Company Overview

23.5 Degrees holds the distinction of being the first Starbucks franchisee globally, launching its initial store in 2012. This venture emerged as a result of Starbucks' strategic initiative to expand its presence in the UK through franchising. At the time of Connection Capital's investment, the company operated 13 stores and utilized the funding to acquire an additional 16 locations, paving the way for substantial growth.

Industry Overview in the UK

The UK coffee market has demonstrated remarkable resilience and robust growth over the years, with an annual increase of at least 10% in the 14 years leading up to Connection Capital's investment in 23.5 Degrees. This consistent growth underpins the viability of the café business in the region and indicates a sustainable demand for coffee products.

Moreover, the UK market continues to exhibit considerable potential, characterized by a significant amount of market headroom that can accommodate further expansion strategies. With a rising trend towards coffee consumption and an increasing appreciation for specialty coffee experiences, the sector remains attractive for investors.

Additionally, the changing consumer preferences towards premium and ethically-sourced products have further bolstered the sales of established brands like Starbucks. This creates an environment favorable for franchise operations, particularly in urban areas where foot traffic and brand recognition play a crucial role in sales performance.

Overall, the UK coffee industry is positioned for continued growth, offering dynamic opportunities for expansion through franchising and innovative service models. This favorable outlook aligns seamlessly with 23.5 Degrees' strategy to enhance its market penetration.

Rationale Behind the Deal

The rationale for investing in 23.5 Degrees stemmed from the identification of a highly skilled management team with a solid franchise track record and specific experience with Starbucks. The company outlined a clear growth strategy, focusing on an organic rollout model that demonstrated impressive return on investment (ROI) metrics, supported by a robust pipeline of prospective new locations.

This combination of management expertise and a well-structured growth plan presented a compelling investment opportunity, poised to capitalize on the favorable market dynamics of the UK coffee sector.

Investor Information

Connection Capital is known for identifying high-potential investment opportunities, particularly in sectors exhibiting consistent growth. With a focus on leveraging its expertise and resources to support portfolio companies, Connection Capital recognized the significant upside potential at 23.5 Degrees. By providing essential capital and strategic guidance, the investment firm aimed to accelerate the brand's growth trajectory and enhance operational capabilities.

With a proven track record of successfully managing franchise investments, Connection Capital was well-positioned to facilitate the company’s expansion initiatives, thereby ensuring long-term value creation for stakeholders.

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The acquisition of 23.5 Degrees represents a strategically sound investment, particularly given the robust growth potential of the UK coffee market and the solid foundation the company had built before the investment. The decision to enhance the management team and optimize operations indicates a commitment to excellence that is imperative for sustained growth.

Furthermore, the remarkable growth in revenue—over six-fold—along with the substantial increase in store count and employee base, highlights the efficacy of the expansion strategy. The successful execution of this strategy not only reflects sound business practices but also underscores the importance of having a clear vision and capable leadership.

The eventual exit in October 2024, resulting in a 9x gross return on the initial investment, further signifies that the decision to invest in 23.5 Degrees was astute and likely to be emulated by other investors looking to tap into the thriving UK coffee market. It showcases the value of identifying strong franchise partners and investing in their growth.

Overall, 23.5 Degrees' journey demonstrates the importance of aligning investment strategies with market potential, making this deal a good investment from both financial and strategic perspectives.

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