Langton Capital – 2019-07-08 – PREMIUM – CVAs, Deliveroo, MARS, June trading, rents etc.:
CVAs, Deliveroo, MARS, June trading, rents etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Our daughter has received the odd Amazon voucher and, because she’s under-18 and can’t have a credit card etc., the money has ended up on our account.
Thereafter, despite various promises to ring-fence her cash, it’s been hard so to do and, to cut a long story short, it’s been spent on moss-removing fluid for the patio.
As a result of which we took a leaf from our politicians’ book and adopted the ‘deny, obfuscate, rationalise & reluctantly apologise’ approach.
However, our first defences were shot down (the idea that Amazon’s computer programmers were idiots never did ring true) and, when we suggested that somebody else had decided to spend her money on our patio and then that she was simply doing her bit for the household, she was, perhaps unsurprisingly, not amused.
So then came the apology section but, as she’s very much a ‘cash up front’ person, that didn’t last too long and I seem to be about twenty quid down on the deal. On to the news:
CVAs – A FEW FURTHER THOUGHTS: We considered CVAs (again) on Friday. Thanks to those who sent in their views. Here a couple more considerations. 8 July 2019:
• As mentioned on previous occasions, CVAs are either a mechanism via which jobs and businesses are saved or a process steeped in moral hazard whereby poor companies are put on life and market efficiencies are lost.
• Either way, they are upon us and here we consider some of the secondary consequences of CVAs.
On the company undergoing the CVA:
• Staff: If a company announces a CVA, staff may be unsettled.
• New staff may be less likely to join, and existing staff could feel twitchy and, in some cases, retention bonuses may be necessary. Pay levels across the board may have to rise.
• Staff turnover is more likely to rise than fall and, due to the need to advertise for, interview and train up new colleagues, this will impact margins going forward.
• Leases: Landlords are often the ‘victim’ of CVAs, and they may change their opinion towards a company that has undertaken a CVA.
• This could impact access to property going forward. Rent deposits may increase, rental terms may be more onerous etc.
• In most cases, landlords may favour rival bids for a lease and, in some cases, the company may not find landlords willing to lease sites to them at all.
• Landlords will not be certain that the first CVA from a company is going to be its last. Indeed, Jamie Oliver’s restaurants underwent a CVA and then called in administrators.
• Creditor terms going forward: Creditors will not forget or arguably forgive a CVA. They may withdraw customer credit. They may trade on a ‘cash’ basis in future. Utilities companies may demand deposits up front.
• Suppliers may not be able to insure the money owed to them by some companies. This could make the above inevitable, however ‘good’ the trading relationship.
• Working capital will be negatively impacted. For many F&B companies, which sell their product for cash to the customer before they pay for it (on credit) to their supplier, this could be a big factor. It will put upward pressure on the cash flow cost of a CVA.
• Customers: They may not wish to dine in a ‘failed’ restaurant. They may demand or expect discounts etc.
Impact on rival companies & the sector as a whole:
• Staff: The cost of labour could be bid up across the market. If CVA companies need to recruit, then any experienced staff will need to be poached from competitors and this will impact the market as a whole.
• Leases: Landlords are only human too. They may lash out post CVAs and, as is the way of the world, the people that they hit may not be those that caused them a CVA-related inconvenience in the first place.
• On the plus side (for leaseholders at least), some downward pressure will be brought to bear on rental levels as a whole and CVA sites may become available (with some or all of the F&E already in place, no lease premium etc.)
• Landlords may sharpen up leasehold contracts to permit them to take back other properties in a company’s estate if if enacts a CVA elsewhere.
• Property owners will be twitchy & they may attempt to snatch back better properties early if they perceive a problem elsewhere in a leaseholder’s estate. Better safe than sorry?
• Landlords have debt and debt commitments. If rents fall in one area, it may be imperative that they put them up somewhere else.
• Lease terms may shorten implying that tenure is less certain and capital assets have to be written off over a shorter length of time
• Customers: If companies that have undertaken CVAs are obliged to offer discounts to keep their customers, some other operators may have to follow suit
GENERAL NEWS – PUBS & RESTAURANTS:
• The Competition and Markets Authority is considering whether to launch a full investigation into Amazon’s $575m investment into Deliveroo.
• Current comparative sales. Wet sales very poor. A little better in the last week but the comps are very tough (World Cup & hot weather). The reverse will be true for restaurants. Most should be up 5% to 10% LfL given the negative draw away from restaurants created by the football last year.
• The Times has reported that Marston’s has appointed Sapient Corporate Finance to oversee a potential sale of its Pitcher & Piano division. The brand currently operates 20 bars and has been given an estimated value of £40m.
• Data from S4labour has found that food and drink sales across the UK hospitality sector slumped, Catton Hospitality has reported. Drink led venues saw sales declined 4.6% this June compared to the same month last year, whereas, food led operators saw food sales fall 0.3%. A decline held to less than 5% would arguably be seen as pretty good news.
• Suggestion that 3,000 betting shops could close across the UK (see Other Leisure below) could put further downward pressure on rents. Most leases do not allow rents to actually decline. However, in the real world, new leases could be struck at lower rents & this effectively encourages tenants to threaten or even actually enact, CVAs.
• Vintage Inns (M&B) is offering 20% off food. Prezzo is still 30% off.
• KAM Media has reported that 49% of those aged 18-24 ‘would rather go to the gym at the end of a day than the pub’. It suggests that ‘pubs need to understand the impact this will have on the opportunities for attracting new customers and gaining maximum spend from those who are already visiting.’
• KAM says ‘it may be that customers are looking to spend the same but on higher quality products, it may be that spend is switching to mocktails from cocktails, either way, consumers are becoming more spend-savvy every day and the pub industry needs to have a broadened offer to take these trends into consideration.’
• We have suggested for some time that, whilst serving food or offering accommodation was a start, it may not be enough to stay ahead of the curve. Fortunately, pubs are much better-positioned to be used as a ‘third space’ than are, for example, restaurants.
• The weekend FT was looking for winners amongst the F&B losers on the High Street. It has quoted analysts singling out Loungers, Franco Manca, Tasty and others as amongst the winners. Perhaps. Though we see those three as a yes, a no and a maybe (but not in that order).
• US journal NRN has been considering whether the ‘meat-free’ phenomenon is a flash in the pan or here to stay. It has contributors saying ‘there’s an energy about it’ and others adding ‘there’s definitely quite a bit of hype out there’.
• So, all bases covered. NRN even adds ‘the jury is somewhat still out’. However, there may be some relatively uncontentious conclusions. Immitation meat could struggle. Meat alternatives are a halfway house and straight veggie food does, at the very least, do what it says on the tin.
• Beyond Meat has a pea-based meat alternative and Burger King is rolling out Impossible Burgers (soy-based). NRN suggests ‘it doesn’t hurt that…marketers call [their products] “plant-based” rather than “vegan.” A 2018 survey by market research firm Morning Consult asked Americans what words or phrases made groceries less appealing, and “vegan” topped the list at 35 percent.’
• Sweet Reason, the producer of hemp and cannabis-infused beverages, has raised $2.5m in funding.
• A YouGov survey has found that less than one in three small businesses have managed to cut down their use of single-use plastics.
• Asda has announced its intentions to join forces with JustEat in order to offer grocery delivery. The initiative will enable customers to order groceries to their home within 30 minutes.
HOLIDAYS & LEISURE TRAVEL:
• A GlobalData report suggests departures from the United Kingdom to mainland Europe are set to increase almost 3% between 2018 and 2023 from 55.9 million to 64.4 million, or approximately one trip per person.
• STR reports US hotel occupancy down 0.5% to 75.5% for the week ending 29 June, with ADR up 1.4% to $133.83 and RevPAR up 0.9% to $100.99.
• British Airways is attempting to pre-empt a potentially damaging summer strike from its pilots by holding talks with them. The pilots are refusing a pay increase of 11.5% over the last three years.
• Per Sky, Vue International will launch a formal sale process in the autumn which will likely value the company at more than £2bn. Vue operates just under 900 screens across the UK and is majority-owned by two Canadian funds: the Alberta Investment Management Corporation (AIMCo) and Omers.
• Analyst Gavin Kelleher told the BBC between 2,000 and 3,000 bookies could close out of the UK’s 8,400 shops following the UK government’s decision to reduce the maximum stake on fixed-odds betting terminals from £100 to £2.
• The owner of Moonpig, Photobox Group is looking to make 42 people redundant. Chief executive of the group, Jody Ford commented: ‘In order to enable each business within the group to simplify operations, we have decided to reorganise the internal operations’.
FINANCE & ECONOMICS:
• The Institute of Directors says that a negative 28% (pessimists over optimists) of directors believe that the economic outlook is worse now than it was before PM Theresa May resigned. A balance of 27% of firms believed their own prospects also worsened.
• The US added 224k jobs in June, considerably more than the c160k forecast by economists.
• Lower levels of productivity in the UK are feeding through to ‘sluggish wage growth’ says the ONS.
• A survey by Absolute Strategy Research has found that investors believe that the risk of a global downturn is now at its highest in at least four years.
• Sterling down vs dollar at $1.2525 but little changed vs Euro at €1.1154. Oil up at $64.28. UK 10yr gilt yield up 6bps at 0.74%. World markets all lower on Friday with Far East down today.
• Brexit, politics etc.:
o Johnson and Hunt to face Andrew Neill on Friday. Many of the postal votes will have been posted by then. Johnson is following an apparent ‘least said’ policy.
o Some 30 Tory MPs, led by Philip Hammond, are reported to be ‘plotting’ to block a no-deal Brexit in October per Sky News.
o The Dept of Health reported to be spending £3m of supply precautions for drugs post Brexit.
o Rumours of a General Election in the Autumn gathering in strength. In a four horse (five including the Greens) race, the outcome could be anybody’s guess. Chances are, some smart spreadsheet jockey will work it out and an October (or even September) election then either will or will not happen depending on what he/she says.
START THE DAY WITH A SONG:
Last Friday’s song was I Predict a Riot by the Kaiser Chiefs. Today who sang:
Why can’t you see,
What you’re doing to me
When you don’t believe a word I say?
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The wretched Tory leadership contest continued to dominate the front page headlines of Saturday’s papers, as party members received their ballot papers, with the Times running with “Johnson set for 74%/26% landslide in battle to reach No 10”, whilst the Daily Borisgraph went with “Downing Street accused of plot to smear Boris” and the front page of the FT Weekend magazine flagged up a revealing article on “All hail Boris” and his leadership style. In terms of Retail news, the main focus was on the CMA ruling that Amazon and the food delivery company Deliveroo should stop integration efforts, pending an investigation into potential breaches of competition rules: on the 25th anniversary of the creation of Amazon, the Guardian illustrated the CMA news with a photo of Jeremy Corbyn sending Amazon a birthday card wishing it “many happy tax
• Saturday’s Press and News (2): The Business editorial in the Daily Mail highlighted that ex-John Lewis boss Andy Street is, as the West Midlands Mayor, leading the charge on “How to save our towns”, with his plans to revive Walsall town centre. And the Daily Mail’s “Zero of the Week” was the Sainsbury boss Mike Coupe, after the revolt against his pay package at the AGM. The Times flagged that the long-serving FD of the troubled car dealer Lookers, Robin Gregson, is to leave the business and the FT had a big article on the growing problems of the motor dealer industry, headlined “Loans probe at Lookers adds to problems on the forecourts”, noting that the recent FCA investigation may have been caused by “inadequate oversight of acquired businesses”.
• Sunday’s Press and News (1): The big focus, in Retail terms, was on Superdry in the Sunday’s papers, ahead of next week’s results, with the Sunday Times following up its note last week that relations between the new CEO Julian Dunkerton and the new Chairman Peter Williams are said to be strained with a big feature on “Superdry revolution frays at the edges”. Superdry was also the first Business feature in the Observer (“Struggling Superdry tries to get back into fashion with its founder setting the tone”) and the Mail on Sunday flagged that the City is braced for a write-off of over £100m by Superdry on expensive store leases and old stock.
• Sunday’s Press and News (2): The Sunday Times had plenty of other Retail stories, leading with the news that ASOS is looking to make 100 redundancies at its HQ (mainly in Marketing). The Sunday Times also flagged that the embattled Philip Green has won his US legal battle with Top Shop landlords, the ex-Argos boss John Walden has stepped down as Holland & Barrett Chairman less than 8 months into the job, Harvey Nichols has reported a modest recovery in profits in y/ March and Ocado is expected to report a fall in first half profits on Tuesday. The Sunday Telegraph focused on Food Retailing, highlighting that both the Co-op and M&S misled the CMA ahead of the Asda/Sainsbury verdict by not revealing their Online Grocery plans. The Sunday Telegraph also had a feature on the jostling for position in the Online Grocery market (“Battlegrounds being drawn in the fight for Online
• Sunday’s Press and News (3): The Observer had a good feature on the problems created for suppliers and contractors by the collapse of the Bathstore chain. The Mail on Sunday noted that Dunelm may announce its special dividend plans with its Q4 trading update on Wednesday and also flagged that the Sainsbury FD Kevin O’Byrne admitted at the AGM last week that the £46m of fees on the abortive Sainsbury/Asda merger was a lot of money. Finally, the Mail on Sunday highlighted that a VAT cut may be part of an emergency post-Brexit Budget and in a feature interview the Co-op boss Allan Leighton raged that the political incompetence over Brexit is damaging business investment and hurting the UK’s reputation abroad…
News Flow This Week: First thing tomorrow we get the BRC-KPMG Retail Sales survey for June (with another weak, weather-related Food performance likely), closely followed by the Ocado interims and then the Marks & Spencer, Kingfisher and N Brown AGM’s. Wednesday brings the Dunelm Q4 update and the delayed Superdry finals. Then on Thursday we get the Pets at Home AGM and the Game Digital/Sports Direct offer acceptance date.