Langton Capital – 2019-04-17 – PREMIUM – High Street, coffee & pig prices, Pod, Dart Group…
High Street, coffee & pig prices, Pod, Dart Group…
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Don’t you find that spellcheckers are getting more and more assertive?
Perhaps even strident, bullying, patronising and downright biased as I’m now being dissuaded from writing owt and nowt because, if I don’t go back and correct the corrections, I find myself writing like some posh nineteenth century poet and using ought and nought.
And that’s just downright wrong because, if I want to write that something was a mistake and that ‘I shunta dun owt’, then I’d like to be free to do so.
Indeed, even the double negative ‘I dint do nowt’ has a place at times and it must be my human right to mangle the language in any way I see fit.
Anyway, we’re being inundated with Out-of-office replies suggesting that Easter is upon us. On to the news:
THE HIGH STREET – ILLUSTRIOUS PAST, UNCERTAIN FUTURE? With voids beginning to rise, what does the future hold for the High Street? 17th April 2019:
• For many years, the High Street was the place to be. But rents have risen, the Internet is upon us and habits have changed. Where do we go from here?
• The High Street was the place to be. Footfall could be guaranteed & it’s where people (and brands) came to see and be seen.
• And, above all, it’s where people came to spend money.
• Affordable transport helped, the suburbs probably suffered quietly but rents rose in line or ahead of High Street spend and units continued to churn
• But, whilst banks slipped away and shoe shops made way for phone shops etc., some ‘anchor tenants’, specifically the department stores, could be relied upon to draw trade
• Like pilot fish, food & drink operators amongst them, other players sprang up around the department stores in order to benefit from the footfall
• With F&B struggling to get in, what could have gone wrong?
• Well rents could have risen (and they’ve very sticky on the way down), the Internet could have become a reality and customer habits could have changed
• Tech changes mean some shoppers price products on the High St but buy them online. Non-differentiated goods (books, CDs, toys, DVDs, video games) were impacted first
• Other products (travel, banking, clothes, spectacles, perfume etc.) are now affected. Delivery (aided by tech, e.g. Google Maps) is now also a major factor
• The Local Data Company suggests that voids are rising.
• The real problem could be partly obscured when space is taken temporarily (by phone case or Xmas wrapping paper shops) or by charity shops on non-economic rents
• Major change is underway, but people still need stuff. And they still need to eat
• But High St rents are arguably too high, space may be better-sourced on business parks etc. Even here, the Internet may disaggregate the industry, remove the need for ‘shops’ altogether
• Think of department stores, book shops, electrical shops, DVD retailers etc. and ask yourself ‘if they didn’t exist, would you build them?’
• And, as some operators look to exit, who will come in?
• JDW may have rescued the banks. Phone shops helped shoe shops exit etc. but who’s the next operator to take space?
• We don’t need 25,000 tattoo parlours, nail bars or hipster barbers. And they certainly wouldn’t pay the rents that HMV etc. signed up to
• Footfall is in decline, sales are falling & costs are rising. Esp. labour, rents, business rates. This process must be finite. It’s hard to see it ending well
• As mentioned on numerous occasions, the market has no braking mechanism, only a crashing mechanism
• It’s rarely worth urinating uphill.
• There are some things that won’t change, we’re not going to uninvent the Internet, for example.
• And the changes in consumer behaviour that the Internet has kicked off are likely here to stay.
• But, and here’s the point, there are some things that can change – chief amongst them, rents.
• Because, whilst not many High Street properties will be demolished, they may need to be used in different ways and retail and residential users will probably want to pay a discount for shop frontage, not the premium currently paid by retail operators
• But rents are sticky on the way down. Property companies benefit from upward only leases etc. but, when economic reality takes over, there are still problems
• Property companies may be borrowed up to their eyeballs, for example. Their debts need servicing and the companies ‘need’ a certain level of rent to cover their own costs
• However, at the end of the day, that’s just too bad, isn’t it? Economic history is littered with operators and industries that ‘needed’ something and didn’t get it.
• Councils and central government may have a role to play here. Though CVAs are a move in this direction, there will be a certain reluctance to kick this process off.
RANDOM COMMENT CORNER:
1. We talk below about bacon prices rising. Last week we mentioned that pork prices were on the rise due to an outbreak of African swine flu in China. This is now coming to pass. China will be sucking in clean meat. This will impact prices. The size of the Chinese market is awe-inspiring. China raises and butchers about 60 pigs for every one raised in the UK.
2. Coffee prices are at decade lows & farm-gate milk prices are falling. Did anyone tell Starbucks, Costa etc.? Despite rises in rents, business rates, NMW, NLW, workplace pensions etc., the margin on a High Street coffee, already extremely high, may be rising. NB. We accept there are 101 reasons why the cost of coffee does not impact the price of coffee. We’re just saying…
GENERAL NEWS – PUBS & RESTAURANTS:
• Pod has reported full year numbers to 3 Jan 2019 to Companies House saying that the year saw a ‘dramatic turnaround in performance for Pod’.
• The group increased sales from £17.2m to £17.4m driven by slightly fewer stores but with LfL sales up by 4%.
• Pod says the year remained challenging but EBITDA moved into the black with a £1.2m increase to £0.4m. The group says that cost control remains critical.
• Below EBITDA costs drove Pod to a loss before tax of £486k, better than last year’s loss of £1.75m. Pod now has retained losses of £8.5m. Shareholders’ funds stand at £1.1m.
• UK unemployment fell by 27k in the 3mths to February. See Finance & Markets below.
• An estimated 100 jobs will be lost at the head office of Whitbread following the sale of Costa to Coca-Cola for £3.9bn. Whitbread is now set to focus on its Premier Inn budget hotel brand and its restaurant portfolio of Beefeater, Brewers Fayre and Table Table.
• Just Eat has acquired the software services company Practi for £6.7m. The software group provides small restaurant chains with tablet-based Point of Sale systems.
• Stonegate Pub Company is set to introduce portable phone chargers at 150 of its sites, in partnership with power bank rental network ChargedUp.
• Bacon prices could be about to rise, following increased demand on British pig-meat from China. The Chinese market has had to source from alternative markets due to the recent outbreaks of swine flu in Africa.
• The Bill’s restaurant group has announced plans to refurbish a quarter of its estate by this summer.
• The Morning Advertiser has reported that research has shown that houses within a walking distance of a JD Wetherspoon pub have a selling price of more than £70,000 less than the local average.
• A global decline in coffee prices has resulted in many to fear Central and South American farmers may abandon their production, fuelling an industry crisis. The fall in prices has led coffee to reach its lowest level in a decade.
HOLIDAYS & LEISURE TRAVEL:
• UK airports have complained of Brexit uncertainty beginning to hit home at the Routes Europe conference in Hannover. Stansted Airport chief commercial officer Aboudy Nasser said: ‘International demand is soft, the German market is actually shrinking as Europeans don’t feel welcome in the UK’. Nasser also commented that UK airports are losing routes because of Brexit, stating: ‘Airlines tell us that Europe is more profitable. Airlines are asking for renegotiations of terms because of Brexit’.
• Netflix anticipates that new subscriber numbers will decline in Q2 as the film and TV streaming group continues to roll out price rises. In Q1 Netflix saw subscriber growth of 9.6m .
• Caesars Entertainment has appointed Anthony Rodio as its new chief executive. The group announced it has set up a committee to evaluate takeover interest it has received amid continued pressure from activist investor Carl Icahn to sell itself.
FINANCE & ECONOMICS:
• UK unemployment fell by 27k in the 3mths to February. The ONS reports that the jobs market is ‘robust’ and that the rate of unemployment is just 3.9%. The ONS reports ‘the jobs market remains robust, with the number of people in work continuing to grow. The increase over the past year is all coming from full-timers, both employees and the self-employed.’
• Average weekly earnings rose by 3.5% in the year to February, equating to a pay rise of c1.6% after inflation.
• The number of workers in employment remained unchanged at a record high of 32.7m. GDP growth remains sluggish suggesting that productivity remains a problem.
• The NIESR ‘nominal wage growth appears to be stabilising at around 3½ per cent amidst a tight labour market and prolonged Brexit uncertainty. Yet real wages remain lower than before the 2008-9 financial crisis. With productivity growth continuing to be weak, nominal wage growth risks adding to inflationary pressures in the economy.’
• A study from the TUC reports that British workers spend more time working than other countries in the EU. With GDP sluggish & unemployment low, the TUC points out UK workers are less productive.
• The Chinese economy grew by 6.4% in Q1 versus a year ago.
• Sterling down a shade at $1.3059 and €1.1552. Oil up nearly a dollar at $71.99. UK 10yr gilt yield unchanged again at 1.22%. World markets mostly higher yesterday but Far East mixed in Wednesday trade.
• Brexit, politics etc.:
o Westminster on holiday. Seems sensible.
o Institute for Government reports UK faces the danger of ‘stumbling’ into the next phase of Brexit talks. Exhaustion may be setting in.
o The IFG reports that the division of tasks between Downing Street and the Department for Exiting the EU could be complicating matters.
o Speaking during a visit to Ireland, US Speaker Nancy Pelosi has said there is ‘no chance whatsoever’ of a trade deal between the US and UK if there were any weakening of the Good Friday Agreement.
START THE DAY WITH A SONG:
Yesterday’s song was Maneater by Hall & Oats. Google the song and check out that moustache. What’s all that about? Anyway, today who sang:
You don’t care for me,
I don’t-a care about that
You got a new fool, ha!
RETAIL NEWS WITH NICK BUBB:
Pendragon: The profit warning today from the motor retailer Pendragon (better known for its Evans Halshaw and Stratstone businesses) is buried in what looks like a routine Q1 trading update, which begins with good-looking 4.6% LFL revenue growth. However, gross margins have been weak across the board, because of “challenging trading conditions” and with operating costs under pressure as well, an underlying loss before tax of £2.8m has been reported for Q1, which is said to be as much as £10m below the company’s expectations. In the light of this poor performance, the new CEO and CFO have launched an “operational and financial review” of prospects, which will be announced in June. In the meantime, the Pendragon share price will take a pounding and its UK rivals, Lookers and Vertu Motors etc, will be under the spotlight…
John Lewis Trading Watch: After a rough time with the Easter comps against last year, the calendar shift is starting to unwind and trading at John Lewis looked better last week, as sales in w/e April 13th, according to yesterday morning’s JLP weekly overview, were 4.8% up gross (over 4% up on a “LFL” basis). In terms of sales mix, Fashion/Beauty sales were up by 10.4% gross last week and Home sales were up 6.9% gross, but Electricals were 2.4% down gross. John Lewis LFL sales are still, however, running over 5% down over the first 11 weeks of H1 (down 4.0% gross).
Waitrose Watch: Trading at Waitrose was also boosted last week by the later fall of Easter this year, as they reported a 7.2% bounce in gross ex-petrol sales in w/e April 13th. The first 11 weeks of H1 are now running flat LFL (up 0.2% gross). The calendar shift is that Easter is much later this year (Easter Day is April 21st, compared to April 1st last year).
News Flow This Week: There is no more company news scheduled, ahead of the long Easter weekend, but the ONS Retail Sales figures for March are out tomorrow morning.