Langton Capital – 2019-04-10 – PREMIUM – Overcapacity, RTN disposals, costs, Hollywood Bowl etc.:
Overcapacity, RTN disposals, costs, Hollywood Bowl etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
At the weekend, I was sent out to buy some shelves for one of the bedrooms. I came back with a nice looking bird-table, a few KGs of bird seed and a new chain for the chain-saw.
Whilst, apparently, was a mistake but, if there’s one thing that I dislike more than putting together those ill-named bits of ‘easy-assembly’ flat-pack furniture or putting up shelves, it’s paying for the right to do so.
Hence, when entering a big shop with bright lights and loads of special offers, I’m likely to be distracted and, though the bullfinches are busy eating our seeds and the blossom from our fruit trees, I still quite like birds.
And I enjoy cutting things up so the decision was pretty easy. Hopefully the dog will be right on this one. The upset is brief and, like putting a big brown stain on someone’s shirt when asked to do the ironing, it might even achieve a secondary objective into the process. On to the news:
STRUCTURAL OVERCAPACITY IN THE RESTAURANT INDUSTRY: Symptoms, solutions & the risk of contagion. 10th April 2019:
• CDG’s historic numbers released yesterday point to an industry that was struggling with overcapacity, low prices and slack volumes. And then, as the numbers were only up to end-April, everything got worse. We had a heatwave, a World Cup and an extension of Brexit uncertainty. Where now for the casual diners?
The current situation:
• Casual Dining Group’s delayed numbers to end-April 2018 were indeed awful. Apollo and other shareholders had racked up disclosed accumulated losses of £563.9m, over half a billion pounds, and there will have been more losses later in 2018.
• Investors paid too much for the company. CDG and others had put on more units beyond the point where it was sensible to do so.
• The economy weakened, confidence fell, capacity rose, prices slipped, discounting became a feature and we are where we are. But where to from here?
Simple but not easy:
• Mr Buffett’s words rather than ours but true all the same.
• When in a hole, stop digging.
• Then assess the situation and, if it looks like the solution is to 1)put prices up, 2) cut costs and 3) drive footfall whilst 4) your competitors cut capacity, then that may well indeed be the ‘solution’
• Sounds easy? But here, as so often the case, execution is key and, sometimes, execution is not possible.
• Putting prices up is tricky. Some pubs may be able to do so (watch out for falling portion sizes) but most restaurants cannot. Witness high levels of discounting.
• Cutting costs is also very difficult. The cost of goods, labour and property costs will add up to c75% of revenues and none of them are going down any time soon.
• In fact, weak Sterling, the NMW, NLW, Apprenticeship Levies, pension contributions, business rates and intransigent landlords make cutting costs anywhere very tricky.
• For pubs, they may be able to drop table service, put some money into ordering by App etc. but these may not generate material savings and they are not an option open to restaurateurs
• Driving footfall requires a good product, excellent execution, well-located units etc. You’ve either got it, or you haven’t.
• Other operators may decide to pull the price lever. This may have a short-lived impact, it is likely to be contagious & the road back to full price could be a tricky one
Are pubs any different?
• A little, perhaps. Pub prices are generally lower than those in restaurants. There may be some short-term upside. But this would not be a long-term solution.
• Drink sales are currently buoyant, and pricing may be easier to achieve. Care would need to be taken here as the gap between supermarket and pub pricing is already large. Any BBQ weather in the spring would remind customers that they could just stay at home and save money.
• Costs can be cut a little more. Table service could be dropped. Operators could introduce Apps to allow ordering from table. Portion sizes could be cut. But again, this is finite.
• And capacity has been coming out. This, perhaps, is the main difference currently between the pub and the restaurant markets. There is more often an alternative use for a suburban pub than there is for a High Street or retail park restaurant
FROM THE ARCHIVE: RESTAURANT OVERSUPPLY, THE EARLY DAYS. Margin vs LfL sales growth, comment from 2006:
• There’s very little new under the sun. Margins can be enhanced but sales will often drop. Or LfLs can be pushed but prices & margins could fall.
Comment from 2006:
• We said ‘all things being equal, selling one thing, for a million pounds, is considerably easier than selling a million things for a pound each.’
• This often tempts operators into ‘pushing price’. We said ‘whilst margin growth is finite, within reason, revenue growth is not.’
• But people are people and we believed ‘as going for margin can be seductive, companies which do so may find, from time to time, that they have moved some considerable distance down what they subsequently see as a blind alley.’
• We were talking about Restaurant Group amongst others. The company continued down said alley, quite profitably, for a considerable distance.
• Companies ‘are trapped in a gilded cage, constantly defending the indefensible against more nimble competitors and there are often a number of new initiatives, green shoots, more new initiatives etc before what may always have been inevitable happens.’
• Operators then ‘find themselves obliged to engage reverse gear, get themselves out of their current position and move backwards before they can move forwards once more.’
• This means some companies attract bids from other operators, who are still keen to jack prices. In 2006, the massive boom in take-privates was just around the corner.
RANDOM COMMENT CORNER:
• Interestingly 1) neither RTN nor CDG currently have CEOs.
• Re City Pub Group 2) with LfLs at just 1.6% and costs rising. It is likely that profits from the existing estate are lower this year than they were last. The group is therefore dependent on acquisitions to grow profits.
• Loungers 3) is hoping to value its business at up to £300m for 146 bar restaurants. The units cost less than £1m each to build, many much less.
• More heuristics, it’s time we did a book review, comment on CVAs (are we seeing landlord push-back) & other.
GENERAL NEWS – PUBS & RESTAURANTS:
• Restaurant Group disposals. The Caterer quotes RTN as saying ‘as mentioned at our full-year results, a number of our leisure sites are in structurally unattractive locations and we are actively reviewing our estate and exploring options in line with our strategy.’ True but not an attractive story to be telling potential buyers?
• RTN says ‘we are currently marketing a number of sites and, if sold, we will endeavour to redeploy staff to other sites within our portfolio.’
• Fleurets updates on Q1 saying ‘within the restaurant market this quarter there appears to have been again a strong mix of news.’ That will often be the case. It points out that Q1 saw good numbers from Brasserie Bar Co but also moves to cut estates from Polpo & Giraffe.
• Fleurets points out that wet sales have performed relatively well adding ‘the pub sector has been increasingly buoyant in the first half of this year with multiple large deals all coming to fruition.’ Asahi has bought Fuller’s beer business.
• Cutting costs, every little helps.
• The latest GO Technology report from Zonal suggests that online bookings have now overtaken the telephone as the favoured method for reserving a table. Zonal says ‘45% of consumers now prefer to make their booking online, compared to just 20% who use the telephone.’ It says ‘this is a radical change from four years ago, when well over half (58%) of consumers preferred to make table bookings by telephone.’
• Zonal reports would-be customers are reluctant to pay a deposit when booking a table.
• The TriSpan backed street-food operator, Thunderbird Fried Chicken has opened a bricks and mortar site in Brixton Market Row. Founder Matt Harris said: ‘We started looking for high-street sites to see what was out there. Around that time we began talking to more people and it just gradually snowballed from there. Then TriSpan appeared over the horizon at just the right time, at a stage when we were starting to build a pipeline ahead of us. It has picked up more momentum from there, and having them on board will put us on an incredibly steep trajectory’.
• Westons Cider has announced a new Strawberry Cloudy Cider flavour for its Rosie’s Pig brand, which will only be available for the on-trade.
• US wine exports have declined by 4.8% to $1.47bn in 2018 with volumes down 1.2%. Charles Jefferson, Wine Institute vice-president of Federal and International Public Policy, commented: ‘We have made critical progress on trade agreements with the UK, Mexico and Canada, and we continue to advocate for wine tariff elimination in key markets including China and Japan’.
• Diners in the UK steal £186m worth of tableware from bars and restaurants every year, a report from Nisbets has found. The worst offending age group are the 18-24-year-olds with more than a third (34%) admitting to swiping tableware.
• Plant-based protein manufacturer The Meatless Farm Co has secured a new listing in Morrisons. Rob Woodall, CEO of The Meatless Farm Co, said: ‘The UK market is extremely important to us as we’re a British plant-based company, but we also strongly believe that the UK is central to this global shift in the way people eat. The meat alternatives market is expected to be worth £4.1bn globally by 2020, but we also know from our own research that 42% of British consumers are increasing the amount of plant-based food they eat this year’.
• PwC reports the UK high street lost a record 2,481 shops last year, according to figures collected by the Local Data Company. Figures from Springboard and the BRC show a 2% drop in the number of visitors to UK shops.
• London-based PubLove opens White Ferry House in Victoria, following a £500,000 refurbishment. PubLove is the seventh partner of Ei Managed Investments.
HOLIDAYS & LEISURE TRAVEL:
• Aito reports a majority of members wants the UK to remain in the EU, calling Brexit ‘misery and uncertainty’. More than 88% want to stay part of the EU but a soft Brexit is also accepted by a good number as a potential way forward, according to Aito.
• Leeds Bradford Airport has begun work on a terminal extension which aims to improve passenger experience.
• Gatwick will add ten new routes this summer, increasing airline capacity to 16.9m departing seats. Long-haul destinations are among the fastest-growing including Doha and Buenos Aires, with carriers also raising frequency to a number of European destinations.
• Manchester Airports Group calls for an ‘orderly Brexit’ as it reported a 4.2% rise in passengers in March. Stansted saw the highest growth month on month, but East Midlands airport showed a 5.9% decline to 256,000 passengers.
• Hollywood Bowl Group has updated on H1 trading saying it has seen ‘continued strong revenue growth with good progress in new centre programme.’
• Hollywood Bowl says ‘the Group has continued to trade well through the first half of the financial year with total revenue growth of 5.3% and like-for-like revenue growth of +4.4%. This strong performance, across all our revenue lines, has been driven by the continued successful execution of our simple and effective customer-led strategy.’
• The group says ‘further organic growth has been delivered through our focus on enhancing our customer experience through the ongoing investment in technology, the trialling and rollout of proven initiatives, all while maintaining our competitive price point.’
• Overall, Hollywood Bowl comments ‘the Group continues to trade in line with the Board’s expectations for the full year.’ The group says ‘we have a strong pipeline of new centres secured to the end of FY2022 and we continue to focus on looking for high quality locations which meet our strict investment criteria. CEO Stephen Burns says ‘I am delighted to report a strong start to the year, as our continued focus on customer experience underpinned another consecutive period of LFL sales growth, with a successful Christmas and New Year period.’
• Wynn Resorts has terminated talks to acquire Crown Resorts less than 24 hours after it made a $7.1bn bid. Wynn said ‘Following the premature disclosure of preliminary discussions, Wynn Resorts has terminated all discussions with Crown Resorts concerning any transaction’.
• Pinterest targets $15-17 per share for its IPO, valuing the company at around $11.3bn and potentially raising $1.3bn in net proceeds. The company reported annual revenue of $755.9 million in 2018, up 60% from a year earlier, but still recorded a net loss of $62.97m.
FINANCE & ECONOMICS:
• The IMF says the global economy is at a ‘delicate moment’ adding that ‘there are many downside risks’. The IMF is not currently predicting a global recession.
• Sterling down a shade at $1.3058 and €1.1596. Oil just off its 2019 highs at $70.68. UK 10yr gilt yield down 1bp at 1.10%. World markets all lower yesterday with Far East down in Wednesday trade.
• Brexit, politics etc.:
o A no-deal Brexit would push both the UK and the EU into recession, says the IMF. It believes GDP in the UK would fall by 3.5% with the EU down by 0.5%. The IMF reports ‘more generally, a no-deal Brexit that severely disrupts supply chains and raises trade costs could potentially have large and long-lasting negative impacts on the economies of the United Kingdom and the European Union.’
o Two cabinet ministers broken ranks saying a customs union would be the worst of all worlds (Liam Fox) and that the withdrawal agreement should be reopened (Andrea Leadsom).
o Mrs May meeting with Frau Merkel & M Macron. Strict conditions expected to be demanded if the EU is to agree to another Brexit extension. EU leaders thought to favour a long extension.
START THE DAY WITH A SONG:
Yesterday’s song was Wake Up Boo! by The Boo Radleys. Today, who sang:
Gentlemen don’t get caught, cages under cage,
Gentlemen don’t get caught
TOPICS FOR CONSIDERATION IN PREMIUM EMAIL:
• Thematic pieces including Pubs vs Restaurants, Delivery, Experiential Leisure, Crowd Funding, CVAs, Employment 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:
• Debenhams: The continuing “war of words” between Debenhams and Sports Direct reached a climax yesterday…It began at 7am with an official announcements from the latter that it was now prepared to underwrite a £200m rights issue (with strings attached), closely followed at 7.02am by an announcement from the former that the offer had been rejected and that alternative refinancing options were being pursued. At 8am Debenhams announced that trading in the shares had been suspended (at the close of 1.8p, capitalising the business at just £22m) and at 11.40m it further announced that a pre-pack administration had been executed, as expected, wiping out the equity shareholders. At 2.43pm Sports Direct announced that its offer to make a 5p a share bid had lapsed. Bizarrely, a little later, at 3.51pm, Sports Direct separately announced that its notional offer for Findel had met with only minimal
• Sports Direct: The Sports Direct share price actually edged up yesterday, against the sector trend, despite #MadMike’s increasingly desperate and bizarre behaviour, perhaps on relief that he isn’t now going to be able to fulfil his crazy dream of running the doomed Debenhams business. But we are indebted to Bryce Elder, the FT stockmarket correspondent, for pointing out on the excellent “Markets Live” webcast on FT Alphaville yesterday that Debenhams is not the first of his investments to effectively go bust recently, as Goals Soccer Centres announced on March 27th that it had forgotten to pay £12m of VAT and that its shares had been suspended…Bryce Elder voiced the thoughts that “I wonder how much of Ashley’s nonsense around underwriting rights issues and stuff was to deflect attention from the fact that he’s now going to have to write quite a large chunk of stock owned strictly
• John Lewis Trading Watch: It would obviously be interesting to know how badly #MadMike’s existing department store business, House of Fraser, is trading, notwithstanding his ridiculous statement back on March 25th that “Sports Direct does not consider House of Fraser to be a competitor of Debenhams”, but no doubt that will come out in the wash. In the meantime, trading at their rival John Lewis looked weak again last week, as sales in w/e April 6th, according to yesterday morning’s JLP weekly overview, were 5.8% down gross (over 6% down on a “LFL” basis), thanks to the later fall of Easter this year. In terms of sales mix, Fashion/Beauty sales were up by 4.3% gross last week, but Home sales were down 3.9% gross and Electricals were 16.6% down gross. John Lewis LFL sales are running well over 6% down over the first 10 weeks of H1 (down 4.9% gross).
• Waitrose Watch: Trading at Waitrose was also distorted last week by the later fall of Easter this year, but this time it worked in their favour, as they reported a 17.3% bounce in gross ex-petrol sales in w/e April 6th. The first 10 weeks of H1 are now running down c0.5% LFL (down 0.5% gross). The calendar shift is that Easter is much later this year (Easter Day is April 21st, compared to April 1st last year), so the distortions will continue for a few more weeks…
• Today’s Press and News: Most of the front pages today are full of the continuing saga about Brexit (eg “May’s hopes dashed as EU targets longer Brexit delay” in the Guardian), but City AM runs with the collapse of Debenhams (“The Bitter End”) and the Business headlines are generally dominated by the war between Sports Direct and Debenhams, eg “Debenhams handover to trigger wave of closures” in the Telegraph, “Ashley fury at Debenhams defeat” in the Times and “Ashley cries foul as Debenhams rejects final offer and goes into administration” in the FT. The Times also flags that “Mike Ashley’s losing bets begin to stack up” and that “Finger-pointing begins for Debenhams demise”, whilst Lex column in the FT (“Debenhams/department stores: end of Emp-ire”) looks at the situation in detail, noting that Debenhams was worth as much as £1.2bn four years ago and that “Eccentric UK retailer Mike
• News Flow This Week: Today brings the Tesco finals, the ASOS interims and the Dunelm Q3, whilst tomorrow brings the WH Smith interims and the opening of the new Primark flagship store in Birmingham.
• Quote of the Day: After the futile trips to Berlin and Paris by the beleaguered Prime Minister yesterday, here’s another useful insight from Hilaire Belloc (1870-1953): “I have wandered all my life, and I have also travelled; the difference between the two being this, that we wander for distraction, but we travel for fulfilment”.
• Nick is currently in the US.