I would like to say how much I enjoy the e-mails from Langton Capital on a daily basis. I use the newsletter as an ideal way of keeping me up to date with what is going on financially in the drinks industry.
Tenanted pub company
Marston’s, Just Eat, China lockdown, Gen Y, Millennials etc.:
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A DAY IN THE LIFE:
Just how is it that leads and wires, computer leads, telephone headphones, charging cables etc., can get so tangled up?
I mean do they snake around at night is some sort mating dance? Or are there gremlins that sneak into your office and dance around on your desk or root around in your backpack looking for cables to tie up into great big Gordian Knots?
Indeed that must surely be the answer because why would anybody in their right mind construct some impenetrable heap of cables and wires such that, when their phone rings and they want to put in their earphones, they end up in (yet another) battle with an inanimate object that leads to bad language, spilled drinks, startled dogs and missed phone calls?
Anyway, that’s simply another mystery that we’ll have to unravel. Get it? Anyway it’s Friday. It feels like it’s been a long week so, without further ado, let’s move on to the news:
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THE GENERATION GAP: More obvious now than ever? We’re thinking of Brexit, climate change, meat free options, alcohol-free drinks, smoking and a whole host of other issues. 24 Jan 2020:
The generation gap:
• A generation gap implies a difference of opinions between one generation and another regarding beliefs, politics, or values.
• In the modern day, this is perceived to be the gap between younger people’s opinions and their parent’s or grandparent’s.
• It’s the Millennials & Gen Z vs the Baby Boomers & Gen X
• There has, arguably, been even more polarisation recently than in the past
• Views on each side are increasingly becoming at odds with one another, and tensions can fray.
• Indeed, in some cases, the mere mention of Brexit is banned at the family dinner table. Let alone climate change, veganism, the Royal Family in the 21st century etc.
• And on the business level, it leaves operators wondering whether they can satisfy both groups of consumers or whether, as is often the case, they may alienate all age-groups if they try to tread a middle path
A fight on many fronts:
• Brexit, the problems getting on the housing ladder and the rise of populism are not the only contentious issues between the generations in the UK.
• The younger generations are generally more climate conscious and can be quicker to blame the profit seeking motive of capitalism.
• Activists such as Greta Thunberg are raising the profile of younger activists, and climate protest is more widespread.
• There is a movement to change our diets to something more sustainable with less meat.
• Health is also at the forefront, with the NHS saying the proportion of 16-24 year-olds who say they never drink alcohol has risen from 18% in 2005 to 29% in 2015.
• Public Health England say smoking among 18-24 year olds was the fastest falling age group in 2018.
• Wealth is another contentious issue, with less than 30% of millennials owning property by the time they are 30, compared to over 50% of UK ‘Baby Boomers’ when they were that age.
• The above puts the younger generation’s goals at odds with those of their elders
• Each generation has a different set of incentives from which they derive their political and social beliefs.
• The generation gap feels as though it is widening
• This is perhaps exacerbated by the more negative impacts of the information age, where people can retreat to like-minded echo chambers on social media platforms.
• This means the market is faced with consumers with increasingly polarised views.
• The question is, how can a company or an industry appeal to both when their desires seem sometimes to be mutually exclusive.
• Agreeing on everything is nigh on impossible as we are not a hive mind, but instead a society of autonomous individuals.
• Perhaps more dialogue is needed between the generations to address wealth inequalities and long-term plans, lest dinner time becomes any more fraught.
• Meat free options are a big deal.
• Travel may become something the young feel they should apologise for. Flying burns a lot of fuel. Skype, emails, the humble telephone and the rest mean many trips are not necessary and holidays may come under pressure. Flying thousands of flunkies to a climate change junket in Rio or wherever looks somewhat hypocritical
• Low and no-alcohol drinks are growing in popularity.
• Younger consumers value experiences over things.
• It is entirely possible that, over time, we will eat less meat, fly less, drive less, consume fewer things (including alcohol) etc.
• We may become generation rent, experiences may rise to the fore and business models may have to evolve accordingly
MARSTON’S Q1 (16wk) TRADING UPDATE: Marston’s has this morning updated on trading for the first 16wks of its current financial year being the period to 18 January. 24 Jan 2020.
Managed & Franchised Pubs:
• Marston’s reports that sales at its managed and franchised pubs rose by 1.0% in the period compared with the same period a year ago
• Drink sales are up but food sales fell slightly in the period
• LfL sales for the 2wks of Christmas were up by 4.5%.
• This compensated for more subdued trading in early December (which was a ‘consequence of poor weather’)
• Costs, with the exception of labour costs (which have been impacted by comments regarding the National Living Wage), have been in line with expectations
The National Living Wage:
• The rise in the NLW, up by 6.2% on 1 April, is ahead of Marston’s (and the sector as a whole’s) expectations
• The hike will impact Marston’s (depending on what happens to differentials) by £2m to £3m in H2
• The gross impact will be double this in FY21 but the company will have longer to mitigate the impact
• Differentials may narrow a little, but this can only go so far and prices will likely have to rise
• Best estimates at this stage are that, by taking a little price, tighter labour scheduling and efficiencies, MARS may be able to mitigate up to a half of the gross impact in FY21
• But it’s not as though the company hasn’t been doing much of this already and, as cost savings etc are finite, it is likely that price rises could feature more prominently than they have in the recent past
• Here MARS will need to be measured and cautious. It will not be alone. For some operators, for example the casual diners, this may be a very serious problem
Trading – Beer Company:
• Beer Company sales volumes are down (the percentage isn’t given) largely due to weakness in the off-trade
• Here, although sales are lower in absolute terms, MARS has increased market share
• Lager has been a weak spot and, ex-lager, MARS beer sales are flat
Balance Sheet, Cash Flow & Debt:
• Marston’s has now achieved some £60m of its targeted £70m of pub disposals and is raising its guidance to £85m to £90m of asset sales in total
• The additional disposals should be at book value at least
• Some £1.5m of the profit downgrade likely today will be as a result of the above
• Debt should come in some £20m below previous estimates. The group had been targeting £1,200m of debt (compared with its FY19 debt total of £1,399m)
• At this level of debt, the company will still ‘generate annual net cashflow of at least £50m after dividends by that time.’
Conclusion & Outlook:
• CEO Ralph Findlay comments ‘Marston's has delivered a creditable performance in a challenging market.’
• Mr Findlay says ‘trading in the key Christmas fortnight was good and has remained solid since which is encouraging.’
• He adds ‘our balanced pub portfolio enables us to perform well in the context of current market dynamics and our market-leading Beer Company has continued to increase market share in both the on and the off trade in the period.’
• Regarding debt, the company says ‘we are making excellent progress on our debt reduction strategy, well ahead of the original 2023 target.’
• Re the future, Marstons says ‘looking forward, greater clarity on the political agenda should positively impact consumer confidence.’
• The company concludes ‘overall the economic environment for the consumer looks encouraging with low unemployment and healthy wage growth providing us with increasing confidence that the market will grow in 2020.’
• Marston’s has quantified the impact of the greater-than-expected rise in the National Living Wage and has guided to an increase in the value of pub disposals.
• These both impact profits negatively and there will be downgrades today. However, reassuringly, there has been no downgrade prompted by less buoyant trading as a whole.
• Christmas was good but early December was sluggish. It feels as though London had a better Christmas than did the UK’s provinces. January, though a slack month in any event, has been reasonable to date.
• The consumer is benefiting from high levels of employment, rising real incomes and will now benefit from a material hike in the National Living Wage this April. Further out, the government is committed to raising the NLW to £10.50 by 2024.
• This will put money in pub customers’ pockets and some of the wages paid out by companies such as Marston’s should come back to it through its tills.
• This isn’t likely to be immediate but, if the lapping of the first failed Brexit date on 29 March leads to a pickup in confidence, consumer spending could be on an upward trend for the remainder of this year.
• Talk of a Boris Bounce was perhaps premature but the consumer is relatively well-positioned, the pubs have Euro 2020 to look forward to and summer last year wasn’t wonderful as far as the weather was concerned.
• Marston’s is a freehold-heavy, vertically integrated pub group that has benefitted from the recovery in wet-sales. Its shares were buoyed last year by the Greene King takeover and the company remains focused on reducing debt whilst holding its dividend.
• Despite today’s downgrade, the group’s shares remain inexpensive. The yield is secure at around 6.4% and, with debt coming down, the company continues to reshape its portfolio in order to focus on its core, freehold estate of well-managed and well-maintained properties.
• The group’s LfL sales are ahead of last year suggesting that the company continues to sell product and services that the consumer would like to buy at a price they are prepared to pay.
• Lodges, craft brewing and food (in the longer term) remain attractive areas in which to do business. The group is well-placed to return to growth and to create further value for its shareholders.
PUBS & RESTAURANTS:
• Takeaway.com has announced that the CMA intends to investigate whether the company would have re-entered the UK market if it were not for the proposed merger with Just Eat. Takeaway.com closed its UK operations in 2016 after the group reported an adjusted EBITDA loss of £768k.
• The FT have reported on the review launched by the CMA, stating that the authority has threatened to hold up the deal which was set to close within days.
• To some extent the CMA is levelling the playing field with Amazon / Deliveroo. In the latter case, the CMA said that it was concerned that Amazon could have re-entered the UK market if it did not invest in Deliveroo.
• Takeaway.com says that its offer, which now has 90% acceptances, will be delayed for a week. We would suggest that, depending upon what transpires re the CMA, this could be extended.
• The Inn Collection Group’s managing director Sean Donkin said: ‘We are absolutely thrilled to have added this superb venue to our collection. We’re looking forward to investing significant capital into realising the full potential of this phenomenal site for the community of Helmsley and visitors to Yorkshire alike to eat, drink, sleep and explore from’.
• CGA, in association with UK Hospitality, has produced its latest Future Shock report saying that some 83.1% of those surveyed expect the hospitality brands they use to engage on at least some aspects of sustainability.
• Some 64.6% of respondents require the ethical sourcing of food and drink with 50.3% saying they want to see evidence of reduced carbon footprint through menu engineering and commodity usage.
• CGA says that 40.6% of respondents are prepared to pay extra to encourage sustainable practices regarding food and drink with those willing to pay extra for environmentally friendly packaging and a reduced carbon footprint coming in at 25.2% and 22.7% respectively.
• UKH says ‘sustainability is arguably the key issue of our time. It will become more important and hospitality needs to lead efforts to promote sustainability yet further.’ It adds ‘consumers are challenging hospitality businesses to respond to many more big sustainability-driven changes, Future Shock shows—like a rise in vegan and vegetarian diets and the increasing avoidance of single-use plastics like straws and cups.’
• CGA concurs saying ‘our research for this edition of Future Shock highlights the mounting importance of sustainability in consumers’ choices and behaviour. The environmental impacts of restaurants, pubs, bars and hotels are under intense scrutiny, and all operators will need to demonstrate a genuine commitment to sustainability as we enter the new decade.’
• Hotel Chocolat shares finished down 4% yesterday on the back of its somewhat cautionary trading update.
• Punch Pubs & Co has acquired seven pubs from Heartstone Inns this week. Punch’s Chief Executive Officer, Clive Chesser said: ‘We are pleased to welcome these seven wonderful pubs into the Punch family and look forward to working together with our new Publicans and their teams’.
• Handmade Burger Co. has entered into administration for a second time, putting 300 jobs at risk. Punch’s Chief Executive Officer, Clive Chesser said: ‘We are pleased to welcome these seven wonderful pubs into the Punch family and look forward to working together with our new Publicans and their teams’.
• The Manchester-based Italian restaurant group, Tre Ciccio has entered into administration. The group commented on Facebook: ‘We can confirm Tre Ciccio Ltd is currently in temporary administration for a limited period due to losses in the Tre Ciccio Bramhall restaurant. However, we are trading as normal and it’s very much business as usual while we go through a restructuring process’.
• Tom Crowley will step down as CEO of Boparan Restaurant Group after three years in the role.
• Flat Iron relaunched its London Liverpool Street site under its core concept, having initially opened it as a collaboration with The Winemakers Club.
• Daniel Thwaites has purchased two pubs in Lancashire, the sale of both pubs was overseen by Fleurets.
• The online booking platform, Stay In A Pub, launches a Late Pub Rooms offer on their website to fill empty rooms in the quieter times of the year. Empty rooms are an enormous loss of profit with an average room rate of £76-£100 and 80% of consumers saying they would eat and drink in the pub when they stay.
• Morrisons announces that it will create 7,000 new shop-floor jobs but that 3,000 managers will either leave the company or have their roles downgraded.
HOLIDAYS & LEISURE TRAVEL:
• China has locked down two cities, Wuhan and Huanggang, to prevent the spread of the coronavirus outbreak that has killed 17 people and infected nearly 600.
• Accor has announced it will join the UN Global Tourism Plastics Initiative, and has vowed to remove single use plastics from guest experiences by 2022. Chairman & CEO of Accor Sébastien Bazin commented: ‘We are aware of the significant impact we have on our planet and our responsibility to create tangible benefits for our employees, guests, suppliers, partners and host communities’.
• European hotels saw occupancy increase 0.4% to 72.2% during 2019, according to data from STR. European hotels also reported ADR up 1.8% to EUR 113.36 and RevPAR rose 2.2% to EUR 81.90.
• STR has found that US hotels saw occupancy increase 1.1% to $58.90, ADR rise 5.2% to $130.99 and RevPAR up 6.4% to $77.16 during the week ending 18 January.
• The Whitehall watchdog has reported that HS2 is behind schedule and over budget as the project was grossly under-estimated. It is believed the project could cost £106bn, having originally been assigned £56bn in 2015. The first phase of the project was due to open in 2026, however full services are now forecast to begin between 20131 and 2036.
• Holiday Extras has said consumers are postponing booking their holidays because of Brexit concerns. It says the biggest concern was healthcare with 20% worried about the availability of reciprocal healthcare. Other concerns include queues at passport control (23%), the exchange rate for euros (18%), passport changes (15%), and 14% were concerned about the potential negative attitudes to Britons overseas.
• Holiday Extras says ‘there’s still a lot of uncertainty about travelling to Europe after January 31 when we leave the EU. The good news for travellers is that for the whole of 2020, even after we leave the EU, we’ll be in a transition period during which our travel rights will be pretty much the same as before Brexit, so holidays between January 2020 and the end of the year shouldn’t really be affected by Brexit.’
• Whitbread opens an 89-room Premier Inn on Lillie Road, West Brompton.
• Channel Tunnel operator Getlink reports passenger numbers up 1% to more than 11 million. Revenue increased 3% to €315 million, driven by the launch of a third daily London-Amsterdam service.
• Amazon Music reports that its streaming service has surpassed 55 million customers, but still lags behind Spotify and Apple Music, which have 248 million and 60 million users respectively.
• G4M shares finished up 12% yesterday on news that Christmas trading had been good.
FINANCE & ECONOMICS:
• The CBI has said that manufacturers in the UK have seen a ‘surge in optimism’ in the three months to January. The CBI says that manufacturers have a ‘spring in their step’.
• Sterling a shade higher at $1.312 and €1.1873. Oil a little higher at $62.27. UK 10yr gilt yield down 5bps at 0.59%. World markets lower yesterday in the UK & Europe but the US was mixed. Far East up in Friday trade.
• Politics & Brexit:
o PM Boris Johnson has said that, with legislation now only awaiting royal assent, Brexit is effectively done.
o Trade tensions with the US have risen in Davos with Sajid Javid saying that he will tax Facebook & other online giants more in March.
o Reuters reports that UK government officials have formally recommended granting Huawei a limited role within Britain's future 5G infrastructure. The US has warned the UK not to do this.
o Negotiation considerations. FT points out that EU ‘deal’ with Switzerland actually comprises ‘no fewer than 100 agreements governing their relations.’
o Dutch PM Mark Rutte has put the chance of an EU / UK trade deal this year at 50:50.
START THE DAY WITH A SONG:
Yesterday’s song was Animal Collective with My Girls, today who sang:
I wish I was like you,
Find my nest of salt
Everything's my fault
RETAIL WITH NICK BUBB:
• Mothercare: Yesterday’s announcement was grandly headlined “Transformation Plan Update”, but there was not a lot of new information in it, other than the news that the company is still trying to restructure its debt facilities and that the long-suffering (but ambitious) CEO Mark Newton-Jones has stepped down, with the CFO Glyn Hughes taking over.
• BDO High Street Sales Tracker: We highlighted on Wednesday that the John Lewis sales figures for last week were disappointing again, but today’s BDO High Street Sales Tracker for medium-sized Non-Food chains (which has been reporting surprisingly/suspiciously good progress in recent months) is again very good…In w/e Sunday Jan 19th, BDO Fashion sales were up by as much as 10.7% LFL, whilst Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as Fashion retailers) were up by 9.3% last week (up 4.8% in Store sales and up by 25.8% in Online sales).
• Trade Press: Retail Week magazine has not been published this week, but Drapers magazine is out today and the front cover is a photo of “Sports Legend”, Peter Cowgill, the lugubrious boss of JD Sports, to flag up the main feature on how “How Peter Cowgill took JD into the Premier League” (which quotes our view that although Peter is an acquisition junkie, his record, although not perfect, is far better than Mike Ashley’s). In terms of News stories, Drapers highlight the demise of Beales, as well as the news that “Mixed Christmas results reveal malaise on the High Street”. In terms of other Feature articles, Drapers look at why ASOS has hired a Chief Growth Officer and also examine Ikea’s proposed makeover of Hammersmith High Street.
• News Flow Next Week: There are very few retailers left to still report on Christmas trading (with AO.com surprisingly quiet), but there is an ScS update on Wednesday, along with the Wickes Capital Markets Day in sunny Watford. And with the end of the month coming up amazingly quickly now, we get the widely followed monthly GFK Consumer Confidence survey first thing on Friday.