Langton Capital – 2019-03-07 – Gregg’s, C&C, delivery, labour costs, pubs vs restaurants etc.:
Gregg’s, C&C, delivery, labour costs, pubs vs restaurants etc.:
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A DAY IN THE LIFE:
Tech problem today means that a chunk of work didn’t get saved. Gnashing of teeth at stupid-o-clock this morning. Rather a nuisance but we’ll cope somehow. 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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GENERAL NEWS – PUBS & RESTAURANTS:
• Greggs has reported sales up 7.2% to £1.03bn for the year ended 29 December, with LfL sales rising 2.9%. The group saw operating profit excluding exceptional items climb 9.1% to £89.1m, as the group opened 99 net new stores taking their total to 1,953.
• The company commented: ‘2018 was a year that tested the resilience of Greggs’ business model and demonstrated the benefits of our strategic investment programme. The first half was significantly impacted by extreme weather but once this returned to normal our underlying strengths helped us recover the lost ground and deliver results for the year that exceeded our expectations’.
• Commenting on current trading, Greggs said that LfL sales in the first seven weeks to 16 February had been up 9.6%. The group stated: ‘Whilst there are significant uncertainties in the months ahead, Greggs has started 2019 in great form, helped in part by the publicity surrounding the launch of our vegan-friendly sausage roll. We hope to continue benefiting from this strong momentum during the first half of 2019 before facing stronger comparatives later in the year’.
• The drinks manufacturer and distributor, C&C has stated that trading has been strong and they anticipate EBIT for the 12-month period to 28 February 2019 will be towards the upper end of current market expectations. Commenting on the acquisition of Matthew Clark and Bibendum and group debt, the company said: ‘Operational delivery, customer service and the underlying cash contribution of both Matthew Clark and Bibendum in the second half have continued to improve. Consequently, Group year-end net debt is now expected to be well below current market estimates, within a range of €305m – €312m’.
• The luxury hospitality recruiter, The Change Group has found that EU hospitality applicants dropped 8.5% in 2018, while the average take-home pay for British hospitality workers has also declined by 3.4%.
• The Berlin-based meal-kit group, HelloFresh has seen sales rise 43% in Q4 2018, allowing the group to aim to breakeven this year. Chief executive and co-founder Dominik Richter said: ‘2018 was our most successful year to date, in which we meaningfully expanded our customer offering in terms of meal types, choice and price and assumed market leadership in every single market’.
• Research from the financial ombudsman, Natalie Ceeney, has found that the government will be required to take action to prevent society becoming cashless before everyone in the UK has means to deal with it. The report found that the drive towards cashless is promoted by businesses refusing to accept cash owing to the cost of handling it.
• A report by Quinyx in collaboration with Development Economics and Censuswide has found that a ‘disorderly Brexit’ could result in the UK’s hospitality industry suffering a £1.8bn reduction in economic output. The report also found that 60% of UK hospitality businesses think leaving the EU will negatively impact their ability to hire kitchen staff.
• Ei Group has is to launch a new targeted networking and recruitment event for the North of England, taking place on March 28th at the Spitfire pub in Southport.
• Chapel Down has launched what it believes to be the first gin made from pinot noir grapes.
• Campari has recorded net profits to have fallen 16.8% in 2018, while the group saw total sales decline 2.4% to €1.71bn.
• The Food Standards Agency has ruled that cannabis-infused drinks should be removed from shops after the EU reclassified the products as ‘novel’, resulting in many consumers ‘panic buying’ the drinks.
• Looking at delivery, foodservice analyst Peter Backman comments that it is good for the top line but says that it ‘is a factory in all but name’. There is none of the restaurant experience and, though LfLs may be improved, margins most definitely are not.
DIFFERING COST STRUCTURES: PUBS VS RESTAURANTS No5 – 7 March 2019:
• We looked at lease structures versus freeholds yesterday. Today we take a look at labour.
• Labour used to represent perhaps 25% or 26% of revenues in a well-run, busy, managed pub. It’s now up to 33% or more.
• Pressure from the NMW, NLW, apprenticeship levy, mandatory pensions, chef shortages etc. has caused this. A tight labour market and pressure elsewhere (business rates etc.) mean that this is a real problem.
• Restaurants have differing cost structures & may be more impacted here than pubs.
Labour in a service industry:
• It’s a service industry, the clue is in the name.
• But, having said that, the labour involved in popping the cap on a bottle of Beck’s is much lower than that involved in sourcing, cooking, serving and clearing up after a meal.
• Margins on drink are also higher and more reliable. There should be less waste. There won’t be many unopened bottles of wine in the skip behind the restaurant but there will be plenty of curly lettuce & other veg.
• And, even where they do serve food, pubs will often be bar service. The consumer does some of the work.
• Certainly, prices in pubs are lower than they are in restaurants but, in the current environment and 10yrs from the last recession, that may not be a bad thing.
Cutting labour costs:
• This is pretty difficult. The customer expects a certain level of service – but more so in a restaurant than a pub.
• Serve yourself coffee etc. doesn’t go down well in a white tablecloth establishment.
• Back of house efficiencies can be made in both pubs and restaurants. But cost cutting is finite and, at some point, the customer may notice.
• Automation (spud peelers etc.) can only go so far but every little helps. See our comments on grills without fat trays that can save an hour a day in labour & require less flue cleaning etc.
The perception of value:
• Two meals for a tenner are common in pubs. Even less on some occasions but, given the upselling (olives, bread, water, coffee, another drink) in restuarants, customers can often double the price of a main or even more to arrive at the spend per head
• This can lead to bill shock and it is hardly surprising that restaurants have become much more heavilty involved in vouchering than have pubs
• Tomorrow we’ll round off this series by asking: where to from here?
DELIVERY – WHAT’S THE END-GAME? DELIVERY VERSUS RESTAURANTS No2 – 7 March 2019:
• Delivery didn’t invent food. It’s simply inserting itself between farm and fork. It needs to take cash from someone (restaurants, farmers, customers) in the long run.
• In the short run, shareholders (Deliveroo’s are down half a billion quid) are propping the whole thing up.
• But 1) in the short run how compatible is delivery with table service and 2) in the longer run, what’s the end game?
A ‘new industry?’
• If there are no more calories being consumed, then the cake isn’t any bigger. It’s just being squabbled over by more players.
• Just Eat is profitable (but it’s a different, more of a B2B model, a service to the industry) but Deliveroo most certainly is not
• That’s not to say it won’t be. But it will need to carve out a large chunk of industry profitability for itself in order to do so.
• With their costs, rents, rates, labour, being sticky and unlikely to fall, the restaurant industry will not be keen to plug this gap for a company that may ultimately put them out of business
Short & medium-term compatibility:
• Not many of the UK’s tens of thousands of restaurants were designed with delivery in mind.
• That means that helmeted or lycra-clad delivery staff have to share entrances with, and squeeze between the tables of, the Valentine’s Day and Mothers’ Day crowd
• This may sound like a small thing – but it isn’t. Even opening and closing the front door and letting the wind & rain in forty or fifty times an hour can be an irritant
• Furthermore, resources are finite. How does the restaurant choose who to serve first between its eat-in diners and its delivery customers?
• The eat-in-crowd may have another drink but, if they’re left waiting too long, they won’t come back. And, grumpy at the best of times, overworked chefs won’t take kindly to increased pressure
Longer term outcomes:
• Look at what Amazon is doing. It’s buying Whole Foods, is rumoured to be interested in Morrison’s & it’s building stores. GVC bought Ladbrokes & heaven knows what Uber and AirBnb will end up buying.
• The above gives some indication as to what the delivery companies may do over time.
• Dark kitchens are perhaps a step on the road towards owning & running restaurants.
• Although there would be problems with the alienation of some of its existing restaurant counterparties, it would absolutely not be a surprise if, at some point, Deliveroo were to buy a major restaurant chain
• It’s one thing letting the fox into the henhouse but to feed the predator bread and warm milk whilst waiting for him to do his dirty deeds is quite another
• Tomorrow, we’ll leave Delivery for a while.
• With the accountants telling us that IFRS16 will ‘increase’ earnings on some measures, we’ll look at EBITDA, the big lie.
HOLIDAYS & LEISURE TRAVEL:
• A YouGov survey commissioned by Abta has found people are prepared to cut back on other items or activities to save money rather than forego their holidays. The survey shows 25% of consumers would reduce spending on eating out, compared to 13% who said they would cut back on holidays.
• The World Travel & Tourism Council claims the sector can be a major UK growth sector post-Brexit. UK travel and tourism grew by just 1% last year to represent £234 billion, well below the world average growth rate of 3.9% and the EU average of 2.7%. Spending by international visitors dropped by 9.7% from £31.5 billion in 2017 to £28.4 billion in 2018.
• The CAA reports 2018 traffic growth almost halved yoy to 2.7%, with 292m passengers travelling through UK airports. The fall in growth is down to fewer people travelling between the UK and the EU, dropping to 1.3% compared to 7.6% in 2017.
• STA Travel claims face-to-face agents will remain key for travellers with complex itineraries despite the rise of online agents. UK country manager Tim Fryer said face-to-face guidance remains key at a time when tailor-made, multi-stop trips featuring lesser-known destinations are on the up.
• Per HotStats, US hotels report January profit per room up 2.4% yoy despite occupancy down 1% to 67.4%. RevPAR was up 0.8% yoy, with ADR increasing by 2.3 percent to $209.10.
• An American court delivers the verdict that Uber is not liable for criminal charges after one of its self-driving cars fatally crashed into a woman walking her bike across the road last year. The car’s human backup driver, Rafaela Vasquez, could still face charges.
FINANCE & ECONOMICS:
• Sterling up at $1.3181 and €1.1656. Oil up at $66.14. UK 10yr gilt yield sharply lower at 1.22%. World markets down except UK.
• Brexit etc.:
o Geoffrey Cox has apparently come back from Europe with nothing. ERG may find its bluff being called. Mrs May’s deal may yet get passed.
PRIOR DAY LATER TWEETS:
• Later tweets: IFRS16 and restaurants – see premium email. Could raise ‘debt’ for retail operators by an average 98% says Ernst & Young
• Delivery – see premium email. It’s a macro, micro thing. Delivery didn’t invent eating. It’s cannabalising something
• Report suggests UK could cut tariffs on 80% to 90% of goods in no-deal Brexit. Mostly B2B (car parts etc.). Not food, need to protect farmers
• Markit all-sector composite PMI of 51.4 consistent with GDP growth of 0.1% Q on Q. Not very compelling. Hiring decisions delayed etc.
START THE DAY WITH A SONG:
Yesterday’s song was The Doors with Light My Fire, today who sang:
Just get me to the airport, put me on a plane,
Hurry hurry hurry, before I go insane
I can’t control my fingers, I can’t control my brain
RETAIL NEWS WITH NICK BUBB:
Greggs: Back on Feb 19th Greggs flagged that the new-year had got off to an “exceptionally strong start”, so there is not a lot of new news in today’s finals for the 52 weeks to Dec 29th, although the results statement is still a lengthy one. There is no further update beyond the +9.6% LFL sales reported for the first 7 weeks of the year, driven by all the PR about the infamous “vegan-friendly sausage roll”, and CEO Roger Whiteside simply says that “We hope to continue benefiting from this strong momentum during the first half of 2019 before facing stronger comparatives later in the year”, but Greggs has flagged that there will be a special dividend with the interims to return surplus cash to shareholders.
Grocery Market Share Watch: Although the latest Nielsen grocery sales figures on Tuesday morning (for the 4 weeks to Feb 23rd) showed that overall supermarket industry sales value growth slowed to 2.5%, the rival Kantar survey reported a slightly worse outcome of +1.6% for a similar 4 week period (to Feb 24th), on a “Till Roll” basis. However, on a pure “Grocery” basis (ex-Non Food) overall sales growth was 1.9%, according to Kantar, driven by Aldi/Lidl growth of 8.7% combined. Asda was the main winner amongst the “Big 4” on this basis, with gross sales up by 1.4%, whilst Morrisons was up by 0.7% gross and Tesco was up by 0.6% gross, but Sainsbury was down by 1.7% gross. M&S Food (having been up as much as 3.9% in gross terms in the previous 4 weeks) slipped back sharply, to -1.4%.
News Flow This Week: The much-awaited John Lewis Partnership finals and Bonus announcement are out at 9.30am.
TOPICS FOR CONSIDERATION IN PREMIUM EMAIL:
• Thematic pieces including Pubs vs Restaurants, Delivery, Experiential Leisure, Crowd Funding, CVAs, Employemnt levels (& costs) etc.
• Occasional ‘deep dives’ into stocks (Pat Val, RTN etc.), trends etc.
• Book reviews. Black Swans, The Honest Truth about Dishonesty, Dark Pools, Lean Start Up, 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
• Behavioural economics. Over-confidence, Hofstadter’s Law, confirmatory bias etc.
• Other. Guest contributions, From the Archive etc.