Langton Capital – 2019-03-05 – CVAs, discounting, Casual Dining Group, GVC & other:
CVAs, discounting, Casual Dining Group, GVC & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
We’ll be covering behavioural economics etc. in the Premium email shortly & I think it’s pretty important.
Because it fills in that crucial gap between whats we think we do and what we actually do like, for example, if one spouse does 60% of the housework, the other 50% and the three kids do 10% each, then there’s some sort of perception gap.
Furthermore, you could say that you aspire to be a vegetarian, but you have a problem because you like meat quite a lot & don’t much like veg.
Hence, you might convince yourself that you’re a partial veggie. Or a flexitarian who would be a total veg-head if you didn’t include the bacon, sausage, black pudding (sorry, what were you thinking…), chicken and more bacon that you’ve consumed since dawn yesterday and also put to one side the beef, pork, lamb and fish that you’ll no doubt be putting yourself around before the end of the week. Or indeed before the end of the day.
However, in the final analysis, it’s what people do that really counts. It’s actions that show up in the statistics rather than aspirations or the sum of what people say (or even think) that they do. The optimism bias is guilty of causing many failures as are other biases such as those to do with familiarity etc. On to the news:
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Today, we consider the Ed’s / Giraffe situation & suggest that pubs and freeholds are actually more versatile and flexible than are restaurants and leaseholds. We also look at Casual Dining Group. We’ll be looking at various behavioural economic issues before too long.
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OVERCAPACITY IN THE CASUAL DINING INDUSTRY: PUBS VS RESTAURANTS No3 – 5 March 2019:
• The Ed’s & Giraffe CVA keeps the consequences of oversupply front-of-mind.
• It’s harder to restructure with leaseholds than it is with freeholds.
• Pubs have a greater variety of uses, either as an add-on to licensed sales or as an alternate use.
CVAs in the news:
• The proposed CVA for Ed’s & Giraffe, though a disaster for staff, supports our contention that excess supply is having several (arguably foreseeable) consequences.
• Boparan calls a spade a spade, saying rising costs & oversupply have sunk its restaurant business. To add to the good news, Boparan says that it is seeing a ‘softening of consumer demand’. The Ed’s & Giraffe story below illustrates a couple of points:
• The next ‘best’ use of a busted restaurant is still as a restaurant. Getting capacity to exit the market is difficult.
• Without being rude, it’s not easy to turn around certain concepts. Let’s call them ‘bad’ – or at least directionless – concepts.
• Overrented sites may still be overrented, even if charges are reduced. Boparan is said to be looking for rent reductions on 13 sites in addition to handing the keys back on another 27.
• Despite the ‘bargain’ price paid to Tesco, Giraffe was either overrented or was not actually a very good operation. Or both. Global cuisine in a child friendly environment? With alcohol. What kind of ‘niche’ is that?
Leaseholds vs freeholds:
• A convoluted series of hoops need to be jumped through in order to secure meaningful change across a leasehold estate.
• Freeholds, though capital heavy, offer considerably more flexibility than do leasehold units. Pubs, particularly suburban pubs, are often freehold; restaurants are predominantly leasehold.
• IFRS16 will level the playing field in terms of reporting. Lease payments are every bit as onerous as interest payments.
Alternative & associated uses:
• Pubs are much more versatile than restaurants. You may go to a pub to eat, drink, sleep, stand around & chat or play any one of a number of traditional or now experiential games.
• But you go to a restaurant to eat.
• Pubs are more likely to have outside space. Though some are, they are less likely to be clustered on the High Street or on retail or leisure parks. They are less dependent on retail footfall to drive customer flow.
• Whilst you wouldn’t want to be stuck with a parcel of leasehold restaurants when the music stops, with a number of pubs, you would have some options.
• See below for the scale of discounting that’s still going on. Boparan Restaurants is offering ‘2 for 1 on Breakfast, Lunch & Kids’ Menu’, Beefeater (WTB) 33% off food, Café Rouge & Bella Italia (CDG), 25% and 40% off food respectively, Prezzo 40% off, Pizza Express 25% off.
• This is an understandable reaction to oversupply and slack demand at the micro level – but at the macro level, it leaves the whole industry struggling to cover its costs.
• Margins will be under downward pressure and, when you add in delivery and the impact that that has on margins, it will be tough for the industry to stand still.
Where is the road back?
• You should have an exit plan. Ask your average burglar (who opens the back door as soon as he’s in the front or the UK/US armies in Iraq).
• If you don’t, then you risk being stuck in a situation (ask the above) and this can be rather damaging.
• Because we see discounts as always addictive and contagious and they are becoming endemic. If customers get it into their heads that they should have 25% or 33% off the cost of their meal, then getting back to full price could be either 1) difficult or 2) impossible.
• Factor in rising costs (delivery, wages, pensions, apprenticeship levies, business rates etc.) and you have an unpleasant situation.
GENERAL NEWS – PUBS & RESTAURANTS:
• Boparan Restaurant Group, the parent company to Giraffe and Ed’s Easy Diner, has announced it will close 27 of the brands restaurants after entering a CVA. Tom Crowley, chief executive of BRG, said: ‘The combination of increasing costs and over-supply of restaurants in the sector and a softening of consumer demand have all contributed to the challenges both these brands face’.
• The companies will need to secure the support of 75% of creditors at a meeting on 21 March. The CVA process is being overseen by KPMG. Boparan acquired Giraffe from Tesco (which did not make a success of the chain) in 2016. The group acquired Ed’s, which was then in administration, in the same year
• Some 300 jobs may be lost. Landlords will be left with a number of units. It’s unlikely that these will be demolished. Most will probably come back as some sort of F&B offer. Will Wright at KPMG comments ‘this CVA seeks to address the cost of the company’s leasehold obligations across a number of unprofitable sites and, if successful, will put the business on a surer financial footing.’ It is hardly fair on competitors who have not restructured & been able to leave some of their bad decisions behind them.
• Discounting an issue. Prominent on the Boparan Restaurants’ website – ‘2 for 1 on Breakfast, Lunch & Kids’ Menu’.
• Other discounts now available out there: Beefeater (WTB) 33% off food, Café Rouge & Bella Italia (CDG), 25% and 40% off food respectively, Prezzo 40% off, Pizza Express 25% off. See more on discouting in Langton Premium Email.
• The number of pubs, bars and nightclubs with 24-hour alcohol licenses has decreased by nearly 20% over the last five years, research from law firm EMW has found. Marco Mauro, Legal Director at EMW said: ‘Continued cultural changes in the way people interact and socialise, such as through dating apps, and the rise of Netflix, has created less demand for pubs, bars and nightclubs. Increasingly many individuals are also now not going out until much later in the evening, and, as a result, they can often spend less on drinks at the pubs’.
• SIBA have commented on the Portman Group’s publication of the sixth version of the Code of Practice on the Naming, Packaging and Promotion of Alcoholic Drinks, with Chief Executive Mike Benner stating: ‘SIBA is disappointed that the Portman Group are pressing ahead to introduce new guidance which says that ‘single-serve’, non-resealable containers shouldn’t contain more than 4 units of alcohol’.
• The London based cafe, bar and restaurant group, Grind is to begin its third round of crowdfunding this Friday. David Abrahamovitch, founder and CEO of Grind said: ‘We’ve got a huge amount lined up for the next eighteen months, and couldn’t be more excited to be announcing our return to the crowd, and I can’t wait to share the news of all the exciting openings we have planned on Crowdcube next week’.
• Pizza Hut is begin tests with food delivery using autonomous robots made by FedEx later this year.
• The Inn Collection Group expands its facilities with the ambition to double its portfolio to 21 inns by 2022. The North East pubco recently successfully bid to gain £10m of funding for future acquisitions.
• SSP UK & Ireland introduces street food trader Mother Clucker into its Camden Bar & Kitchen site in London Stansted Airport.
• Tilray, a Canadian cannabis producer, acquires hemp food manufacturer Manitoba for $318.1m.
• Research from Barclaycard has found that around one fifth of Brits are stockpiling items such as tinned and dried foods in a bid to safeguard themselves against a no-deal Brexit.
• Council tax for households in England increase 4.5% on average from April. CEO of the Chartered Institute of Public Finance and Accountancy, Rob Whiteman said: ‘The extent of the rises across the country are a reflection of the incredible fiscal pressure faced by local authorities and police’.
• Findel’s board has rejected a £140m takeover bid, after Mike Ashley’s Sport Direct triggered a mandatory offer as it bought another chunk of shares in the group.
• Casual Dining Group has announced CEO Steve Richards is to leave the company in May after 5yrs in charge to join holiday company Parkdean Resorts as Chief Executive. Continued in Premium email…
CASUAL DINING GROUP C.E.O. TO LEAVE THE COMPANY:
• Casual Dining Group has announced that CEO Steve Richards is to leave the company after 5yrs in charge at the end of May to take up the role of Chief Executive at caravan holiday company Parkdean. Continued in Premium email.
• Greene King CEO Rooney Anand joined CDG as chairman in December last year at which time he said: ‘I’m very much looking forward to supporting Steve and the management team, helping them to build on the solid foundations they’ve established at CDG as they continue to grow and develop the business in the fast moving and competitive casual dining market.’
• Steve will now not be there, though his departure isn’t said to be related to Rooney Anand joining the company but rather to the Parkdean job becoming available.
• Casual Dining Group has had a difficult few years. Although frustrating & not very helpful, the best advice regarding a turnaround is sometimes ‘don’t start from here’. Brands may be tired, competitors may have moved on, the rents may be at the wrong level etc. etc.
• CDG (at the time operating under the Tragus name) had a bit of a heart attack and underwent a CVA in 2014. The newco was incorporated in August of that year. It acquired the Las Iguanas and La Tasca chains in 2015. It has disposed of some restaurants since.
• CDG reported May 2017 numbers (the most recent for which information is available) a little late & revealed that it had lost £78.6m after exceptional costs in the year after a loss of £69.3m the year before. The company had accumulated losses to May 2017 of £96.8m. Revenues were up and underlying, much-adjusted EBITDA was reported to have moved up from £16m to £17m. The company announced a new cash investment of £30m in July last year as a part of a refinancing of the group.
• In November, the Sunday Times reported that CDG had appointed restructuring specialists Alvarez & Marsal to help the company in discussions with landlords aimed at reducing its rents.
• Chairman Rooney Anand says ‘on behalf of the Board I would like to thank Steve for his achievements as CEO of CDG. We will be appointing his successor soon and making a further announcement in due course. Steve will be helping us effect a smooth transition as we continue to grow and develop the business in the fast moving and competitive casual dining market.’ Could be a tough gig.
HOLIDAYS & LEISURE TRAVEL:
• Parkdean has announced that John Waterworth, co-founder ‘has decided to retire from his role as CEO this summer.’ The company says ‘John has enjoyed a hugely successful and distinguished 37-year career including the past 20 years as CEO at Parkdean Resorts. Under his leadership, the business has grown turnover from £10m to £430m and has developed from a single park at Trecco Bay, to be the leading Holiday Park owner and operator in the UK with 67 parks.’ Parkdean has announced that Steve Richards, currently CEO of Casual Dining Group, is to join as CEO.
• Martin Robinson, Chairman of Parkdean Resorts says ‘on behalf of everyone who works at Parkdean Resorts, I’d like to acknowledge John’s immense commitment and passion for the business which has allowed him and the team to achieve so much.’
• Per HotStats, UK hotel RevPAR increased by 3.4% yoy in January but profit per room fell by 2.6% as cost pressures mounted. Occupancy was up 0.2% to 64.8% with ADR up 3.1% to £107.02.
• Association of Independent Tour Operators director Noel Josephides says ‘Consumers are looking at the Brexit mess and thinking ‘no matter what they tell me, I just think I’ll wait’.’ Figures in the industry are urging the government to reassure consumers that it is safe to make holiday bookings.
• GVC has reported full year numbers to end-Dec saying that its ‘global scale and market diversification [is] delivering very strong online growth in all key territories.’
• GVC says revenues rose by 9% pro-forma to £2.9bn with underlying EBITDA up 13% at £640.8m. The loss after tax is £56.4m with a loss per share of 12.2p. The group is paying a 32p per share dividend.
• GVC CEO Kenneth Alexander comments ‘the Group’s full year results reflect a very strong performance…with the completion of the Ladbrokes Coral acquisition in March making the Group the largest online-led sports-betting and gaming operator in the world. Excellent operational execution, effective marketing and a good World Cup helped both the legacy GVC and the acquired Ladbrokes Coral businesses perform ahead of expectations and materially ahead of the market, delivering market share gains in all our major territories.’
• GVC concludes its model ‘combined with the benefit of being a truly global scale operator, together with the opportunities provided by the integration of Ladbrokes Coral and our joint-venture in the US with MGM Resorts, the Board is confident the Group is well-placed to absorb the impact of the Triennial Review and associated tax increases in 2019, and deliver strong EBITDA growth in future years.’
FINANCE & ECONOMICS:
• The UK Construction PMI for February fell to 49.5 in February, down from 50.6 in January. Any number below 50.0 indicates contraction. Markit says ‘the UK construction sector moved into decline during February as Brexit anxiety intensified and clients opted to delay decision-making on building projects.’
• Sterling down at $1.3161 and €1.1615. Oil little changed at $65.39. UK 10yr gilt yield down 3bps at 1.27%. World markets: UK up on weaker Sterling but most everywhere else lower yesterday & Far East down today.
• Brexit etc.:
o No10 to pay £1.6bn of taxpayers’ money to Brexit voting Labour towns. Not an attempt at bribery it says. Payment will be over 7yrs.
o Japanese ambassador says more Japanese companies may need to leave the UK in the event of anything other than a promising post-Brexit deal.
o Chris (‘failing’) Grayling under pressure to resign after conceding £33m to Eurotunnel & then not turning up in HoC to defend himself. Labour said he had become an “international embarrassment”.
o Telegraph reports European investors are putting more money into the UK.
PRIOR DAY LATER TWEETS:
• Later tweets: Sacked former Pat Val CEO Steve Francis is to sue new owner Causeway Capital. Other lining up to sue CAKE’s auditors etc.
• Ed’s & Giraffe close c1/3 of stores via CVA, Carluccio CEO Mark Jones says his chain would have collapsed but for its CVA
• ERG & hardliners cave in as they take Mrs May’s ‘no-Brexit’ threat seriously. Deal dismissed as ‘worse than staying in EU’ could succeed
• UK says it will not lower food standards to pander to the US. Mrs May to bribe Brexit-voting Labour towns. All to play for
START THE DAY WITH A SONG:
Yesterday’s song was Won’t Get Fooled Again by The Who, today who sang:
Take your time, hurry up,
The choice is yours, don’t be late
Take a rest as a friend
RETAIL NEWS WITH NICK BUBB:
• BRC-KPMG Retail Sales for February (the 4 weeks to Feb 23rd): We flagged last Thursday that another positive LFL sales outcome was expected, after the decent January, but today’s BRC-KPMG figures are a bit disappointing, with LFL sales down a tad (ie by 0.1%). In terms of the key Food/Non-Food sales split, it looks like a case of Food good/Non-Food bad, albeit Food was hit in the final week by tough comps with the stockpiling last year ahead of the “Beast from the East”, whist Non-Food was very mixed with Electricals strong and Clothing/Furniture weak.
TOPICS FOR CONSIDERATION IN PREMIUM EMAIL:
• Thematic pieces:
o Pubs vs Restaurants. Are pubs recovering or just in remission? The efficacy of promotions. No road back.
o Experiential leisure: the future or a fad? Crowd-funding (meets iceberg, iceberg wins). CVA phenomenon & over-renting etc. What to do with ‘busted’ models.
o Employment, unemployment & the interplay of confidence & consumption. Big ticket versus small ticket etc.
o Why one man’s ‘single-minded leader’ is another’s ‘blinkered bigot’
o The menace of models – i.e. how to avoid being precise(ly wrong).
• Occasional ‘deep dives’ into stocks, trends etc.
o If it walks like a duck…If companies are throwing money at customers, landlords etc., why should we be surprised when our research reveals that the High Street’s ‘hot one hundred’ are losing their shareholders a fortune.
o RTN & Wagamama. Patisserie Holdings. People with firmly held views & a 50:50 chance of being right etc. The few pros and many cons of operating within bubbles.
• Book reviews:
o We’ve read 100s & will pick the odd one from Black Swans, The Honest Truth about Dishonesty, Dark Pools, Lean Start Up, history of the 60s, horror of the 70s, Grinding it Out, Sapiens, Smartest Guys in the Room, Client Nine, Black Edge, The Billionaire’s Apprentice, Thinking Fast & Slow, Wizard of Lies & many others.
• Accountancy, Audit & other, thrill-a-minute topics:
o IFRS16, Balance Sheets – folly of the snap-shot. Going concerns, audit reports, the impact of Pat Val etc.
• Behavioural economics:
o Over-confidence, Hofstadter’s Law, confirmatory bias etc. etc. Power of incentives. Occam’s Razor. The Power of Patterns. The influence of ‘social proof’ i.e. following the herd.
• Other: Including guest contributions, From the Archive: 2009 and all that, all we learn from history is that we don’t learn from history etc. Remember ‘efficient balance sheets’ and share buybacks & take-privates of 2007-09? Also, the 99% (share price drop) club?