C&C, Xmas trade, labour shortages, Brexit & other:

A DAY IN THE LIFE:

So, we’ve gone from no Christmas trees to three over the weekend.

One was a straggly artificial effort that used to play songs at high volume whenever it was switched on but which mysteriously had its workings gouged out with a screwdriver after it got stuck on Jingle Bells for 2hrs last year, one is real (but dead) and another, mercifully smaller, is alive and in a pot and has been named Carl.

And, in contrast to the Oxford Union, which apparently (unless it is 1 April) now insists on neutral (and made-up) pronouns so as not to specify gender, our 10yr old insists that I call him ‘he’ and that I speak to him from time to time such that I don’t hurt his feelings.

And that I’m prepared to do.

At least until we put him outside in the rain and snow, ignore him for months and let the dog wee on him daily for a year after which we’ll violate his rights by pressure washing him before dressing him up in fairy lights & letting him back in the house on 1 December 2017. What a life. On to the news:

CROWDFUNDING IN THE CROSSHAIRS?

AKA shocks, regulation, fallacy of ‘5 sigma’ events & Crowd-Funding:

• Q: If ‘five sigma’ events should only happen 1 in 3.5m times, why are they so frequent?

• A: Because there is no normal distribution.

• A: And we suffer from over-optimism, wilful blind spots, call it what you will.

• A: And regulators, politicians etc. may interfere, they may not have read the script.

• A: And there may be a lemming-like belief that the worst can never happen.

Yet it not-infrequently does – cases below happened just this week in just this sector:

• CFD (betting) operators were hit Monday when legislation was proposed in the UK

• They were clobbered again when similar moves kicked off in Germany

• UK domestic betting companies fell when FOBT restrictions were proposed

• Asian gaming stocks fell when ATM daily limits in Macau were rumoured

Learnings:

• Betting stocks are friendless when it matters. But that’s enough about them.

• Also friendless when the chips are down, may be some other ‘disrupters’

• Remember politicians may grandstand & punters have votes, companies don’t.

Lateral Thinking – Implication for Crowd-Funding etc.:

• The FT suggests P2P lending & crowdfunding (here) may be curbed

• It says there is ‘evidence of consumer detriment’.

Small (but consistent) consumer losses will still prompt investigation:

• Lotteries (small bet, extremely long odds) are heavily-regulated.

• There is evidence that punters will pay the same for 1/10k or 1/1m odds.

• Crowdfunding features crazy valuations, lack of liquidity, unclear exit routes, risks etc.

• Customers & punters (a.k.a. ‘investors’) may therefore ‘need saving from themselves’

• And politicians like to tinker so take a step back, fault the logic

• Legislation may be on its way. It may even happen before the first high-profile failures…

PUB, RESTAURANT & DRINKS PRODUCERS:

• C&C reports expanded manufacturing and distribution partnership with AB InBev, incl. new distribution arrangements for Magners in England, Wales, the Channel Islands and the Isle of Man.

• C&C reports ‘existing contract brewing arrangements with AB InBev have been renewed and extended’. It says ‘no consideration is payable by either party on signing of the Expanded Partnership Agreements, which will come into effect over the coming months, and are long term, multi-year contracts; and the Expanded Partnership Agreements are expected to be earnings neutral in the first full year of operation and accretive thereafter driven by increased volumes and value, particularly in cider in England, Wales, the Channel Islands and the Isle of Man.’ C&C CEO Stephen Glancey reports ‘we are delighted to renew and expand the scope of our long term partnership with AB InBev’. He says ‘we have been manufacturing and distributing AB InBev’s beer brand portfolio in our core territories of Scotland and Ireland since the acquisition of the Tennent’s business from AB InBev in 2009.
Today’s renewal of these agreements is testament to the strength of our distribution networks across Ireland and Scotland and our leading positions and brands in these territories; and underscores the quality and efficiency of our manufacturing facilities.’

• ETM Group saw turnover rise by 17% to £22.9m as group EBITDA grew 10.1% to £2.3m for the year ended 29 February 2016. The group continues to actively expand ‘with a view to increasing its presence in the eating out and drinking market in London’ and already has two further sites lined up for 2016 openings, while a ‘significant gain’ has been realised upon sale of the freehold of The Gun Public House, further funding ETM’s ambitions.

• The Sunday Times writes of Soho House’s tightening finances as the group negotiates a bold global expansion programme that involves sites in Hong Kong and Tokyo. The Chicken Shop, Dirty Burger and Pizza East operator recently found the budget of its Soho Farmhouse soar from c£45m to over £70m and Soho House has had to borrow £40m from two funds, call up more than £20m of fresh equity from its backers and sell a 50% stake in its restaurant business to Iranian-born property tycoon Javad Marandi. Its bonds, meanwhile, have repeatedly been downgraded by rating agencies and Moody’s believes the operator needs to slow down the pace of growth so that cash flow can be used to deleverage.

• The first signs of strain emerged in September last year when it was forced to pull a £200m high-yield bond issue, with reported concerns about Soho House’s debt-to-earnings ratio, up from six times in 2012 to more than ten times, and forcing the group to raise £40m of high-interest money from a couple of funds. Burkle and Caring put in £21.2m of extra equity, extended the overdraft by £5m and raised £13.8m by selling 50% of Chicken Shop, Dirty Burger and Pizza East to Marandi.

• McDonald’s has downsized plans to sell part of its Asia franchise after failing to find a suitable buyer in South Korea.

• Bookatable has reported that pub bookings for Xmas Day are +12% on last year. They are now +26% on 2014. Much of the increase will be a shift in booking patterns but observers see the forward bookings as a sign of confidence. The PMA quotes a number of operators as saying that they are up on 2015.

• US journal NRN has pointed out that, though restaurant shares are +5% on last year, LfL sales ‘have been weak all year.’ NRN says ‘profits next year are expected to continue improving thanks to low commodity costs. And the industry seems to be offsetting labor cost increases, for the most part.’ So much for bothering to increase sales.

• JDW reported on Friday that it had bought back another 38,590 of its own shares for cancellation at an average price of 813p

• Food & Drink Federation has called on the government to give reassurance to European workers that they will be allowed to remain. Between 1/3 and 2/3 of staff in many hospitality operations are foreign born. Signatures to the above letter include the National Farmers’ Union, the ALMR and the British Growers Association. The letter says ‘a significant element in our ability to deliver affordable and high quality food and drink is the part played by workers from the European Union. All options should be explored, including a workable points-based system for shortage occupations, sector-based and seasonal or guest worker schemes and effective transitionary arrangements. If they are not, the UK will face less food choice and higher food prices.’

• The Grocer suggests that rising food prices will have helped push inflation to its highest level for more than 2yrs later this week.

• Nando’s has reported revenues up to £809m in the year to February from £587m in 2015. PBT fell to £21.3m from £44.6m. The group last year significantly increased its investment in Singapore, Malaysia and India. It now sees “significant growth potential” in those markets next year.

• Pizza Express has put the price of its Margherita Pizza up from around £8.45 to £9.10 at its Haymarket site. The 65p increase is in response to a c10p or less increase in the cost of ingredients. The group is now asking for £13.50 for its American Hot

• Coke CEO Muhtar Kent is to retire in May next year. COO James Quncey, who is British, is to replace him. Shareholder Warren Buffett commented ‘I know James and like him, and believe the company has made a smart investment in its future with his selection.’

• Transport secretary Chris Grayling has rejected calls to cut the blood alcohol limit from 80mg per 100ml to 50mg. A similar reduction in Scotland has caused a decline in trade for many pub venues and research by the Scottish Licensed Trade Association found 64% of 400 outlets surveyed considered the lower drink-drive limit the single greatest threat to their business. Speaking to the Evening Standard, Grayling said: ‘We have a drink-drive problem, but it’s not people who had a glass of wine at the pub, it’s people who systematically flout the law. We have a fairly thinly stretched police force and we should concentrate on catching the serious offenders.’

• The Wine and Spirit Trade Association has called 2016 the ‘Year of Gin’, with export sales up 166% by value since 2000 and domestic sales breaking the £1bn barrier. Since the WSTA began releasing its Market Report in 2012, gin sales in the UK on-trade have increased by £300m, while sales in the off-trade have grown 68% since 2012.

• MCA data show that menu price inflation has significantly outpaced the Consumer Price Index in the past year, rising by about 3% in the twelve months to October 2016.

• A report by Tetley finds that tea sales have grown by 8.8% in pubs in the year to August, making the channel worth £76m.

• Tougher rules are needed to protect investors in crowdfunding platforms, according to the FCA, which suggests applying ‘mortgage-lending standards’ to the industry. Recent AltFi data suggest that about one in five crowdfunded businesses fail, and the FCA says it has identified several weak spots in the market. These include a lack of comparability between crowdfunding platforms, ‘complex and often unclear product offerings’, and insufficient operational risk management, while stronger rules are required in the event of business failure. FCA CEO Andrew Bailey said the watchdog would consult further and is looking to propose new rules next year.

• A group of 30 food and drink associations have warned in an open letter that the UK faces higher food prices without continued access to EU workers. They argue that EU workers play an important role in the supply chain but some are already starting to leave, and are calling on the government to provide ‘unambiguous reassurance’ about EU citizens’ right to remain. Just under a third of workers in UK food manufacturing are from the EU.

LEISURE TRAVEL & HOTELS:

• Travel growth globally is expected to continue to outpace economic growth by a couple of hundred basis points, according to Expedia chief financial officer Mark Okerstrom.

• Six Egyptian police officers are reported to have been killed in a bomb blast near a mosque on a road used to drive tourists to the pyramids.

• PPHE Hotel Group has acquired the freeholds of art’otel cologne and art’otel berlin kidamm in Germany for €54.5m.

• Cairo bombing on back of Istanbul blast will do little to promote tourism to Egypt or Turkey

• Millennium & Copthorne reports that CEO Aloysius Lee is to retire at the end of February next year. The group says ‘the Nominations Committee is continuing with succession planning and recruitment of a new Group Chief Executive Officer. A further update on the search and final details of Mr Lee’s remuneration arrangements will be provided in due course.’

OTHER LEISURE:

• Macau has denied reports that it is to halve ATM withdrawal limits.

• 21st Century Fox has made a takeover approach for Sky that values the broadcaster and producer at £18.5bn, or £10.75 a share, making for a 36% premium to close on 8 December. Alex DeGroote, analyst at Peel Hunt, said: ‘Sky has not performed well in the UK stock market this year, and is seen as a Brexit loser. Fox is of course also a dollar bidder, and the collapse in sterling makes Sky a less expensive purchase than pre-Brexit. There will also be cost synergies, which will reflect economies of scale in technology and content, such as sports and movie rights.’

FINANCE & MARKETS:

• BCC reports that current robust economic performance is unlikely to last. It has been ‘business as usual’ since the 23 June vote. The BCC now expects 2.1% GDP growth this year but only 1.1% next and 1.4% in 2018.

• Accountants BDO say the economy has stabilised “in a lower gear” than it had been running at before the referendum. It sees business optimism continuing to fall.

• ICSA & FT report suggests that majority of FTSE350 co secretaries expect business conditions to deteriorate next year. Only 8% expect an improvement. The ICSA reports ‘now that Brexit is a reality, we are seeing a return to caution.’

• UK trade deficit down to £2bn in Oct. Good news as imports down by £1.8bn whilst exports up by £2bn

• Survey by ComPeer & IRESS suggests international investors are cutting ongoing investment in UK by >50%

• Times says Britons will be given the chance to keep their EU citizenship on a personal basis post Brexit

• The Independent reports Britain is turning against globalisation, blaming it for low UK wages and inequality

• IMF boss Christine Lagarde has said that she is confident she has done nothing wrong. She goes on trial today. She told French TV ‘negligence is a non-intentional offense. I think we are all a bit negligent sometimes in our life. I have done my job as well as I could, within the limits of what I knew.’

• World markets: UK & Europe up Friday. US also higher. Far East mostly up in Monday trading

• Brent trading sharply higher at around $56.65 per barrel

• Sterling stable at $1.2587. Up a little at 119.2c per Euro

• US long rates continue to firm w. 30yr treasuries at 3.16% (Friday 3.10%). UK 10yr bonds at 1.46%. Was c0.5% in July

• Rightmove reports house prices fell by 2.1% in December after a 1.1% fall in November

• Buy to let sales said to have ‘plummeted’ by c50% in the last year on the back of alleged ‘war on landlords’

YESTERDAY IN A NUTSHELL – SELECTION OF TWEETS, LIVE TWEETS ON WEBSITE:

• CGA Peach’s BrandTrack survey has suggested that restaurants are rated for quality whilst pubs are rated for value.

• CGA Peach suggests that the power of brands may have diminished over the last three years.

• Lion Capital is in exclusive talks to buy the Piper Equity backed, 90-strong Loungers chain reports Sky News.

• Drake & Morgan has converted its second Corney & Barrow site, to be known as The Pagination in Cabot Square, Docklands

• US restaurants registered a 1.3% drop in same-store sales in November reports TDn2K. November was the 9th consecutive drop

• Brewdog’s latest bond offering has raised £2.9m. The group has said it will raise between £0.5m and £10m.

• McDonald’s is to move its non-US tax base from Luxembourg to the UK, meaning the new holding company will pay UK tax

• Rising oil prices and slowing demand will see airline profits fall for the first time in six years in 2017, per IATA

• Shares in betting companies fell after a cross-party group of MPs has said maximum stakes on fixed-odds betting terminals should be cut

• The European Central Bank has extended its programme of QE to Dec 17 but has cut monthly purchases from €80bn to €60bn

• Fund managers selling bonds & reducing exposure to UK could drive up yields and increase borrowing costs for HMG (and for everyone else).

• Later tweets: Gold has bad month. Trading around $1170. Gold/oil (no. of barrels of oil per ounce). Lowest of year at 21.6 barrels. Down c40% from March.

• ECB to maintain QE. Still heroine, just a little less of it. Shock therefore still to come. Supply push will remain an issue re capacity

• Worth noting that US restaurant LfLs have been <0% for 9mths. Changing tastes? Nah, that’s what comes from over-building

• External shocks. FOBTs, CFDs in UK, CFDs in Germany, cash withdrawals in Macau. Betting companies politically friendless?

RETAIL NEWS WITH NICK BUBB:

• Saturday Press: The big business story in the Saturday papers was the mega-bid for Sky by Fox/Murdoch, but the main Retail story was that Amazon is trialling checkout-free convenience stores in the US (as per the big article in the FT about retail automation and shop jobs in the US, as well as an article in the Guardian noting that Amazon may bring the Amazon Go concept to the UK). The Guardian also flagged that the future of Sports Direct Chairman Keith Hellawell is to be voted on by shareholders for the second time in four months in early January. The Times picked up on the bullish BDO overview of High Street sales in November and its Money section focused on Hotel Chocolat as its “Share of the Week”. The Daily Mail highlighted that the BHS administrators are considering making a claim on the £8m of fees earned by the advisers to Dominic Chappell in relation to his purchase of BHS
and it also noted the management changes at the struggling fashion chain Jaeger. Finally, it is worth noting that the front page story in the Daily Mail was about so-called “rip-off” gift card expiry dates and that it also had an interesting double-page feature article by the estimable Harry Wallop on the changing face of the High Street in Loughton in Essex.

• Sunday Press: There were no big Retail stories in the Sunday papers, although the Sunday Times revealed that the struggling menswear chain Blue Inc is close to being taken over by its biggest supplier, Padma Textiles of Bangladesh, through a debt-for-equity swap. The Sunday Times also flagged that the convicted fraudster Paul Sutton received several payments from BHS after the ill-fated takeover by Dominic Chappell…The Sunday Telegraph noted that the two founders of Specsavers had their dividend payout cut in half to £17m last year, despite the company recording an increase in profits. The Observer followed up on the story that Amazon may bring the Amazon Go checkout-free store concept to the UK and also followed up on Sports Direct, mocking its bizarre claim that media attention was upsetting its staff and also noting, in its Business leader column, that Mike Ashley continues to
behave as if he runs a private company. The Mail on Sunday flagged that rival JD Sports is now worth nearly twice as much as Sports Direct (despite Mike Ashley’s preposterous claim a few years ago that he would crush JD) and the Midas column in the Mail on Sunday advised its readers to buy shares in Hotel Chocolat. Finally, there were a few previews of the results from Dixons and Carpetright next week, noting that both companies could do with some good news.

• Sports Direct: While we have been on a well-deserved holiday over the last 10 days, we have missed a bit of news… including the McColl’s Q4 update, the BRC-KPMG Retail Sales figures for November, the Joules pre-close update, the Ocado Q4 and the Mulberry interims and we will try to catch up on those this week. But the most bizarre announcements came from Sports Direct last week, with the interim results at 7am last Thursday coming out at the same time as a separate announcement trumpeting the recruitment of an obscure City “big-whig” (one David Brayshaw) as a non-exec and just over 2 hours before an abrupt announcement that the company is suspending its puny share buyback programme (just £13m worth of shares bought back since July at an average price of c286p). And then on Friday afternoon came the sudden announcement that the shareholder vote required to decide the future of the
embattled Chairman Keith Hellawell will be on Jan 5th. As for the disappointing interims themselves (underlying PBT down 57% to £71.6m), the aforementioned Chairman had the gall to end his statement with these words; “I have no doubt that the extreme political, union and media campaign waged against this company has not only damaged its reputation and influenced our customers, it has impacted negatively on the morale of our people”. Even more bizarrely, despite warning that full-year profits would be at the lower end of the range, not helped by much higher than expected depreciation charges and the ill-fated expansion into Europe, Sports Direct announced that it had bought a corporate jet for $51m!

• News Flow This Week: Tomorrow morning brings the Carpetright interims, as well as the latest Kantar/Nielsen grocery market share data. The Dixons Carphone interims are on Wednesday and then we get the ONS Retail Sales figures for November on Thursday.