Langton Capital – 2019-03-21 – PREMIUM – Sportech, pricing, confirmatory bias, Pizza Union, discounts etc.:
Sportech, pricing, confirmatory bias, Pizza Union, discounts etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, it’s the first day of Spring today and, appropriately, with temperatures rising in the House of Commons, it’s getting a bit warmer.
But we’re not here to talk about that so here’s a thought for you. If you didn’t already know the answer, would you think platypuses and giraffes were more, or less, likely to be real than were unicorns?
Because if the three were lined up and you were asked which one was fabricated, you might not pick out the unicorn.
Because, whilst a unicorn is just a horse with headgear, a giraffe has got all of that going on but has an unbelievably long neck and spots into the bargain.
And a mammal with a beak that lays eggs? I mean do me a favour. But they do exist so, with that in mind, Mrs May will probably bring her deal back for a third time.
Because miracles can happen and we were considering over our cornflakes just how many good words are getting an airing at the moment with one politician or another firing them at their rivals.
We particularly like (and find appropriate) ‘nefarious’ (adjective re an activity or an action: wicked or criminal) and ‘mendacious’ (simply not telling the truth a.k.a. lying). On to the news:
BEHAVIOUR AT THE TOP OF THE MARKET – FROM THE ARCHIVES: Langton writing in Sept 2006, some 14yrs into an economic upswing – 21 March 2019:
• There’s not much new under the sun. Gouging, upselling, premiumisation, call it what you will, is a late-cycle feature. You can’t gouge in a recession. Langton has been banging on about it more recently, but we were also mentioning it 12yrs ago when the John Major to Gordon Brown boom (which lasted a remarkable 17yrs) was about to go pop.
From the archive – gouging:
• We said: ‘when customers are routinely asked if they’d like olives, bread, water, coffee and heaven knows what else, the bill for a couple of eight quid pizzas complete with beers, can easily exceed thirty quid at the till.’
• This leads to ‘bill shock’. This is manageable in a boom, but less so when customers are counting the pennies.
• We said in 2006 that bread, olives, water & coffee cost very little but have margins of 70% to 90% when added to a customer’s bill.
Archives on ‘Maximising Lifetime Spend’:
• We’ve always preferred this as it seems somehow more sustainable through thick and thin.
• We commented ‘maximising the lifetime spend of a customer would imply coaxing him or her back…say once every six weeks for a substantial number of years.’
• This is ‘effectively a form of brand-building…[and] the net-present-value of the profit made from these visits…would be likely to exceed the windfall quick-fix of making a few extra pounds on any one visit.’
The choice between the two:
• Jacking prices or upselling makes sense if you are 1) permanently rammed or 2) you have transient trade
• This might not be attractive but would fit if ‘the restaurant catered for tourists, particularly overseas tourists or operated in an airport…’
• We said ‘in the mass-market for casual-dining, up-selling does run the risk of creating a space beneath it into which competitors can expand.’
• We’ve seen this recently where companies such as Restaurant Group have been obliged to ‘invest in price’ (a.k.a. reverse policies)
• We added ‘something as simple as free water and / or free bread and olives can differentiate a restaurant, give it a USP.’
CONFIRMATORY BIAS – BEHAVIOURAL ECONOMICS No2: 21 March 2019:
We are all at risk of believing our own BS…
• We like to think we’re right, it’s human nature. And we often look for evidence that we are. More dangerously, we’re inclined to ignore evidence that we’re not.
• We may even shout at underlings who bring us bad news, might tell them, perhaps non-verbally, to go away until they agree with us
• This behaviour can spread through an organisation & bubbles (or echo-chambers) can be created.
• This can end very badly as information flows are distorted or even blocked altogether.
• We wouldn’t go so far as to say that this happened at CAKE, but it does fit the facts.
• If one believes a variant of the ‘Lone Gunman’ theory, that very, very few people knew that a fraud was being undertaken, then what else can have happened?
• The industry-beating margins, industry-beating levels of stability of earnings etc. etc. that were lapped up like mothers’ milk were an illusion that was only made possible because of the confirmatory bias displayed by those running the business
The antidote? Dare anyone say the King has got no clothes on?
• Tempering human nature is more easily said than done but managers need to keep their feet on the ground
• They should be approachable & nobody should be in fear of their jobs for crying wolf
• External ‘idiot-checks’ should be undertaken. Auditors, and only a former auditor can really say this, should be embraced as a useful function & be encouraged rather berated and beaten down on their fees
STRAINS ON CASHFLOW. PROVISIONS – ACCOUNTANCY No6 – 21 March 2019:
• Provisions are useful in that they allow management to ‘clear the decks’. But this is a synthetic rather than a tangible action & the cash costs associated with provided-for units continue.
• Therefore ‘profits’ may exceed cashflows for a number of years after a heavy bout of provisioning. And, as many busted ‘profitable’ companies have found out, you can’t take your profit down the bank, only cash.
Provisions in action:
• Many a company, particularly those with new executive management teams, have an ‘I wish we hadn’t done that moment’
• This may refer to divisions that they would like to sell, units they would like to shut down etc. and the human reaction is to provide for the costs of doing the above in a ‘kitchen sink’ job
• This may be accompanied by a dividend cut though, at Restaurant Group for example, this came a couple of years after the management change
• Provisions are then set up to cover the cost of running, shutting and disposing of uneconomic units.
• This 1) allows ‘clean’ numbers or numbers from ‘continuing operations’ to be quoted in figures but 2) does not change the cash cost of paying rent, running, shutting and selling the above units.
• Hence, when units are provided for and boarded up, although the costs of the ongoing rent, business rates and security costs do not hit the P&L, they most definitely do hit the bank account – and this can cause problems
And when is an exceptional cost not exceptional:
• This is something of a hot topic but, it could be argued, if provisions are added year after year, then the costs are not exceptional
• Certainly the cash balance will be taking the hit on an ongoing basis meaning that, although accountants have tightened up in this area, provisions need to be closely monitored
GENERAL NEWS – PUBS & RESTAURANTS:
• The Ivy Collection has appointed Jonathan Peters as CFO. CEO of the group, David Campbell said: ‘Jonathan is a very commercial CFO, with extensive international experience, and at Everyman has shown a well-proven ability to help drive both top and bottom-line results in a multi-site environment’.
• Pizza Union has reported abbreviated numbers to Dec 2018 to Companies’ House saying that, with its four units, it ‘has continued to build brand awareness across its existing locations in East London.’
• Pizza Union reports sales up 43% (on full year contributions from newly-opened units) to £6.7m. It reports that LfL sales were higher in the two units that it held for a full year. The group cautions that the UK restaurant market remains highly-competitive but says ‘we believe we are competing effectively in this crowded sector due to the quality & affordability of our offer’.
• Pizza Union reports profit before tax some 35% higher at £1.05m. The group has accumulated profits after taxation of £1.93m since its incorporation in August 2012. Shareholders’ Funds are some £3.43m.
• The Cambridge-based kitchen equipment group, Synergy Grill is rebranding to Synergy Grill Technology to put a greater emphasis on the multi-patented technology within its flagship product. Justin Cadbury, chairman and CEO of Synergy Grill, said: ‘The award-winning technology behind Synergy Grill is what truly sets it aside from our competitors, and therefore, it was important that this was reflected within our visual identity’.
• Prezzo 40% off mains, ASK 30% off mains. Where’s the road back to full pricing?
• BV Restaurant Group has opened its first restaurant and gaming hall concept in London, called Rebound. Head of the group, Paul Reynolds has said: ‘With the launch of Rebound, we have worked meticulously to develop an offer that is authentic and does not just copy what the rest of the market is doing. We want to make sure we get this concept right and then Rebound should have a very exciting future’.
• London Stansted airport has partnered with luxury food outlet Not Always Caviar to create a sandwich designed with flavours that are enhanced at altitude.
• Starbucks has stated that it will invest $100m into Valor Siren Ventures, the venture fund led by private equity firm Valor Equity Partners. Starbucks CEO Kevin Johnson said: ‘We believe that innovative ideas are fuel for the future, and we continue to build on this heritage inside our company across beverage, experiential retail, and our digital flywheel. At the same time, and with an eye toward accelerating our innovation agenda, we are inspired by, and want to support the creative, entrepreneurial businesses of tomorrow with whom we may explore commercial relationships down the road’.
• Stockpiling ahead of Brexit could lead to shortages, a top official at the Office for Budget Responsibility has warned. Sir Charlie Bean commented: ‘If there is a lot of this behaviour, it potentially worsens the shortages – it is like a bank run, it makes things worse because everyone is trying to stockpile commodities because they think they might run out, and that creates the shortages’.
• Britvic has invested £2.2m into its Tango brand, as the department launches three new sugar-free flavours.
• The Little Vegan Market in Middlesbrough has doubled in size in under a year to accommodate increasing demand.
• Papa Murphy’s Holdings refranchised 29 stores and closed 10 in Q4 as it works towards its target of being 95% franchised by 2020.
• Starbucks is testing compostable cups in five locations – New York, San Francisco, Seattle, Vancouver and London.
• Portuguese pastelaria, Santa Nata, will debut in the UK with two sites in Covent Garden in the next two months.
• Kababji, a Lebanese grill house, is set to open its first UK site in Wimbledon later this month.
HOLIDAYS & LEISURE TRAVEL:
• Jet2holidays updates its TV adverts with a ‘visit your local independent travel agent’ message, encouraging customers to overcome Brexit-related uncertainty. Head of trade Alan Cross said ‘we need to persuade them harder than ever before not to delay and to book now.’
• Staycity is set to open its first resort-style property in Paris, featuring 284 apartments, 22 holiday villas, an outdoor swimming pool, café and restaurant. Prices will start from €99 for a studio and €385 for a villa.
• UBS analysts suggest long-haul travel via space will be flying passengers from New York to Shanghai in half an hour. The future market could be worth £15bn pa and will cannablise the market for 10hrs+ flights.
• STR reports February US hotel occupancy up 0.7% to 62.2%, ADR up 1.9% to $128.94 and a RevPAR increase of 2.6% to $80.15.
• Lyft executives say reducing insurance costs is ‘the number one initiative’ as the company prepares to IPO. Lyft will do this by phasing in self-driving vehicles on simple routes first. Lyft reported a net loss of $911 million on revenue of $2.16 billion in 2018.
• Sportech has reported FY numbers to end-Dec saying revenues fell 3.9% to £63.9m with adjusted EBITDA up 18.8% at £8.0m. The group made a statutory loss before tax from continuing operations of £2.4m.
• Sportech has completed the sale of Sportech Racing BV in the Netherlands and closed its central London office. It has ‘commenced [a] campaign to provide sports betting solutions to US clients’ and is seeking to extend its current Connecticut licensing to cover sports betting.
• Sportech chairman Richard McGuire reports ‘the Group enters 2019 with a renewed impetus to drive operational efficiency across all business divisions and deliver an enhanced customer experience. Growth opportunities exist with the launch of new betting products and features and a resolute progress towards a future in US sports betting across both our business and our consumer-facing divisions. The acquisition of the Lot.to Systems platform and talent show a clear focus on developing digital initiatives further, which supports our continued evolution to deliver growth and drive operational efficiency.’
• Disney closes its $71bn acquisition of 21st Century Fox, Disney will absorb the Fox film and TV studios, the FX networks, National Geographic and the Indian TV giant Star India in a huge boost to its content.
FINANCE & ECONOMICS:
• Record employment levels but sluggish GDP suggest that productivity could be static or falling. Unless, of course, as some suggest, the measure of GDP is outdated as it does not take account of technical innovations.
• UK CPI rose to 1.9% in the year to February (from 1.8% in January) on the back of higher food & alcohol prices.
• The US Fed has said that it does not expect to raise interest rates this year.
• Sterling down at $1.3214 & €1.1568. Oil up a dollar or so at $68.60. UK 10yr gilt yield down 4bps to 1.15%. world markets lower yesterday but Far East higher in Thursday trade.
• Brexit & politics:
o Mrs May blames recalcitrant MPs for ‘delaying’ Brexit. This despite her saying in the House of Commons 108 times that the UK would leave the EU next Friday.
o Mrs May ‘personally regrets’ the fact that MPs do not agree with her. BBC quotes ‘two senior MPs’ as saying she is ‘delusional’. Others say her comments were ‘toxic’ and ‘reckless’.
o A Sky poll suggests that 90% of Britons think that the way the UK/EU negotiations are being conducted is a ‘national humiliation’. Only 7% think that it isn’t & 3% didn’t have an answer to the question.
o Mrs May in Brussels to agree a ‘short delay’. Suggests she will resign if it is longer than 30 June. President Tusk says likely EU will agree but only if Mrs May can get her deal passed in the House of Commons.
o FT says ‘Mrs May has changed her position completely.’ It says that the chance of a no-deal Brexit has increased. Parliament is to discuss the situation on Monday.
o The FSB says that small businesses are unprepared for Brexit and will have no choice but to ‘take it as it comes’.
o Propel reports that Junkyard Golf is ‘reviewing its options’. It has ‘appointed advisors to review options for its next stage of growth, which could include a sale of the five-strong business’.
PRIOR DAY LATER TWEETS:
• Sum of the parts valuations (SOTP) considered in Premium Email. They’re a tool – but can be used for constructive or nefarious purposes
• Behavioural economics in Premium Email. Overconfidence. Great but there are no supermen among us. Aim to temper any excesses…?
• CAKE administration. Horror movie alert, hole gets bigger. Can always make a bad situation worse. Group may never have made a profit
• Accountancy comments in Premium email. Lumpy cashflows. Rental payments due next week. Why ‘profitable’ companies can go bust…
• Tasty says ‘market conditions for 2018 continued to remain extremely challenging.’ Says this will continue for some time
• NIESR: High employment due to labour hoarding as alternative to capex. Sluggish GDP & rising employment suggests productivity falls
• Cabinet, Tory Party & Parliament frozen with indecision. Last 3yrs littered with bad decisions, Referendum, June 2017, triggering A50, crackpot red lines etc
START THE DAY WITH A SONG:
Yesterday’s song was Led Zeppelin with Immigrant Song. Today who sang:
I am one of those,
Neurotic to the bone
No doubt about it
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.
RETAIL NEWS WITH NICK BUBB:
• Next: The much-awaited Next finals begin with the pithy Chairman’s statement that “The Next group has delivered profits exactly in line with the guidance we issued in January 2019 and we are maintaining our guidance for the year ahead”. On the subject of Brexit, CEO Simon Wolfson makes the interesting observation that “Our feeling is that there is a level of fatigue around the subject that leaves consumers numb to the daily swings in the political debate”, but he will no doubt be quizzed on the subject at the analysts meeting at 8.45am, along with his latest “15 Year Stress Test” on the Stores/Online core business.
• Ted Baker: Today’s finals are headlined “Resilient performance against very difficult trading conditions” and the analysts meeting at 10.30am, conveniently timed after the Next results meeting, will be the first hosted by the new CEO, Lindsay Page, so we look forward to seeing how he approaches things.
• Game Digital: Today’s interims from Game Digital look pleasing and the company has been confident enough to go up against Next, with an analysts meeting at 9.30am.
• Today’s Press and News: We haven’t really had time to look at the papers today, as we have to dash to get to the Next results meeting in the City, but we have seen the FT and the front page is obviously dominated by the latest in the Brexit political crisis, with the headline “May pleads with rival parties to save deal as EU issues ultimatum”, noting that a Brexit delay depends on approval for the hapless PM’s deal in a third vote next week and that failure points to a no-deal exit…In terms of Retail stories, although the FT flags up the failure of Julian Dunkerton to get the backing of the key shareholder advisory groups for his plan to come back to the Superdry business, the focus is on the embattled Kingfisher and the decision to dump the CEO, Veronique Laury (“Kingfisher to replace head after profits misfire”) and Lex column in the FT looks at the situation in detail, noting that
• Planet ONS Watch: In the real world, as per the overall BRC-KPMG figures for February (the 4 weeks to Feb 23rd), Retail Sales were a bit weak last month, but we will find out at 9.30am what “seasonally adjusted” life was like on the High Street on that bizarre parallel world, the Planet ONS (aka the Office of National Statistics), via their official Retail Sales figures…City economists (who still treat the dubious ONS figures as the gospel truth) generally expect flat month-on-month seasonally adjusted sales volumes, although Capital Economics have pencilled in a 0.5% dip in February (to give year-on-year volume growth of 3.2%), for what it’s worth. We will be focusing, as usual, on the year-on-year non-seasonally adjusted sales value figures and the key split between Large Businesses and Small Businesses (as the ONS usually thinks, despite all the evidence to the contrary, that Small