Langton Capital – 2016-01-11 – Daily Wrap: Capacity issues, online retailers, craft brewers & other:
Leisure Wrap & Other:
So the trading day is grinding to a close. We’re another day older but are we any wiser? After a day of intensive head-scratching, pen flipping and gossip, we have been considering the following. As always, contact us if you’d like further details:
Capacity issues, London and other:
• Today we cover both 1) the FT’s comment that over-capacity could be becoming a major issue for the casual diners (see various prior emails) and 2) press comment on the likelihood of a 3dy tube strike.
• Neither of these bits of news are likely to be welcomed by the capital’s casual diners.
• New entrants, some sensible, some not, have both a) increased competition & therefore the number of operators wishing to take a slice of the cake and b) bid up the cost of property, rents etc.
• Good existing operators can arguably deal with a) because they are good at what they do but they will have a problem with b).
• Hence when new entrants bid up the cost of property and push rents to hitherto unheard of levels, they may be causing problems for even the best of operators.
• With this in mind, it is not surprising that operators have in some cases been looking to the regions for expansion opportunities.
• Meanwhile, in London at least, branded casual dining is becoming a crowded market.
• This provides opportunities for some operators, frequently new entrants themselves, that are able to accept lower margins and to provide customers with a high quality product at truly good value
• Elsewhere, there are perhaps too many operators trying to enforce 68%, 70% or 72% margins whilst providing their customers with an increasingly mediocre product
• Consumers are unlikely to appreciate being made a fool of and a ‘strong brand’ can only go so far.
Online retailers, SBRY & Home Retail, etc.
• Suggestions over the weekend that SBRY was interested in Argos’s delivery expertise.
• Which is a relatively new one on me but the group has apparently been impressive in recent months with 24hr delivery now possible.
• Independent apparently saying that SBRY sees the purchase of Argos’s delivery capability as the best hope of stopping the Amazon juggernaut. See Nick bubb.
• Tanks vs small boy with catapult or would the combined entity really have a chance of turning the tables?
• And a related thought. If SBRY is buying Argos for its home delivery, which has been put in place only relatively recently, then why doesn’t it build a similar model itself and avoid paying 1) for Homebase and 2) any premium?
Craft brewers etc.
• Perhaps it was always likely (see Innocent Drinks, Pret etc.) that alternative operators would ‘go mainstream’ and, in many cases, be taken over by established operators.
• Certainly craft brewing may be going this way.
• But that perhaps misses the point that many consumers are taking to craft brews because they are not ‘mainstream’ and, given the number of craft brewers out there, it is a simple task to move from Camden or Meantime to Truman or York Brewery
• Following this argument through, it could be that the majors are buying something intangible that, like a puff of smoke, may be gone when you try to grasp it
Holiday companies’ costs:
• We notice that TUI is amongst Friday’s risers. That’s perhaps not saying too much (as it was a down day) but the shares were up by around 2.8% in a market that was generally lower.
• Oil is clearly a lot cheaper than it was a year ago.
• Fuel costs are typically locked in for around a year in advance.
• At any point, an operator may have secured 100% of its current season’s oil, perhaps 50% to 66% of the upcoming season and 33% to 50% of the season after that.
• This means that lower oil prices will take a while to come through to the bottom line.
• We would also mention here that Thomas Cook has recently said that 75% to 80% of any reduction in costs tends to be handed on to customers.
• Hence lower oil prices, though good, will take a while to feed through and will not fall through to the bottom line $ for $. Not by a long chalk.
• Having said the above, we not that Sterling has been markedly weak against the Euro.
• It is giving back (it’s the upper line, the US$ is the lower line) some of the last year’s gains.
• This will impact holiday companies as, very roughly, perhaps around 1/3 of their costs are in Euros (beds), 1/3 in dollars (aviation) and 1/3 in Sterling (head office & retailing etc.)
• Of course exchange rates are also locked in because, though printed brochures are not what they were, the groups wish to lock in costs at the same time as they make promises on prices.
• For the holidaymaker, however, the impact of any change in currency is more immediate as he/she will notice it as soon as they land at the airport
• This may impact 1) the amount of cash that they bring home from their current holiday (this could influence spending at pubs & restaurants) and 2) their inclination (or financial ability) to book another holiday over the medium term
Random information, hopefully not all of it useless:
• A somewhat tacky point but staycations could rise (again) in number if consumers decline to travel overseas in the light of increased terrorist activity
• ASDA is to put another £500m back into customers’ pockets.
• FT carries an interview with Waitrose MD Mark Price in which he made gloomy noises about future industry margins. See Nick Bubb. In this, Waitrose makes common cause with ASDA whilst Sainsbury CFO has been suggesting that 2016 could be the year of grocery recovery.
• Crude price fell by 10% last week alone.
• Oil price low & testing new lows. High natural gas price therefore somewhat anomalous.
• Sugar price strong, most other soft commodities extremely sickly.
• Oils, miners & financials extremely weak on Friday.
• House builders looking strong. Some concerns re level of house prices.
• S&P last week had its worst week in 4yrs.
• Gold rally. Still need a microscope to register its ‘bounce’.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. FT suggests there could be some over-expansion on the High Street by the casual diners. Says similar to excess supermarket growth
2. The Daily Mirror has suggested that an(other) upsurge in staycations could provide a boost to British pubs in 2016
3. Surely the big boys buying craft brewers should realise customers are buying craft beers to get away from the big boys?
4. London underground train drivers are reported to be considering 3dys of strike action in row over all-night services per BBC
5. Trade reaction to new drinks guidelines; HMG criticised for nannying consumers, points out consumption falling anyway.
6. ASDA is reported to be set to cut another £500m in prices this year. Keeps more money in consumers’ pockets.
7. US nonfarm payroll numbers surged in December in a move that reinforced the opinion of some observers that Fed will raise rates in March
8. Bank of England reports that interest rates for savers are hitting new lows. Average rate on ISAs now 0.85% in Dec from 0.99% in Nov
9. Household debt at 5yr highs per TUC analysis. Says UK households are in debt to the tune of c25.5% of annual income.