Langton Capital – 2019-03-25 – PREMIUM – Branding, IPOs, familiarity, JDW, grind, T Cook & other:
Branding, IPOs, familiarity, JDW, grind, T Cook & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
As a part of its weekend in Robin Hood’s Bay on the Yorkshire riviera, Langton had a vegan sausage roll to see what all the fuss was is about.
And we can report that the red-hot mush (I think it was 110p, a bit dearer than the tradition variety at 95p – both figures a bit hazy) tasted pretty good.
Furthermore, if you cram it all in your mouth at once to stop the seagulls from mobbing you, it can take the skin off the roof of your mouth just as efficiently as can the sausage meat more commonly found in said roll.
At that point, taste becomes a secondary consideration and treatment for minor burns moves up the agenda. On to the news:
BRANDING VS INTIMACY; PRACTICAL PROBLEMS:
What are the practical considerations? Inappropriate branding can lead to retrenchment down the line, but intimacy makes it hard to achieve scale:
• It’s hard to know where to stop. There will be a ceiling for virtually all brands. Some are very high (McDonald’s, Subway, Starbucks) but others can impact a little sooner. Perhaps Pizza Express, Frankie & Benny’s etc.
• For smaller chains, building scale is a challenge. A portfolio of brands may be necessary. To maintain authenticity, these may need to be run by founders or founder-types and herding cats has never been easy.
• Success is rarely effortless, though it sometimes looks that way.
• Some brands, such as McDonald’s, have never really hit ceilings as new markets (first in the US, then the West, then the East, the developing world, transport hubs etc.) have always opened up.
• But even this will be finite and other brands have overshot what might be seen as their natural scale.
• Pizza Express in the UK, for example, is discounting heavily and Frankie & Benny’s is looking to exit sites.
• Discounting is a quick fix but may not lead to a permanent increase in sales whilst exiting sites can be costly and is behind a number of recent CVAs.
• Indeed, moving from forward gears to reverse entails a radical shift in business outlook. Restaurant Group is attempting to deal with this via the acquisition of Wagamama and a focus on its growing businesses whilst some other operators may lack the funding to consider such a radical solution.
• Not all operators want to be (or can be) large. Some are addressing niche markets whilst others need too much TLC per site to grow beyond a certain point.
• But it can require a lot of discipline to step on the brake and, when Private Equity has bought businesses on the basis that they could grow further, this often results in problems
• Arguably Jamie’s relied on the personal touch (or at least the personal touch) of the person with his name in the title and this may be true elsewhere
• This leads to the suggestion that portfolios of brands should perhaps be managed under one financial roof. This isn’t new but, when the brands are in their growth phases, the management of the egos involved could be difficult. Or impossible
• Although the development of the casual dining market is a work in progress, we can pull out a few features
• Some ‘overexpanded’ brands are responding with closures. Some are discounting whilst others are taking the more radical step of undertaking CVAs and openly admitting that they have expanded too far. Some may even end up back in the hands of the entrepreneurs that sold them in the first place
INITIAL PUBLIC OFFERINGS – BEHAVIOURAL ECONOMICS 4: MACRO VS MICRO: 25th March 2019:
• We have the habit of underemphasising the Macro but focusing too much on the Micro. By this we mean that virtually nobody wins the lottery, but the individual ticket-buyer thinks they will be the one. An obese person presenting with swollen feet is very likely to have diabetes but each individual is ‘different’ etc.
• And this drives behaviour regarding IPOs. Many, many IPOs end up at a discount. Insiders are selling, newbies are being asked to buy etc. But ‘this one is different’ is the common refrain.
We can build a ladder to the moon…
• We’ve got three bars in Shoreditch, we can have 200 nationwide. Or we’ve grown at 40% compound for two years, we can keep that up for twenty etc. etc. etc.
• We’ve heard it all before but still they come.
• We’ll cover this heuristic, particularly with regard to IPOs, in more detail later
FAMILIARITY BIAS CONTINUED – BEHAVIOURAL ECONOMICS No5: 25 March 2019:
What you see is all there is…
• We can and do fight against it but, once presented with a list (say 30 England players to make a team of 11), it’s harder to look beyond that list than any of us would car to admit.
Being too comfortable with familiarity…
• But, if someone says to you ‘here are the five possible solutions’, what’s to say that there aren’t seven.
• Or 10 or twelve. We know there are five senses, for example, but there aren’t. What about the sense of balance? We can place ourselves relative to the centre of the planet. And what about proprioception? We know where our hands are with our eyes closed, etc.
• See Freakonomics. There’s no genius involved, just the ability to think laterally. We’re trying not to say ‘out of the box’ but that’s what we mean.
The above in practice:
• It’s not a new thought but sayings such as ‘a fresh pair of eyes’ etc. have some relevance.
• People, even geniuses, probably do get too stuck in their ways etc.
• Less pleasantly, overfamiliarity with auditors, an overbearing relationship with finance directors etc. can have negative results
• More heuristics, comment on CVAs (are we seeing landlord push-back), IPOs & other.
GENERAL NEWS – PUBS & RESTAURANTS:
• Former GNK CFO Ian Bull is to joing Domino’s Pizza Group as a non-executive director from 18 April. Domino’s says ‘Ian has wide-ranging domestic and international experience, coupled with in-depth of knowledge of the retail and digital sectors. He held senior finance roles within the BT Group and has previously been group finance director of Greene King plc, chief financial officer of Ladbrokes plc and most recently was chief financial officer of Parkdean Resorts until 2018.’
• Per Morning Advertiser, the new JD Wetherspoon’s meat-free full English breakfast is being described as ‘too small’ by vegans.
• Starbucks opened a four-storey premium coffee venue in Tokyo last month, offering a fully immersive coffee experience.
• Grind is now over-funding on Crowdcube. The operator had initially targeted £1.35m with £1.13m already committed from new and existing investors. The company now has the promise of £2.99m on a pre-new money valuation for the loss-making chain of 11 coffee shops. The company was up to £2.27m on 11 March.
• As mentioned, Grind, which was founded in Shoreditch in 2011, reports that it ‘has spread across London and evolved into an award-winning group of 11 central London locations serving coffee, food and cocktails to a killer soundtrack.’ It is ‘one of London’s fastest growing and most exciting hospitality brands.’
• Grind is valuing itself at 3.5x historic sales or 21x historic site EBITDA. The last accounts lodged with Companies House (to April 2018) show a retained loss for the year of £1.35m with cumulative losses since incorporation of some £4m). The company is planning 3 company owned and 3 franchised openings in the next 18mths. The co reports that it achieved 19% LfL sales growth in FY18.
• Moody’s reports that Darden Restaurants’ upward revision of its full-year same-restaurant sales growth for fiscal 2019 is a ‘credit positive’. It reports ‘the company indicated that same restaurant sales growth will be in a range of 2.5% to 2.7%, versus previous guidance of approximately 2.5%.’
• CGA’s latest Business Leaders’ Survey ‘despite general market optimism remaining flat, there has been a slight quarterly increase in individual business confidence’. There is more optimism in the drink market than there is re food. Restaurant growth is said to have ‘stalled’. CGA says the number of licended F&B outlets continues to fall with capacity mostly coming out of the drinks market.
• The US Distilled Spirits Council reports retaliatory tariffs are having an increasingly negative impact on American whiskeys, ‘particularly to the EU’. Total US spirits exports reached a record $1.8bn, a 9.5% increase from $1.64bn in 2017, but the rate of growth significantly slowed from 14.9% between 2016-17.
• Asteya Partners is building a stake in Domino’s Pizza, according to The Sunday Telegraph. Asteya currently has a seat on the board of Restaurant Brands International, owner of Burger King.
• Costs on the rise. Every little etc. First class and second class stamps will rise in price by 3p to 70p and 61p respectively. Royal Mail has apologised for breaking Ofcom’s 60p price cap for a second class stamp.
• Volvo unveils a new on-board device that can detect if its driver has had too much to drink. Cameras will monitor eye movements to gauge a driver’s level of intoxication or distraction and can automatically slow the car or pull it over.
• Molson Coors will invest £5m in Pravha, redesigning Pravha’s packaging and launching a new advertising campaign.
HOLIDAYS & LEISURE TRAVEL:
• Thomas Cook Group announces ‘streamlining’ of travel agency estat.
• TCG will close 21 shops, reducing the UK retail estate to 566 shops. Some 320 staff have been placed at risk of losign their jobs as a part of this and other retail rationalisations. The company said 64% of its bookings were made online last year – up 30% year on year.
• TCG Chief of Tour Operating, Will Waggott, says the ‘announcement reflects the wider challenges seen on the high street, with more and more customers choosing to book online. These measures will help us to drive greater efficiencies across Thomas Cook so that we relentlessly focus our resources in those areas that give us the greatest opportunity to make a difference to customers in our core holiday offering.’ Mr Waggott says ‘looking ahead, we will be working to ensure that Thomas Cook is fit for the future, putting a rigorous focus on costs in a competitive environment while giving customers more reasons to holiday with the strongest brand in travel.’
• Thomas Cook has announced that it has agreed to enter into a JV with Ionic Invest, to buy the tour operator of Biblio Globus, one of the largest tour operators in Russia.
• TCG says ‘the joint venture, in which Thomas Cook intends to assume a 30% minority stake, will give Thomas Cook a leading position in a growing market, help to further diversify the Group’s customer base, and enable it to secure additional flight capacity to support the future growth in its existing Russian business.’
• TCG says its ‘existing Russian tour operating business will also benefit from this relationship, opening up further growth opportunities from Summer 2019.’ TCG will put in $3m on clmpletion with a further $3m in Jan 2020 (both payments being 30% of the total investments). The maximum cash consideration payable for the business, over time, will be $150m (TCG share $45m).
• Flight delay compensation law firm Bott and Co reports the number of flight departure delays and cancellations at UK airports rose by 72% since 2015. This increase has been attributed to cabin crew strikes, re-occurring drone chaos, tightly packed flight schedules and uncertainty over Brexit.
• European airline average passenger numbers were up 4.2% yoy in January, described by ACI Europe as a slowdown.
• STR reports European hotel occupancy up 0.1% to 65.0%, ADR up 1.9% to €100.60 and RevPAR up 2.0% to €65.34 for February 2019.
• Game announces it will commit more resources to its ‘Belong’ gaming experiences after seeing H1 pre-tax profits up 20.3% yoy.
FINANCE & ECONOMICS:
• Historically low bond yields in the run up to first 29 March and now 12 April mean that companies who have three year pension reviews dated end-March could have to work out their liabilities using extremely low yields.
• Sterling up a little at $1.3192 and €1.1671. Oil lower at $66.73 and 10yr government gilt yield down another 5bps at 1.02%. World markets down on Friday with the Far East lower in Monday trade.
• Brexit & politics:
o Up to a million marched against Brexit in London on Saturday. Anti-Brexit petition up to 5.2m signatories.
o Embattled Mrs May could see parliament taking back control of the Brexit process later today.
o Sunday press talks up rumours of coups, no-confidence votes & general elections.
o Talk of indicative votes this week. But government could then ignore them, bring Mrs May’s deal back for a third time.
o Speaking of Boris Johnson’s ongoing manoeuvres to become PM, German mag Der Spiegel says Brussels may ‘have to tolerate the unpredictable political lunatic during the highly complex second phase of negotiations centering on the future relationship between the UK and the EU.’
PRIOR DAY LATER TWEETS:
• Should you brand and build scale, or remain intimate & build barriers? There’s a case to be made for both. See Premium Email.
• Familiarity bias. Old dogs, new tricks etc. We overemphasise what we know, ignore what we don’t. See Premium Email
• Creditors OK Boparan’s CVA proposal. 27 Giraffe & Ed’s Easy Diner restaurants will close & rents to be cut at 13 sites.
• TUC & CBI call on Mrs May to stop UK leaving EU with no deal. Press say PM has had her Gethsemane moment, is resigned to crash-out
START THE DAY WITH A SONG:
Last Friday’s song was A Change is Gonna Come by Sam Cooke. Today, who sang:
The ice age is coming, the sun is zooming in,
Meltdown expected, the wheat is growin’ thin
Engines stop running, but I have no fear
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:
Mr Bubb is taking a well-deserved break.