed since HRCC (Bahamas) started complaining about the impact it was having on its business.

Hard Rock Cafe International, which is battling a lawsuit from HRCC (Bahamas) and Mr Doyle, alleging that it deliberately manufactured the loss of the Nassau franchise so friends of its senior executives could take over, admitted that requests to reduce its opening hours were received every year between 2004 and 2007.

It referred, in particular, to Mr Doyle’s 2007 request, which was justified on the basis of Nassau’s crime problems and the resulting financial woes for the franchise.

“We request again to be allowed to close at night,” Mr Doyle wrote in a May 10, 2007, e-mail. “While this will hurt our gross, it will improve our controllables/occupancy costs, and will also counteract the increasingly sad state of security and ambience in play throughout downtown Nassau in general.

“The owner of the Chinese restaurant across the street was murdered after being followed out with his day’s takings. There have been over 20 burglaries on our street in the past three years. We have had managers mugged, and managers’ cars stolen.

“Until they pedestrianise that street and redevelop [Prince George’s] Wharf, we are doing nobody any favours by staying open at night,” he continued.

“The expat market will not come down here (even my wife’s many friends) because of safety - they all drive by and go to Atlantis, where they pay more, but feel safe and are in a pretty area.”

Mr Doyle said he was “working extremely hard” to make Nassau viable, adding that it had “over-performed” in the areas the franchise could control, such as sales per foot.

He warned, though, that costs were “outstanding”, and described utilities and marketing costs as “increasingly tough to manage”. The royalty payments to Hard Rock Cafe International, and the Nassau franchise’s insurance were also described as “killers”.

Hard Rock International, though, denied HRCC (Bahamas) 2007 request for reduced opening hours. Thomas Perez, its area vice-president for the Americas and a defendant in the HRCC (Bahamas) lawsuit, even accused Mr Doyle of “sensationalising” Nassau’s crime problem in a bid to obtain his demands.

“I have visited Nassau on multiple occasions, including in the evenings,” Mr Perez alleged in a May 31, 2016, affidavit. “While there, I have not observed a ‘bad’ security situation.

“Obviously, every city has its challenges with crime, and I believe many of those were sensationalised by Mr Doyle as a subterfuge to obtain his desired reduction in operating hours.”

Mr Perez acknowledged that the bulk of the Nassau franchise’s profits were generated in the daytime by cruise ship passengers, but said guests expected that - as an international brand - Hard Rock Cafe would be open in the evenings.

“I also found that, having visited Nassau, there were a number of other businesses open into the evenings that had a fair number of customers and a lively environment,” he alleged.

“In comparing this to the Nassau cafe, on many occasions what I observed was a lack of a strong and committed effort to attract a night-time business, with the notable exception of when Brynn Felix was the general manager there between the fall of 2007 and 2010.

“During that time, the requests for reduced hours subsided remarkably because Mr Felix did establish a night-time business and was committed to bringing in local and hotel customers.”

Undeterred, Mr Doyle resumed his request for early evening closures in late 2011, again citing crime concerns and the impact on Hard Rock Cafe (Nassau’s) financial performance.

A November 17, 2011, e-mail to Alfonso Moreno, Hard Rock’s director of development and franchises for the Americas, recalls their meeting and the issues impacting the Nassau franchise’s ability to be profitable.

“We spent much time discussing our main concern, lack of adequate profitability, and examined in detail the Nassau five-month (May-September) financials, which showed us making a loss for four out of five months,” Mr Doyle told Mr Moreno.

“You thought that the majority of our costs (merchandising/food) appeared to be reasonable, and that staff costs are lower than Cayman and some other cafes, but that our electric costs, in particular, appeared to be the main problem.

“Indeed, you make a very good point by comparing us to similar-sized US cafes that pay $5,000 per month ($60,000 annually) as compared to our average of $17,000 per month ($200,000 annually).”

Mr Doyle then illustrated the ‘vicious circle’ very familiar to Bahamas-based companies, ranging from large hotels to ‘Mom and Pop’ stores, which is how insufficient profitability and cash flow undermines reinvestment in the business.

“In response to your question about what we expected our net profits would be for the year, I said that we should make $300,000-$400,000 on revenues of about $4.5 million,” Mr Doyle told Mr Moreno.

“You mentioned that this 8-9 per cent return was in line with other franchisees. I stated that it is far too low for us because if we have to do a re-fit of the cafe or kitchen, that it would effectively wipe out profits and it left no profit if we have to pay back borrowings.”

Mr Doyle said cash flow difficulties, and the inability to obtain an overdraft facility from a Bahamian commercial bank, had resulted in Hard Rock Cafe (Nassau) being unable to purchase sufficient glass and merchandise inventory.

“I explained.... that our partner and ourselves did not want to put any more money into the business, but to make the business pay its way as our other businesses do,” he wrote to Mr Moreno.

“You correctly stated that without having merchandise we couldn’t generate additional revenues, but I also countered that $4.5 million revenues in Nassau was, in fact, a fantastic revenue figure and that we should be showing a large profit.”

Disclosing that HRCC (Bahamas) injected a further $50,000 into the Hard Rock Cafe (Nassau) franchise the week before, Mr Doyle reiterated: “We have to make both operations (Nassau and Cayman) pay their way, and we have to stop pumping money into them.

“I explained that the reason we were short of merchandise was because we were not making any money to pay for the merchandise.

“I showed you my correspondence with Royal Bank of Canada, offering them an abundance of security, and they still turned us down for an overdraft of $100,000. I mentioned that a total of four banks had turned us down for facilities in Nassau.”

Turning to labour issues, Mr Doyle then told Mr Moreno: “We discussed Nassau management, which you are not impressed with, and I explained that we cannot get work permits for foreigners other than at general manager level.

“We both agreed that the managers are honest and very nice, but that they are not business builders. I agreed with you that our management team are not experienced, since they have no international exposure.

“You suggested that we have a sales and marketing manager, and although your suggestion has merit, I want to see us make money first on the $4.5 million revenues we currently generate before we invest in any more managers.”

Mr Doyle followed up two weeks’ later with a costing exercise, featuring numbers purporting to show how much Hard Rock Cafe (Nassau) was losing at night.

“We believe that we are losing - and have lost - an horrendous amount of money in Nassau by having to remain open at night without the prospect of any viable cruise-related business, which during the day generates profitable retail sales for us,” he wrote to Mr Moreno on November 20, 2011.

“I mentioned that I expected that we could add $300,000-$400,000 annually by reducing night-time hours, and the costing exercise performed does appear to substantiate that we can re-claim substantial wasted profits and reduce our costs significantly.”

Mr Doyle’s costing exercise, based on a 17-hour day spread over five months, showed that the Nassau franchise generated $122,000 in retail sales, and $68,000 in food and beverage revenues, after 7pm.

“The overall loss to us in generating these sales after 7pm is $147,000,” he added. “In other words, the cost in generating these sales is $337,000.

“Operating in the timeframe after 8pm, the sales radically collapse to $36,500 for retail, and $53,000 for food and beverage, and the overall loss for this timeframe is $145,000. The cost in generating these sales is $234,000.

“Extrapolating these losses in Nassau over a full 12 months, they amount to a net #352,800 operating after 7pm, and $348,000 operating after 8pm,” Mr Doyle continued.

“These losses are subsidised by profits taken from elsewhere in our business or by additional investment into our business.

“These figures are only a part of the black hole that we are experiencing. Generating $4.5 million in sales as a top-brand restaurant, we should be generating terrific profits.”

This message was reinforced by a March 8, 2012, e-mail, in which Mr Doyle described the Nassau franchise’s evening hours as “massive loss makers”.

“Nassau, at night, is simply too dangerous, and we want to focus our management and staff resources to increase daytime business, when the highest concentration of tourists are swarming the streets, and the profitable area of retail sales can be best maximised,” he wrote.

Mr Doyle predicted that Hard Rock Cafe (Nassau) would lose $150,000 over the May-November period if it remained open at night.

And, with the business’s annual rate of return (ROR) at around 4 per cent, that $150,000 was vital for “an ageing cafe to operate with a reasonable cash flow that allows us to pay for retail stock”.

“Although our overall retail sales in Nassau outstrip our food and beverage sales by a ratio of 58:42, after 7pm these retail sales for the entire 12 months reverse their positive performance to a very disappointing ratio of 29:71, which effectively is a ‘loss making ratio’,” Mr Doyle wrote.

“Our 12 month figures show that after 7pm, retail sales collapse to only account for 5.94 per cent of total sales, while food and beverage sales fall to 15.2 per cent of total sales.”

Hard Rock International initially disputed Mr Doyle’s figures, telling him that $378,309 in sales was ‘missing’ from his costing exercise.

Mr Doyle, in response, blamed this on a ‘mapping’ problem with the franchise’s hourly reports, which his Nassau technician had been unable to resolve.

Hard Rock International eventually agreed to Mr Doyle’s request for a change in the Nassau franchise’s operating hours, one of its main concerns being the loss of royalty payments to itself, which were based on HRCC (Bahamas) revenues.

Royalty payments feature heavily in the ongoing dispute between Hard Rock International and HRCC (Bahamas), with the former alleging that the Nassau franchise was eventually pulled because of the failure to pay sums owing.

Mr Doyle and HRCC (Bahamas), though, are alleging that intransigence and foot-dragging by Hard Rock International and three of its executives on its requests for reduced opening hours and other “concessions” produced the financial losses that resulted in its closure.

They are claiming this was all part of a plan to ‘squeeze’ HRCC (Bahamas) out, and manufacture its closure, so the Nassau franchise could be handed to friends of Mr Perez, namely Paul Zar and Anders Vestergaard.

This allegation has been vehemently denied by all parties involved on the Hard Rock International side, including ex-Bahamian MP, Mr Pinder.

His company, Thirty 3 Ltd, took over Nassau’s Hard Rock franchise after HRCC (Bahamas) went out of business, and Mr Pinder is adamant he sought out Messrs Zar and Vestergaard himself to run the business.

Numerous questions surround HRCC (Bahamas) purported liquidation, given that the Bahamian accountant appointed to oversee the process asked to be removed within two months of his name being submitted in March 2014.

Paul ‘Andy’ Gomez, now the Bahamas’ ambassador to China, was initially nominated as the former franchisee’s liquidator.

However, Kendrick Christie, his Grant Thornton (Bahamas) colleague and partner, told Tribune Business via e-mail: “Records indicate that former Grant Thornton managing partner, Paul Andy Gomez, notified the shareholders of HRCC on May 29, 2014, to remove his name from consideration as the company’s liquidator.”

Meanwhile, Keith Doyle, son of Kevin Doyle, has asked Tribune Business to clarify that he is not a party to any lawsuit involving the Hard Rock Cafe (Nassau) battle.