Langton Capital – 2019-07-09 – PREMIUM – Deliveroo, Young’s, coffee, retail sales, spin & other:
Deliveroo, Young’s, coffee, retail sales, spin & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
We had an interesting looking bird fluttering around the garden over the weekend,
But, as it proceeded to hack big chunks out of one of the oak trees in a search for grubs whilst making an awful rat-tat-tat racket, I’m inclined to add it to the list with deer, foxes, rabbits, rats, seagulls, magpies and wood pigeons under the all-inclusive label ‘vermin’.
That is animals, furry, feathered or invertebrate, that seem to take it as their mission to eat my food (or each other) or simply mess things up.
But, in my more enlightened moments, I can’t help thinking that these animals are convinced that it’s me that’s the problem and who’s to say which one of us is right as God might really be a big, feathery woodpecker, egging his guys on in their daily struggle against mankind amongst all those other nasty creatures.
Anyway, enough daydreaming, it’s time for the news:
AMAZON AND DELIVEROO – MORE QUESTIONS THAN ANSWERS: The CMA has told Amazon and Deliveroo to stay any plans they many have had re integration. 9 July 2019:
• Amazon has taken a stake in Deliveroo as a result of the latter’s latest round of fund-raising. The size of the stake was not disclosed.
• Many understandably viewed this as they would a giant entering the room.
• But now the Competion and Market Authority has ordered a halt to any attempts by Amazon and Deliveroo to integrate
• The CMA has served an initial enforcement order regarding Amazon’s minority shareholding in Deliveroo while it decides whether to launch a formal merger inquiry.
• The CMA says it has grounds to believe that Amazon and Deliveroo had ‘ceased to be distinct’
• The CMA’s order requires that Amazon and Deliveroo’s ‘separate sales or brand identity is maintained’ and there be ‘no integration of the information technology of the Deliveroo or Amazon businesses’.
• Integration of back office systems etc would surely have been the rationale for the deal in the first place
• Amazon had previously made moves to build a delivery business organically. The belief was that it may have decided to hold a large minority or ultimately a controlling stake in Deliveroo instead
• We are unclear as to the size of Amazon’s holding.
• It isn’t certain who pushed the CMA (or why it pushed itself) to launch an investigation.
• Rival delivery companies could have been spooked, restaurants could have feared rising commissions etc
• If Amazon had built a delivery business organically, the CMA would have been facing a similar outcome.
• Private equity and other holders of shares in Deliveroo, which has lost hundreds of millions of pounds in its move to build scale, would have been pleased to see Amazon give some legitimacy to their investment
• The move by the CMA raises the possibility that Deliveroo will never be allowed to sell itself to the highest bidder
• That is maybe as it should be from the point of view of the CMA (and market efficiency in general), but it will not please shareholders
• The move has been called a ‘game changer’ by some analysts
• Amazon says: ‘we believe this minority investment will enable Deliveroo to expand its services, benefiting consumers through increased choice and creating new jobs as more restaurants gain access to the service.’
• We are unaware of the existence (or not) of any clauses in the subscription agreement (for Deliveroo shares) that may or may not allow Amazon to back out of its investment
• Various people will be spitting feathers as such a move by the CMA is indeed a game-changer
• It is inevitable that the CMA will do what it can to protect C&Ms but the implication of the above is perhaps that it’s not good enough to get the product and the company right but that the exit route for an investment also needs to be cleared in advance
• From the point of view of Deliveroo’s B2B customers (the restaurants) this may not be altogether bad news
• It will diminish the market power that might otherwise have accrued to the enlarged business and it could encourage competition
INTERPRETING THE NEWS: News is often given a bit of a spin, a nudge in the ‘right’ direction. Here we consider a couple of today’s stories. 9 July 2019:
Hotels could host dark kitchens (see below, Pubs & Restaurants).
• Whilst apparently being sold as good news, this may well suggest that hotel kitchens are being underutilised.
• Delivery ot the door of your hotel room is a big deal with hotels apparently choosing to fill their beds even if it means Just Eat bags being left outside room doors after the occupants have eaten.
• Room service may have taken the hit. This was often a pretty expensive accident on the part of well-refreshed guests.
• The latter have now gathered their wits and decided to source their food elsewhere.
• If hotel kitchens are underused, it may make sense to offer space to Deliveroo and other operators seeking ‘dark kitchen’ space.
• This because, whilst Deliveroo and Just Eat etc may have widened the market a little, they have not increased demand for food per se meaning that, if space is put on to cook delivery food, space elsewhere will not be being used
Allegra says ‘outstanding’ indie coffee shops could succeed:
• This is true but, surely, the main news is that capacity continues to go on in the form of new coffee shops in addition to which independent outlets find it more difficult to deal with rising costs than do chains
• The idea that the market can expand (in terms of shop numbers) by 3% compound for the next 5yrs is somewhat ambitious as it implies a 16% increase over that period
• Rising costs in the short term are definite whilst success in the longer term is not
Young & Co LfLs down 2.1% in Qtr to 2 July:
• Given the warm weather last year and the World Cup (mid-June to mid-July), a drop of 2.1% is not too bad.
• However, it will lead to declining margins.
• The drop will have been more acute in drink sales (higher margin) than food and, as costs have been rising at or above the rate of inflation, this will have negative implications.
• It is possible that YNGA (London, riverside etc.) could have outperformed the market and we await the Coffer Peach data re June (in about a fortnight) with interest
• Overall, the weather comes and goes. A reversion to the mean is to be expected.
PRIVATE COMPANY RESULTS: Mission Mars (Albert’s Schloss) and London Union have reported FY numbers to Companies House and we will comment tomorrow.
GENERAL NEWS – PUBS & RESTAURANTS:
• Young & Co has updated on trading ahead of its AGM saying ‘when we reported our results in May, we stated that it had been a tough start to the year, with the only good weather coming over the Easter bank holiday. That pattern of poor weather has continued with an inevitable effect on our performance.’
• Young & Co says ’although managed house sales for the first 13 weeks are up 4.4% in total, they are down 2.1% on a like-for-like basis. By comparison, at last year’s AGM, we reported a 5.2% increase in managed house like-for-like sales, having benefitted from a long period of very warm weather.’
• YNGA reports ‘this year, we will benefit from the acquisitions made last year, principally the Redcomb group of pubs.’ It adds ‘these pubs complement our managed house estate in and around London and in the South-West and we remain excited about their future growth potential. We will also see the full year benefit of our major investments in the two hotels we added last year.’
• YNGA reports ‘these new investments, along with other investment made last year in our existing estate, will create momentum and provide a helpful tailwind for continued growth as we compete against last year’s strong comparatives.’
• YNGA concludes ‘we are very confident about the enduring quality of our business and will continue to invest in the existing estate, in technology and in our people. We remain positive about the year ahead and will update shareholders further at the half year.’
• Given the lack of a World Cup this year and difficult weather comps, a drop of 2.1% LfL does not look too bad. Only half of the World Cup is included in the comps against which today’s numbers are measured.
• The BBPA has called on the two Conservative leadership contenders to back beer and pubs in a letter sent to both. The letter called on the government to freeze beer duty and to undertake a review of the business rates system. Chief Executive of the BBPA, Brigid Simmonds commented: ‘ The number of pubs in the UK is falling and they need support now more than ever. This is why we and other industry bodies are calling for the Conservative leadership hopefuls to back beer and pubs’.
• Cosigner to the above-mentioned letter, the UKHospitality Chief Executive, Kate Nicholls commented: ‘After such a prolonged period of uncertainty and instability for hospitality operators, it is crucial to the fortunes of our sector – and the British economy – that a new Prime Minister recognises and acts to protect the value of our venues to the UK economy, culture and society’.
• Sainsbury’s is launching a pop-up no to low alcohol beer pub in central London called the ‘Clean Vic’.
• The BRC-KPMG retail sales data has shown that UK sales suffered their ‘worst June on record’, with sales down 1.3% year-on-year. Chief Executive of the BRC, Helen Dickinson said: ‘Overall, the picture is bleak. Rising real wages have failed to translate into higher spending as ongoing Brexit uncertainty led consumers to put off non-essential purchases’.
• In light of an increase in supply and shaky demand, Allegra’s World Coffee Portal has reported that ‘independent coffee shops face formidable challenges in the UK’s toughening retail climate.’
• Allegra says that those ‘distinguished by outstanding coffee, superb food and pitch-perfect service’ have the potential to succeed.
• World Coffee Portal suggests that the number of independent coffee shops in the UK rose by 4% over the last 12mths. Allegra suggests that the sector as a whole should grow at 3% compound until 2024.
• Allegra reports that ‘rising labour costs and property costs are perceived as the greatest challenges facing independent coffee shops in the UK, ahead of business rates, and increasing competition.’
• Some 80% of independent coffee shop leaders surveyed by Allegra in March 2019 reported positive sales performance in the last 12 months. Allegra suggests that independents’ customers are more likely to drink in rather than take out their coffee.
• Allegra CEO Jeffrey Young comments ‘there is no doubt independent coffee shops face an uphill struggle compared to scaled competitors, particularly in today’s highly challenging retail environment.’
• The Caterer reports that ‘a dozen companies within the Liverpool based Know Group of hotels and restaurants have either been compulsory wound up or gone into voluntary liquidation over unpaid tax bills.’
• Food Service Equipment Journal reports that hotels could host ‘dark kitchens’ so that food delivery aggregators such as Deliveroo can supply in-room takeaways. This may not be from a position of strength as it could imply that the kitchens are not busy enough to stand on their dine in or room service business.
• Quoting comments at a forum hosted by HGEM and EP Business in Hospitality, the journal says ‘66% of hotel guests have used a delivery service to order food to their room and experts insist that will only increase, particular among millennials prepared to snub hotel food for their favourite takeaway brands.’ The percentage rises to 71% for those aged 26 to 35.
• Harry Ramsden has entered into a partnership with Mecca Bingo that will see the brand entering 70 location across the UK.
• AB InBev’s venture capital division ZX Ventures has acquired the UK online beer club and subscription service BeerBods. Founder of BeerBods, Matt Lane commented: ‘It has become increasingly clear that in order for BeerBods to reach its full potential, we need a partner that can help take us to the next level’.
• Uber Eats head of Europe Rodrigo Arevalo has told Bloomberg that Uber Eats is rolling out a scheme to include restaurants’ own delivery teams as well as independent drivers. Mr Arevalo told Daybreak Europe that ‘Uber but they had barely scratched the surface. He also said Uber Eats had carried out a full audit of every restaurant after it was revealed that some had poor hygiene standards, and that all restaurants were now registered with the U.K.’s Food Standards Agency.’
• Discounts still available. Bella Italia 40% off mains, Café Rouge and Prezzo 30% off, Pizza Express 25% off food & M&B’s Vintage Inns 20% off.
• Big Mamma Group, the operator of Gloria and Circolo Popolare restaurants is believed to be considering entering into the London market, Big Hospitality has reported.
• The French foodservice group has seen shares slump following a warning that it has lost several contracts in healthcare and sports and leisure in North America. Chief Executive Denis Machuel stated: ‘The fourth quarter will be less dynamic than the first nine months and we will start next year, even though we are relatively confident, with an impact from the contract losses’.
• The US-based chicken waffle restaurant chain Sweet Chick is planning to enter into the UK market with the opening of an Oxford Circus site later this year.
• Brewdog has entered into a partnership with UK supermarket chain Co-op to exclusively distribute its new East Coast Crush IPA.
• A fire at Jim Beam’s storage facility in Kentucky which destroyed 45,000 barrels of whiskey on 2 July has subsequently caused severe damage to the fish population in the nearby Kentucky River.
• Asda announces it will remove plastic bags from online deliveries, removing around 85m plastic bags from production each year.
HOLIDAYS & LEISURE TRAVEL:
• Elegant Hotels announces that its Hodges Bay Resort & Spa in Antigua, ‘which was originally due to open in July 2017, remains incomplete due to ongoing issues with the construction of the property, which are outside of Elegant Hotels’ control.’
• Elegant ‘confirms that, although the operating term of the management contract has not commenced, it has now received a termination notice in relation to the management contract. The Company disputes the validity of this termination notice and intends to take all action necessary to preserve shareholder value.’
• Elegant adds it ‘has approximately $1.7m of balances outstanding in relation to Hodges Bay; being $1.5m in the form of a loan to the Hodges Bay management company, and $0.2m of unpaid technical service fees. Under the terms of the management contract, the loan is now immediately repayable to the Company following receipt of the termination notice.’
• Not good news but Elegant says ‘the Group’s outlook for FY2019 and FY2020 remains unchanged.’
• Which? travel claims Thomas Cook Airlines suffered the worst delays of any major airline last year, with passengers having a one in nine chance of arriving back from their holidays more than an hour late.
• Gardaland Resort in Italy plans to open Europe’s first Legoland Water Park in 2020. Legoland currently operates water parks in Florida, California, Malaysia and Dubai.
• The Communities Against Gatwick Noise and Emissions (Cagne) expects Gatwick to announce plans for a third runway next week.
• The Information Commissioner’s Office (ICO) will penalise British Airways, owned by IAG, £183.4m after a data breach which saw 500,000 people’s data compromised.
• The board of directors of GVC have categorically denied that they still benefit from the disposal of the Group’s Turkish-facing business in 2017.
• Four children spent nearly £550 in three weeks buying player packs for the Fifa football game on the Nintendo Switch console.
FINANCE & ECONOMICS:
• Real Deals has reported that global M&A volumes fell 12% in H1 this year.
• Sterling a little weaker at $1.251 and €1.1154. Oil down a little at $63.96. UK 10yr gilt yield down 2bps at 0.72%. World markets lower yesterday with Far East mixed in Tuesday trade.
• FT suggests that diplomats such as Sir Kim Darroch, Britain’s ambassador to the US, are seen as ‘fair game’ by politicians who wish to shape the agenda. The leak of telegrams in which Sir Kim described US President Donald Trump’s administration as ‘inept’ and ‘uniquely dysfunctional’ has been called ‘unprecedented’. Mr Trump has said his administration would ‘no longer deal’ with Sir Kim.
• The FT suggests ‘Sir Kim is the latest in a series of top civil servants whom some politicians are trying to label as “pro-European” or “anti-Trump” in an attempt to discredit them.’
• Brexit, politics etc.:
o The CBI has warned that the growing threat of a no-deal Brexit is flagging up the biggest decline in business investment since the financial crisis.
o Scare tactics re a no-deal catastrophe could allow new PM (likely Johnson) to push Theresa May’s deal through the Commons.
o The CBI says ‘for any business it’s hard to take spending decisions now. When the risk of a no-deal Brexit feels very real at the moment, why would you take a big decision now?’
o The Citi UK Economic Surprise Index suggests a sharp drop in growth.
o Boris Johnson says he will force Brussels to ‘look into our eyes’ and make it believe that the UK will leave with no deal if necessary.
o Justice secretary David Gauke has said that he would resign from the government if obliged to put his name to a no-deal Brexit.
START THE DAY WITH A SONG:
Yesterday’s song was Suspicious Minds by Elvis Presley. Today who sang:
Time and again I tell myself,
I’ll stay clean tonight
But the little green wheels are following me
Oh no, not again
RETAIL WITH NICK BUBB:
• BRC Retail Sales survey for June (the 5 weeks to June 29th): We flagged yesterday that another weak, weather-related Food performance was likely for last month, but we didn’t expect Non-Food to be weak as well, so the net outcome of -1.6% LFL is disappointing, not least as the comp wasn’t that tough overall (despite the plethora of World Cup TV sets and paddling pools sold a year ago). The exact Food/Non-Food LFL sales split for June is, as usual, buried in the 3-month moving averages of +1.5% and -2.0% respectively, but it looks like Food was a bit under 1% down LFL in June and that means that Non-Food must have been over 2% down LFL last month (despite good trading in Furniture, Homewares and Appliances). Clothing andoutdoor goods again bore the brunt of the weather shift compared to June 2018. The separate Online Non-Food sales survey doesn’t include the likes of Amazon, but even so
• Ocado: Although trading is said to be have been in line with expectations, today’s interims (for the 26 weeks to June 2nd) look a bit light of City forecasts, with adjusted EBITDA down by 46% to £18.7m, on the back of a 10.5% increase in revenue to £874m. After depreciation of £55m and an exceptional write-off of £99m on the ill-fated Andover warehouse, the statutory loss was nearly £143m, which may get a few headlines in the press …And the impact of the Andover fire and share incentives on EBITDA for the full year looks higher than expected…
• News Flow This Week: Later today we get the Marks & Spencer, Kingfisher and N Brown AGM’s, but no real news is expected (apart from the usual vote against Director’s pay…). Tomorrow 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 (although the offer has already gone unconditional).