Langton Capital – 2017-11-01 – Leisure spending, Paddy Power, betting, rents & other:
Leisure spending, Paddy Power, betting, rents & other:
A DAY IN THE LIFE:
Anyone who can recall Dick van Dyke’s attempts to sound like an Englishman will know that the Americans think there are only three English accents, namely posh, Cockney and Irish.
And there may be a fourth, i.e. none at all, which is their own attempt to speak English but life’s not that simple and, having been told there are more accents between the Humber and the Mersey (or certainly between the Humber and Holyhead) than there are in the whole of English-speaking North America, I think we could put our American cousins straight.
However, any attempts at education will have something of a mountain to climb because, having recently been told by a drunken American lady trying to show off her understanding of English accents in a pub in London to F off back to Ireland ‘where I belong’, there’s a lot of work to be done.
I told her it was time for her to goo worm. She looked at me blankly, a response I often generate in people and, in a lifetime spent vaguely irritating people, I must say it was one of my finer moments. On to the news:
RENTS POISED TO FALL: WHO BENEFITS?
The Times They Are A Changin’
• Landlords have profited from the boom in casual dining.
• Low interest rates, deep pockets, and lots of vacant A1 units have encouraged growth.
• Supply is reaching a tipping point, particularly in London; the market is saturated.
• Interest rates, input costs, wages, competition, etc. have led operators to trim their opening pipelines and even dump units.
• For the first time in years, landlords are struggling to fill space.
A Word on MRO and Tenanted Pubs:
• Pubs who have applied for a pubs code review might find themselves bogged down in a lengthy, complex, and expensive process.
• The process’ muted take-up might reflect its ability to bankrupt a pub business.
• Or could it be tenants are realising that life is not quite so bad under the tied model as had previously been made out?
• Either way, a year on since MRO rocked the tenanted pub market, the landlord is untroubled.
A More Residential Town Centre?
• The High Street is another matter. Retail’s centre of gravity is shifting to online. A meaningful amount of physical shops are outdated.
• While alternative leisure pursuits could fill up some units, this is akin to putting a band-aid on a bullet wound.
• It’s a nice gesture, but you’ve still been shot in the arm.
• House-building continues to lag targets; residential conversion of High Street retail units sounds like the most likely option.
• This shift will take years to play out, however.
• In the meantime, declining rents mark an opportunity for canny operators to selectively acquire sites in deals that can go some way to mitigating softer demand.
PUB, RESTAURANT & DRINK PRODUCERS:
• Deloitte’s latest Leisure Consumer tracker has shown that the eating and drinking out market has seen the biggest fall in spending for a year. Consumers are cutting back with eating out in Q3 down eight percentage points against the prior year.
• Deloitte expects eating & drinking out to be down by 4% in Q4.
• Deloitte reports that most leisure categories have seen a decline in spending since Q3 last year. It says older consumers have been less directly impacted. Holiday spending is down whilst live sport events, which was flat, is the only category not to have seen a decrease year on year.
• Deloitte reports ‘the combination of rising inflation and lower wage growth is stretching disposable incomes and causing consumers to rethink their expenditure. It is no surprise that we are seeing UK consumers tightening their belts.’ It continues ‘the well documented combination of rising inflation and minimal real wage growth has certainly impacted younger leisure consumers more than any other age group. As a result, millennials are reprioritising their leisure spending towards big ticket items, such as holidays and live sports. However, the fact that older consumers are no longer able to protect their leisure spending is a sign of a tipping point. It is likely that bars, restaurants and cafes will be feeling the effects of consumers’ self-imposed austerity measures.’
• The ALMR has welcomed a parliamentary debate on taxation in the beer and pub sector, with Chief Executive of the group, Kate Nicholls, stating: ‘The debate showed that there is proper recognition in Parliament of the importance of the eating and drinking out sector to the UK’s economic and social well-being, as well as being key to our national heritage’.
• Younger US consumers are much more likely to prefer chains to independent restaurants, according to data from consulting firm AlixPartners. Customers aged between 18 to 24 and 25-34 preferred chains 28% and 31% of the time respectively, whereas only 13% of customers over 55 said they prefered chains.
• Papa John’s International Inc. has reduced its US forecast LfL sales in 2017, due to a disappointing 1% sales growth in Q3 results. The group now anticipates that same store sales will increase 1.5% in North America over the year, down from 2-4%.
• The Chief Executive of the BBPA, Brigid Simmonds has commented on the announcement by the DCMS of a 12 week consultation on changes to gaming machines: ‘It is disappointing that the DCMS is not proposing an increase in either stakes or prizes for pub machines, as we had proposed. As today’s report does recognise our evidence on the important role that machines play in pubs, this should be backed up with modest increases in stake and prize levels’.
• Kate Nicholls, Chief Executive of the ALMR also commented on the DCMS decision, stating: ‘These proposals, if implemented, would miss a much-needed opportunity to assist pubs at a time of an unprecedentedly tough trading environment. Amusement machines can be the lifeline for pub operators, who are facing so many rising costs such as business rates, beer duty and employment costs. Pub customers are able to gamble much larger stakes on their phones, so we believe it would be preferable that such activity is more visible and therefore better regulated’.
• The Guardian has referred to Deliveroo’s off-site catering facilities as metal boxes ‘tucked away in car parks or on industrial estates’. According to the Guardian report Deliveroo is aiming to open 200 dark kitchens on 30 UK sites by the end of 2017, with the current number standing at 66 kitchens on 11 sites.
• Debenhams has revealed plans to open another 50 food and drink offerings in its stores over the next three years. Debenhams currently has around 70 third party managed food and drink offerings in its stores.
• The Yorkshire Meatball Co has ceased trading despite a £123,000 crowdfunding campaign last year, with founders of the business blaming losses on an influx of restaurants in its home town of Harrogate. James Sleight, joint liquidator at Geoffrey Martin & Co, said: ‘The company’s financial difficulties arose from a culmination of the historic losses from its restaurant operations and insufficient working capital to promote its products to a wider audience… Despite repeated attempts by management to source further investment for the business to build on its initial success, the company ran out of funds and ceased to trade.’
• Charles Wells has announced a joint venture with Little Gems Country Dining to run a combination of the Little Gems and Charles Wells’ Apostrophe Pubs. Charles Wells chief executive Justin Phillimore said: ‘I am really looking forward to working with Steve and Rachel. They bring with them enormous experience of growing and expanding successful food led businesses and I believe now is a great time for us to team up as I see the next couple of years will give rise to many good investment opportunities.’
• Wok & Go operator PFC Group has launched a £500k crowdfunding campaign to open a flagship store in London in exchange for 5.26% of its equity, valuing it at just over £9.5m. PFC Group generated revenue of £7.4m across its 24 sites, with EBITDA of £483k for its FY 2017, and plans to open another 13 units in the next year.
• Kellogg shares rose sharply yesterday to finish up 9% on news that net sales had increased to $3.27bn in Q3.
HOLIDAYS & LEISURE TRAVEL:
• Virgin Voyages has announced its first cruise will be adult-only. The first of the three Virgin vessels is due to be delivered in 2020.
• The Czech based vinyl producing factory, GZ Media, has announced that it expects to press 30 million record this year, as vinyls continue to enjoy a cultural resurgence.
• Motorway services company Welcome Break’s parent co Welcome Break Holdings 1 Ltd has reported turnover up 4.4% to £649.5m in the year to end-Jan. It says that non-fuel sales were +5.2%. The group reports traffic levels ‘have proven again to be very resilient with traffic passing Welcome Break locations +2.3%’. The group reports profit before tax of £43.5m, down from £43.8m in the year before.
• Paddy Power Betfair updates on Q3 trading saying revenue rose by 9% in Q3 to £440m with underlying EBITDA +7% at £121m.
• Paddy Power reports ‘full year underlying EBITDA now expected to be between £450m and £465m’
• Paddy Power Betfair CEO Breon Corcoran comments ‘Q3 was an encouraging quarter for Paddy Power Betfair, with good stakes growth despite the absence of a major football tournament.’ He continues ‘our international businesses performed particularly well.’
• PPB CEO Breon Corcoran continues ‘Paddy Power Retail also continues to outperform the market through its sports-led proposition and is well positioned to respond to regulatory changes.’ He concludes ‘in the new year, I will hand over leadership of the Group to Peter Jackson and, while the industry remains highly competitive and is exposed to regulatory risks, I believe the business’ scale, leading capabilities and market positions mean it remains well placed to deliver sustainable, profitable growth.’
• The maximum stake for fixed-odds betting terminals could fall from its current limit of £100 every 20 seconds to as little as £2. A 12-week government consultation into the practice aims to reduce the risk of people suffering large losses and to tighten up advertising.
• Per MCA, All Star Lanes’ first new generation concept will boost growth for the company, according to managing director Christian Rose. The site is set to open in March at Westfield London and will take the bowling company to eight sites. The group’s Brick Lane site has seen LfL sales up by 22% since its reopening in February.
• Nintendo profit forecasts have doubled thanks to the success of its Switch console. The video games maker now predict annual profits of £800m, up from £430m.
• DVD rental service LoveFilm by Post ceased trading yesterday, leaving few players left in the industry due to competition from streaming giants such as Netflix.
FINANCE & MARKETS:
• NIESR has cut its numbers and now says UK GDP should rise by 1.5% this year.
• NIESR says UK inflation should peak at 3.2% in Q4. It should be back at 2% by H2 2019.
• NIESR says UK bank rate will rise to 2%. It says ‘the economic and political backdrop remains highly uncertain.’
• NIESR quotes betting odds of around 67% for an early election and, presumably, a hard left government.
• NIESR says in UK ‘the downward revision to our growth forecast primarily reflects a more negative view about the productivity prospects of the economy.’ It quotes ‘austerity fatigue’ as a problem in getting the deficit down further.
• NIESR, what does it know, huh? Still sick of experts?
• Eurozone economy grew by 0.6% in Q3. French economy grew by 0.5% in Q3.
• NIESR on world economy. Says ‘global growth this year and next seems likely to be as good as it gets.’
• NIESR says world GDP should increase by 3.5% this year.
• Flash numbers for the October Eurozone CPI show prices rising at a slower-than-expected 1.4% vs 1.5% in the month to September
• Oil up 40c or so to $61.22
• Sterling stronger vs dollar at $1.3275
• Pound up vs Euro at €1.1413
• UK 10yr gilt yield down 1bp at 1.33%
• World markets: UK higher yesterday with Europe and US also up. Asia up in Wednesday trade
o Chuka Umunna describes leave campaign as ‘the most cynical, opportunistic and dishonest political operation of my lifetime…’ it was a ‘sickly concoction of invented statistics, warped facts and impossible promises.
o IEA says that not all leave voters were deceived. Some are getting what they want. Not all are of limited intelligence, the IEA suggests
o Reuters suggests UK is ‘accelerating preparations for “all eventualities” when it leaves the EU’.
o FT suggests there are not enough customs officials to keep lorries moving post 2019, Lorry traffic has increased five-fold over the last 30yrs whilst the need for border controls had diminished over that period
PRIOR DAY’S LATER TWEETS:
• Too much space. Keys handed back by Lloyds Chemist, phone shops, travel agents etc. We’ve got enough casual diners already. See e/m
• What now for rents? Good luck filling all those tertiary sites. Cash for gold shops, charity shops, pawnbrokers??
• Just Eat jacks guidance for year. Revenue at least will beat expectations. EBITDA, not so much. Shares up nonetheless
• Unsecured lending up 9.9% in September. 3x inflation. Nearly 5x wage growth. Finite. Finite. Finite. In fact, will need to be unwound
• GfK: Confidence minus ten. Worse than minus nine in Sept. Not good. GfK says propensity to spend is ‘more worrying than reassuring’
• GfK bemoans UK reluctance to save. Spending splurge is worrying, it says. Where’s all the cash coming from. Debt, that’s where
START THE DAY WITH A SONG:
Yesterday’s song was Michael Jackson’s ‘Billie Jean’, we perhaps missed a trick of choosing ‘Thiller’ for Halloween. Today who sang:
So you think you can stone me and spit in my eye?,
So you think you can love me and leave me to die?
RETAIL NEWS WITH NICK BUBB:
Next: We flagged yesterday that after a tough October, impacted by difficult comps and the warm weather, it would be interesting to see whether Next and its estimable CEO Simon Wolfson toned down its full-year sales and profit guidance with today’s Q3 trading update. And the answer is…that they haven’t, as the central guidance has been maintained, thanks to the strong August/September trading and the belief that the product ranges have continued to improve, but the Q3 outcome was disappointing. Some people in the City expected full-price sales to be nearly 4.5% up in Q3, driven by Next Directory, but the outcome was only +1.3%, with Next Retail down a sickening 7.7% and Next Directory up 13.2%. Wisely, Next do not pontificate on the outlook for the UK consumer, merely saying that “sales performance has remained extremely volatile and is highly dependent on the seasonality of the weather”
John Lewis Partnership Sales Watch: The warm weather and tough comps certainly conspired against John Lewis in October and yesterday’s sales figures for last week from JLP showed that John Lewis sales slumped by 4.0% in gross terms (c4.7% down LFL, ex Oxford) in w/e Oct 28th, the fourth bad week in a row. The warm weather didn’t help Fashion sales, which were down by 1.9% gross, but John Lewis also blamed the fact that “a competitor promotion was run on fewer fashion and beauty products than last year” (the House of Fraser “Brand Event”). Fewer promotions were also blamed for the 2.0% drop in gross sales in Home last week, whilst the 7% slump in gross Electricals sales was blamed on customers waiting for the new iPhone X smartphone, which goes on sale on Friday. Over the last 13 weeks, however, John Lewis sales have been cumulatively up by 1.5% gross, about flat LFL. Over at Waitrose
Today’s Press and News: The big Retail news yesterday (which came out at the unusual time of 9.39am) was that the highly paid Chief Creative Officer of Burberry, Christopher Bailey, is to “transition” from the company at the end of next year. This is the lead Business story in the Telegraph (“Makeover at Burberry as Bailey leaves after 17 years”), providing another front page fashion model photo opportunity. The FT runs with the headline “Bailey’s Burberry exit dashes hopes of ‘wonderful’ partnership with new chief”, noting that the news has come just weeks into the tenure of new CEO Marco Gobbetti and quoting the Chairman John Peace as insisting that Bailey’s decision had not stemmed from any disagreement between the two men: “They see eye to eye on most things. Not all things, but most things”.
News Flow This Week: Tonight sees the launch of the Waitrose Food & Drink Report 2017-18, at the Waitrose Cookery Skool in King’s Cross. Tomorrow is very busy, with the Morrisons Q3 update, the Howden Q3 update and the Intu Properties Q3 update, together with first dealings in the Footasylum IPO, the much-awaited MPC interest rate decision at mid-day and the Apple Q4 results in the US in the evening. Friday brings a Kingfisher Capital Markets Day. And one day soon the CMA will issue its provisional findings on the Tesco bid for Booker, whilst, by tradition, the much-hyped Christmas TV ads get going in early November (with Sainsbury one of the few retailers to have the decency to wait until after Remembrance Day).