Langton Capital – 2019-04-26 – PREMIUM – Just Eat, Starbucks, Airbnb, new entrants & tech etc.:
Just Eat, Starbucks, Airbnb, new entrants & tech etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Easter is still upon us & bits of Langton are scattered across Europe studying the inside of airports and queuing for various things. The email this week could be a little shorter than normal. On to the news:
DISRUPTIVE NEW ENTRANTS: ARE THEY SOMETIMES ENCOURAGED TO ENTER THE MARKET: Incumbents may push price. Margins may rise. This encourages new entrants but, if barriers are high, new tech may be more successful than more of the same. 26th April 2019:
• Price gouging is inescapable. But it does encourage new entrants to come into the market. In areas where barriers are high (e.g. capex with regard to hotels, licensing re taxis), this can effectively sponsor innovative new players such as Airbnb and Uber. The somewhat disenfranchised existing operators will then moan about this constantly.
A quick look at London hotels:
• The behaviour of London hoteliers did not ‘create’ Airbnb. But the behaviour of hoteliers in the UK capital is typical of that elsewhere in the world.
• London is a large market, it’s a gateway city & it will always be (relatively) busy. But cycles happen; lead times are long.
• From drawing board, hotels could take 5yrs plus to open. This is a barrier to entry & means that operators can and do jack up prices at times
The Hotel Cycle:
• Bottom. Rates are low, occupancy is low, confidence is low
• Off the bottom. Occupancy rises, fingers crossed, rates don’t move
• Mid-upswing. Occupancy still rising, some rates rising, confidence rising
• Top. Occupancy static, all rates now rising, confidence high, new builds kick in
• Off the top. Occupancy falls, rates still rise. Then rates stall
• Downswing. Occupancy falling, weaker operators buckle, cut rates, confidence wobbles
• Add into the above the impact of a new entrant such as Airbnb, and the outlook clouds further
Where are we now:
• The London hotel market has been strong for a number of years
• We are just about at the ‘Off the Top’ mark. A number of operators cautioned slightly last year
• Capacity is coming on (esp. Budget hotels) as a result of decisions made years ago
• Sterling has fallen, tourist numbers have risen, but this isn’t quite as good as was hoped
• Given favourable Sterling, good tourist numbers etc., recent performances have not been outstanding & Airbnb (driven in part by the hoteliers’ own decisions on room rates, will be partly to blame
Other potential markets ‘at risk’ – and possible defensive positions:
• This is all much clearer with hindsight.
• But pointing to industries such as steam engines and horse saddle crafters as examples that failed to adapt is hardly very useful
• The number of operators hit by the Internet is legion. Gambling was hit by (and created its own) digital market. General Retail is a visible victim
• Restaurant pricing sucked in new entrants. The barriers are not great but, in addition to new capacity, fresher operators such as Deliveroo and Just Eat have both widened the market and taken share from operators via the introduction of Dark Kitchens etc.
• Not to stretch a point but adaptable businesses (for example contrast pubs with restaurants) have a more defensible position
• In the same way that draft beer can’t be easily replicated in the off-trade, the pub cannot easily be replaced by the restaurant, library, church or whatever as a ‘third space’
SPENDING PATTERNS. THE GREY POUND UNDER THREAT? The House of Lords, not known as a champion of younger people’s rights, has suggested that older customers are taking too much of the cake. Just talk? 26th April 2019:
• On 4 April we wrote on Generation Have-It-All vs Generation Hopeless suggesting that older consumers’ control of the purse strings was notable and perhaps not sustainable (or fair etc.) The House of Lords has said something similar but, at a time when 47% of Tory voters are over the age of 65 and hardly any are under the age of 25, will anything actually happen?
A few comments:
• Please see Grey Dawn from 4 April for more comment.
• Over-reliance upon any one demographic brings with it risks as well as rewards.
• That said, it is unlikely that income (much less so wealth) will move across demographic lines rapidly.
• Nonetheless, the House of Lords does seem to be suggesting that the current position, where younger people are frozen out of the property market, have poorer pensions etc. may not be sustainable
A double-edged sword?
• The politicians should probably do what is ‘right’ but, in doing so, there may be not-immediately foreseeable consequences
• For example, if younger people find themselves able to get on the housing ladder, saving for deposits etc could actually depress their spending power in the medium term
GENERAL NEWS – PUBS & RESTAURANTS:
• Just Eat plc has reported Q1 numbers saying group orders rose 21% to 61.4m with revenues up 28% at £227.9m
• JE says UK orders increased by 7.4% to 31.9 million. It says ‘Q1 growth was impacted by three factors: a strong comparator, including Hungryhouse before integration and expected attrition of their customer base; the unseasonably warm weather in February; and Easter falling entirely in Q2 this year. We would expect an improvement in UK order growth during the remainder of the year.’
• JE reports ‘outside the UK, orders grew by 40% to 29.5 million, fuelled by good growth in Canada, Italy, Switzerland and Ireland.’ The group says ‘Canada continues to be the standout performer delivering strong growth in the period and SkipTheDishes is on track to report its first full year uEBITDA profit, demonstrating the route to profitability for delivery.’
• JE says ‘we reiterate our guidance of full year 2019 revenue in the range of £1.0 billion to £1.1 billion and uEBITDA in the range of £185 million to £205 million (both excluding Brazil and Mexico).’ Interim CEO Peter Duffy reports ‘Just Eat is on the right path to be the leading hybrid marketplace for online food delivery and we are confident in the delivery of our strategy. Many of our international markets have performed very well in the period although, as expected, we saw softer UK order growth in the quarter. We are making good progress and continue to execute at pace.’
• Foodservice analyst Peter Backman has reported that trading in Q1 for foodservice operators has been mixed. Mr Backman says the period saw ‘January slower than usual but the better weather generated a small boost in March.’
• Backman points out that the comps may be misleading. He says ‘at face value, growth figures were positive compared to last year, but sales plummeted during the onset of the Beast from the East in the same quarter in 2018 and overall growth this year was not as great as the fall last year, leading to poor comparative figures for the quarter.’
• Easter also fell in Q2 this year, which will further complicate the comparative picture.
• Backman goes on to say ‘the outlook for the foodservice sector to continues to darken amid the debilitating effects of Brexit on consumer and business confidence. The market will continue to point downwards for the next two quarters.’ More positively ‘the squeeze on operator margins has eased over the quarter and sales in some sectors have outperformed the overall eating out market, such as food-to-go and food sales in pubs.’
• Backman concludes ‘delivery continued to expand amid indications that the costs of delivery are hurting many operators, while the rise of dark kitchens operating under “virtual brands” (i.e. brands that are not found on the high street, but on aggregator apps) is providing unwelcome competition for high street restaurants. Things are likely to remain tough in the coming months for the commercial sector.’ Mr Backman’s full report can by purchased at www.peterbackmanfs.com
• Starbucks has reported Q2 numbers saying that comparable sales were +3% globally with 4% growth in the US and 3% growth in China
• Starbucks says it increased its rate of new store openings globally by 7% in Q2, with a 17% increase in the rate of openings in China. In absolute terms, the group opened 319 stores in Q2 to take its global total to 30.184.
• Starbucks CEI Kevin Johnson reports ‘Starbucks delivered another quarter of solid operating results, demonstrating that our ‘Growth at Scale’ agenda is working.’ Mr Johnson continues ‘we are especially pleased with our comparable store sales growth in our two lead markets, the U.S. and China, where we are also continuing to drive strong new store development with industry-leading returns. With solid first-half financial results, we are on track to deliver on our full-year commitments.’
• Globally, Starbuck’s operating margin was down 40bps at 15.8%. The group earned 53c in EPS, up 13% on last year.
• Adnams has reported in its AGM comment that beer volume sales increased quarter on quarter in Q1 2019, however, the group reported that margin pressure continued as input prices rose.
• Diageo has reported that low ABV drinks, experiences and instagrammable cocktails could earn the sector an extra £5bn by 2022, taking the industry’s value to £46.7bn.
• Heineken has stated that it will invest £50m into 150 of its Star Pub & Bars sites, a record sum for the group. Heineken UK managing director David Forde said: ‘We believe in the great British pub. We’ve invested just shy of £200m in the past six years into hundreds of our Star Pubs & Bars businesses’.
• One of the winners of the BBC’s Million Pound Menu, Pilgrim is set to open its first site in Liverpool.
• The organic single estate rum, Copalli has launched in the UK. The rum is distilled in the Belizean rainforests and is made from three ingredients rainforest canopy water, yeast and non-GMO heirloom sugar cane.
• RTN’s share price has been slowly recovering. The group’s shares now trade at some 139.5p, around 25% above the low point of 112p that was reached only earlier this month.
• Changing spending patterns to come? The House of Lords Committee on Intergenerational Fairness and Provision has suggested that older people are currently taking too much of the cake. It suggests that the triple lock on pensions should be scrapped with the money put into housing and training for younger people. This may not happen in a hurry at a time when nearly half (47%) of Tory voters are over retirement age.
• North Shields Fish Quay is hosting the first monthly craft beer and food event on the North East cast.
HOLIDAYS & LEISURE TRAVEL:
• The British Foreign Office has warned that terrorists in Sri Lanka are likely to try and carry out further attacks. Foreign Secretary Jeremy Hunt said: ‘Following the horrific attacks on Easter Sunday, and the ongoing Sri Lankan security operation, I have … decided to update the travel advice to British nationals to Sri Lanka to advise against all but essential travel’.
• A report from Certify has found that ride-hailing services such as Uber and Lyft have continued to outsell taxis for corporate ground transportation.
• London’s multi-billion pound Crossrail project has now officially pushed its launch date back to March 2021.
• The BBC reports that rooms available to book on Airbnb have ‘rocketed in number in major UK cities’. The BBC says this has raised the risk of finding ‘hollowed out communities’. The BBC reports that the City of Edinburgh Council has called for licensing and London councils want a registration scheme for hosts.
• Boeing’s Q1 operating profits have fallen 21% to $1.98bn following the grounding of its 737 Max aircrafts.
• GVC Holdings, the owner of Ladbrokes Coral bookmakers, has called for a ban on broadcast advertising for sports betting in the UK, as well as an end to gambling sponsors on shirts. Kenny Alexander, GVC chief executive, said it was: ‘high time that the industry did more to protect its customers from potential harm’. Today’s announcement demonstrates GVC’s commitment to delivering on that’.
• Amazon has reported its fourth successive quarter of record profit, with the online retailer recording net profit of $3.56bn. George Salmon, an analyst at stockbroker Hargreaves Lansdown commented: ‘The benefits of cloud computing are clear for the user, and with profits up 59% this quarter, so are the advantages for Amazon’.
• The market value of Microsoft has topped $1 trillion following better than expected sales and profit figures.
• The Leeds based PureGym has announced revenue up 15% to £228k for 2018. Humphrey Cobbold, chief executive of PureGym, said: ‘As PureGym celebrates its 10-year anniversary this year, we remain totally committed to our mission of making gym membership more accessible and to our vision of inspiring a healthier nation’.
• Facebook has beaten analyst expectations by reporting revenue up 26% to $15.1bn, the social media giant’s monthly users also increased 8% to 2.38bn.
FINANCE & ECONOMICS:
• Sterling little changed at $1.2902 and €1.1584. Oil down a little at $74.33. UK 10yr gilt yield down 3bps at 1.15%. World markets down yesterday with Far East mixed in Friday trade.
• President Trump is to visit the UK on 3-5 June.
• Brexit, politics etc.:
o FT points out President Trump’s upcoming visit to the UK will give some indications as to whether Brexit will bring a new golden age in terms of UK / US trade.
o The US is one of the countries that the UK has a trade surplus with. Mr Trump will be looking to cut this.
o Whilst Brexiters are hoping for a new dawn, the FT suggests ‘hard-headed American strategists take the view that Brexit will reduce the UK’s usefulness as a conduit for US commercial and regulatory influence in Europe.’
START THE DAY WITH A SONG:
Yesterday’s song was ‘A design for Life’ by the Manic Street Preachers, today who sang:
Locked in the cell, feeling unwell,
I talked to a man,
He said it’s better to tell
RETAIL NEWS WITH NICK BUBB:
BDO High Street Sales Tracker: We flagged yesterday that sales at John Lewis were boosted last week by the calendar shift of Easter, despite the unhelpfully hot weather, and the BDO High Street Sales Tracker for medium-sized Non-Food chains for last week, w/e Sunday April 21st, was also a bit mixed, with consumers more interested in barbecues and picnics on the beach. BDO Fashion Store sales were up by only 1.1% LFL (including Online), given tough comps and Total BDO LFL sales (including Homewares and Lifestyle sales) were up by 4.0% last week (up by 6.0% in Store sales and up by 9.7% Online).
News Flow Next Week: Ahead of the much-awaited Sainsbury finals on Wednesday, the latest monthly Kantar/Nielsen grocery sales figures on Tuesday morning will make interesting reading. In the world of Non-Food, Tuesday also brings the Apple Q2 results out in the US, whilst the Next Q1 update is also on Wednesday and Thursday brings the N Brown finals and the Howden trading update. It is also a busy week for AGM’s, with Hammerson on Tuesday, Ocado on Wednesday and Intu Properties on Friday. And the widely followed GFK Consumer Confidnece index is out first thing on Tuesday.