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
Internet & F&B, mini-bonds, cashless trends & other:
A DAY IN THE LIFE:
So, with Argentina going down 0-3 to Croatia, it still looks as though the big teams have failed to turn up.
France might be an exception at this stage but this really could be the year for a Russia, a Senegal, a Mexico or even, dare we say it, an England to lift the trophy.
And then I woke up.
Anyway, it’s Friday, the sun is shining and it’s time to move on to the news:
DOES THE INTERNET IMPACT EATING & DRINKING OUT?
No. But, hang on. Yes
• You can’t consume food or drink over the Internet
• This perceived simple truth was perhaps always simple but not completely true
• Impacts are varied. Any list will be incomplete but on the plus side, operators may see improved labour scheduling, forward ordering & ‘better’ marketing (push notifications).
• Less positively, the Internet is promoting delivery.
• Yes, the telephone has existed for ages - as has delivery - but, arguably, the telephone didn’t cost 20% in commission.
• Delivery may hold LfLs flat but only at a hit to margin
• And the telephone didn’t build dark kitchens & threaten business models. Nor did it replace meals out etc. but rather targeted home cooking
• This is harder to define but is perhaps at least as important
• The High St & shopping centres are ecosystems. Disrupt one bit & most other players feel the impact
• Department stores, electrical retailers, banks etc. are exiting & nail bars, hairdressers, funeral & tattoo parlours are coming in (per LDC data)
• Dwell time is reduced (except for one particular person at the funeral parlour) and also perhaps the customer’s propensity to eat / drink whilst out
• Consumers, perhaps, used to wander around
• They may now have disaggregated their wanderings. Their products are delivered via the Internet and get their exercise is down the gym (or not at all)
• The England - Tunisia match was the most-watched TV programme of the year so far. That helps delivery companies but not many others.
• Only hindsight is 20:20 but the Internet isn’t going away
• Consumers say one thing (bemoan High Street decline) and do another (shop online)
• Operators may have to drive footfall rather than simply cross their fingers and hope to benefit from it
• Mini-bonds. Debt yield with equity risk?
• A company that Langton was close to issued a bond at one stage (details here all from memory). It issued this with a c8% coupon (rising to 10% in year three). It tied this bond to a similar sized investment in equity. The latter had no yield but turned out to be a three or four bagger. The blended ‘yield’ was therefore around 28% over 3yrs. This was actualised and investors actually got the cash.
• We thought this deal was fair as, whilst the c8% yield gave the impression of ‘bond risk’, the whole of the investment was facing an equity risk and therefore should share in the equity upside.
• The company in question was either profitable at the time or it was just about to become materially profit-making.
• The idea of raising debt for a company making losses (and increasing those losses) is a little odd. The yield could be illusory.
• Banks would not make this kind of loan. Hence the appeal to individuals. Security would help but, in a loss-making, leasehold business, there may be few assets.
• POD has removed potentially misleading advertisements for an 8.5% mini-bond from its stores after Propel pointed out that they gave the impression of equity-ownership.
• The adverts said ‘the time has come – you will soon officially be able to own a piece of Pod as our Pod investment bond is set to publicly launch on 25 June. At Pod, we’ve got grand ambitions for our growth and we are launching this bond to provide you with a chance to invest in our passionate and pioneering business.’
• The investment in question gave no equity upside. POD lost £383,964 in the latest accounts lodged at Companies’ House compared with £260,714 the previous year. Turnover fell slightly to £17,041,451, compared with £17,324,966 the year before.
• Equity greed. Most investors, certainly Langton, suffer from this. It is the belief that one should not be diluted and that incoming investors should pay heavily for their investment, much more than you did. Preferably they will get no equity at all. This drives companies to issue bonds. Some would say that the yield, however, should perhaps be 20% or 25% (or maybe half that level if there is meaningful security), payable quarterly in cash, in order to reflect the risk.
PUB, RESTAURANT & DRINK PRODUCERS:
• Property agent CBRE has said that ‘despite a falling number of pubs nationwide, pub industry revenues have risen by almost 4% in the past two years’
• CBRE says Q1 trends in managed houses continue to reflect the impact of new builds and the increased number of casual dining outlets (see Langton comments on overbuilding, The Walk etc.)
• CBRE says millions of fans are watching the World Cup. The are forecast to drink an extra 14m pints at a cost of around£42m.
• Danny Meyer, founder of Union Square Hospitality and Shake Shack and author of book Setting the Table, has said that four of his restaurants are now completely cashless.
• USHG boss says ‘as an organization devoted first and foremost to our employees, we determined that the benefits for our team — particularly their safety — outweighed the unintended side-effects for a small segment of our guests.’ He says, however, that these ‘policies can be broken in the name of hospitality, and if someone wants to enjoy our food and drink, yet is only able to pay with cash, it is unlikely that we would turn them away.’
• Meyer says that cashless is a growing trend. He says that it is safer, more efficient and quicker to not use cash.
• The Northern London brewer Beavertown has sold a minority stake of its own business to Heineken for £40m. Beavertown declined to reveal what percentage of the company Heineken now controls. A spokesperson said: ‘Whether its 1% or 49% the impact remains the same’.
• Global food delivery will grow tenfold in the next 12 years from $35bn to $365bn according to data from UBS. UBS also stated that at scale, unit costs of delivery will drop by 50%, and even more via drones and droids.
• Pret A Manger has launched a reusable bamboo fibre cup, that customers will get a discount for using.
• Indian food delivery startup Swiggy has raised $210m at a valuation of $1.3bn.
• Toys R Us and Babies R Us stores across Australia are set to shut after the company’s administrators were unable to find buyers for the embattled brand.
• A Europe-wide CO2 shortage has led to reduced beer stocks, halting brewing and packaging. The mainstream CO2 producers have closed their sites for maintenance.
• Per Morning Advertiser, Novus re-opens its site at the base of the Gherkin following a £200k refurb, the site is called the Sterling.
• Wagamama has opened a flagship restaurant in via san pietro all’orto, Milan, Italy.
• Cake Box, the fresh cream cakes retailer is to float 41% (£43m) of its business on London’s junior market. Mr Chamdal, the chief executive of Cake Box, said ‘With no direct national competitor for egg-free, fresh cream, personalised cakes, Cake Box is well positioned to continue to expand its slice of the sizeable UK cake market both in stores and online’.
• Fake spirits and large measures are some of the concerns for travellers to Russian World Cup says the Foreign and Commonwealth Office and alcohol charity Drinkaware.
• Creditors vote today to decide whether to accept House of Fraser’s CVA plans, that will see more than half of its stores close.
HOLIDAYS & LEISURE TRAVEL:
• Super Break owners The Malvern Group are restructuring the business, putting a number of roles at risk of redundancy in its York and Manchester offices.
• For the week ending 16 June, STR reports US hotel occupancy down 0.3% to 74.2%, ADR up 2% to $131.72 and RevPAR up 1.8% to $97.70.
• Trampolining centre Bounce Health & Fitness (Derby) has been bought out of administration after calling in administrators earlier this month. the company had failed due to falling revenues and rising costs.
• Instagram reaches more than 1bn active users, up from 800m in September 2017.
FINANCE & MARKETS:
• Bank votes, but only 6-3, to hold interest rates at 0.5%.
• Bank says it will keep its corporate bond purchases at £10bn and maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.
• Public sector borrowing fell to £5bn in May, down £2bn on last year. The ONS has revised down its figure for government borrowing in 2017-18 to £39.5bn. This is the lowest level in 11yrs.
• EU retaliatory tariffs come into force today.
• Sterling up at $1.3259 and ®1.1417.
• Oil down at $73.86
• UK 10yr gilt yield down 2bps at 1.27%
• World markets. UK, Europe & US down, Far East mixed.
• Brexit etc.:
o Liam Fox says now zero chance of Brexit not happening.
o FT suggests Mrs May could try to keep UK in single market for goods to get round Irish border question. Liam Fox says, however, ‘the government’s made it clear that we’re leaving the single market and we’re leaving the customs union.’
o Industry asking for clarity.
o Airbus says it could leave the UK if the country leaves the single market without a deal.
o Adult in the room Philip Hammond has hit back at Boris sniping saying the Treasury is not the enemy of Brexit. Says taxes will rise to pay for NHS spending.
o Home Office says it will make it relatively simple for EU citizens to remain in the UK if they have been here for 5yrs already.
PRIOR DAY TWEETS:
• Later tweets: Commodity prices for coffee & milk falling. Is this likely to bring High St coffee shop prices down? Thought not.
• House of Fraser. Suggestion even rump of 28 stores is too many. If they didn’t exist, would you build them? Late eCommerce convert?
• High Street winners & losers. Shops etc. out, funeral directors, hair dressers & nail parlours in. What’s that say for dwell times, footfall etc.?
• Allegra says tea consumption out of home still growing. Hard to put your finger on why tea out of house isn’t quite the same as coffee
• Greene King appoints PwC to exit Loch Fyne. Will be interesting to see the numbers. Not a successful investment, though
START THE DAY WITH A SONG:
Yesterday’s song was ‘Always Look on the Bright Side of Life’ by the Monty Python. But today who sang the following:
And every demon wants his pound of flesh,
But I like to keep some things to myself
I like to keep my issues strong
It's always darkest before the dawn
RETAIL NEWS WITH NICK BUBB:
House of Fraser: The CVA meeting starts at 10am, so the result should hit the wires by late morning and the vibes are that the landlords haven’t got enough votes to block the plan. But there are two legal entities, House of Fraser Stores (which contains the main operating businesses) and House of Fraser Limited and it is possible that one may be defeated. If the vote does go against them, it may be that the landlords will issue a legal challenge, in which case things will drag on…
Trade Press: Retail Week has not been published this week, but in Drapers magazine the main News story is that UK clothing suppliers are starting to push back against constant pressure from retailers. Drapers also flags up the further profit warning at Debenhams and the profit recovery at Bonmarche, as well as the store closures at N Brown (noting our view that the store locations were not ideal). Drapers also note the shock news that Arcadia is to close most of its stores in the Westfield London shopping centre in White City next week (at the end of their leases). On a happier note, it also has an upbeat review of the new Primark store that has just opened in Westfield.
BDO High Street Sales Tracker: We flagged on Wednesday that John Lewis did quite well again last week, thanks to price-matching the Debenhams Sale and the boost from World Cup TV demand, and today’s BDO High Street Sales Tracker for small/medium-sized Non-Food chains for last week, w/e Sunday June 17th, is also reasonable (with increased discounting helping to compensate for less helpful weather than last year). BDO Fashion Store LFL sales were up by 0.6% (against a -1.5% comp last year) and, including Homewares and Lifestyle sales, total Store LFL sales were 1.7% up. And overall Online sales were up by 14.7% (with Online Fashion sales alone up by 21.1%).
News Flow Next Week: The big talking point next week will be the “Philip Green: Damaged Goods” book by Oliver Shah of the Sunday Times, which is officially published on Thursday. Before then, we get the latest Kantar/Nielsen grocery sales figures and the Carpetright finals on Tuesday, whilst John Lewis Partnership announces a Strategy update on Wednesday. We then also get the JD Sports AGM update on Thursday. And, with the end of the month coming up quickly now, the CBI Distributive Trades survey for “June” is on Tuesday and the monthly GFK Consumer Confidence index is out first thing on Friday.