Langton Capital – 2019-07-24 – PREMIUM – Marston’s, restaurant collapses, Britvic, Comptoir etc.:
Marston’s, restaurant collapses, Britvic, Comptoir etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, are you wearing shorts to work today?
A straw poll (i.e. walking from the flat to the office admittedly before 6am this morning when the proportion of delivery drivers, Langton Capital staff and homeless people to commuters is relatively high) revealed that 47% of those at first glance identifying as males were wearing shorts compared to 53% who will be sweating through their pants for the rest of the day.
Inelegantly put, perhaps, and the poll was only 36 people including me, but it does go to show just how much the City has changed in the last couple of decades. Whilst we didn’t count ties, it’s likely less than half of the long-trouser wearers were sporting them.
Anyway, it’s going to be a scorcher. On to the news:
THE CURRENT RASH OF RESTAURANT COLLAPSES: Did it always have to end this way? Cheap money => overbuilding => supply outstrips demand => discounting => margin worries => CVAs => administrations. Answer: Probably, yes. 24 July 2019:
The Current Restaurant Cycle
How did we get here?
• Over the last decade we have been in an era of super low interest rates and cheap money aimed at encouraging the economy.
• This led to a race for yield, consequently driving yields down and making the market enter into a period of low yields.
• Any yield is better than no yield. This encouraged private equity into investing into the UK restaurant market. It had a similar effect on landlords, who would build new units to satisfy demand. Lots of available money + lots of available units => rapid growth in F&B outlets.
A frothy market
• Crowded market. By 2015 the eating out market has become crowded and rents are rising.
• Private equity is feasting on the sector with many brands such as PizzaExpress, Zizzi, Strada, Prezzo Gusto and La Tasca all changing ownership in a short time period. The market has become frothy with private M&A activity.
A disruptor appears:
• Delivery becomes a thing. By late 2016 the main delivery players have established themselves.
• Amazon launches its ill-fated Amazon Restaurants. Deliveroo has secured $100m to expand beyond Europe and Uber Eats is viewing food delivery through a global prism.
• A crowded market restricts restaurant’s share of voice, leading them to partner with the delivery companies at the cost of margin.
• Overcapacity. When did you last struggle to find a restaurant or coffee shop? Precisely. The sector is now struggling with overcapacity, erosion of margins and increasing rents, rates and labour costs.
Clouds on the horizon
• The UK voted narrowly for Brexit in June 2016 and the nation was divided. The pound tumbles and business uncertainty looms.
• By as early as 5 December 2016, The Independent newspaper reports over 5,500 restaurants are at risk of closing down as ‘restaurants rely heavily on foreign food imports’.
The frothy sector is now firefighting on all fronts.
Putting the cart before the horse
• Cut prices to drive footfall. Discounting ramps up in the industry with many of the big, established chains doing it.
• In 2017, The Telegraph reports ASK, Bella Italia, Zizzi, Pizza Express, Strada and Café Rouge are all discounting in an effort to entice customers. Margins are squeezed further.
An inevitable conclusion
• Losses, closures & CVAs. In early 2018, the BBC reports one in three of the UK’s top 100 restaurant groups are not making a profit. It is no surprise then that by July Linklaters reports Q1 CVAs up 143%, signalling a struggling market.
• A rash of CVAs takes place in 2018, with Prezzo closing 94 outlets, Carluccio’s closing 34 units, Byron’s closing 20 and GBK closing 17, Jamie’s Italian shutting 12 and Strada 11.
• By December, Moore Stephens report that 1,219 restaurants went bust in the year to September 2018, up from 985 the year before.
• Market Growth Monitor from CGA and AlixPartners suggests there was a 0.1% drop in casual dining sites in the year to December 2018, the first fall in nine years.
• By this time, market leader Restaurant Group had been stumbling for years partly as a result of its own over-building.
• Pat Val failed in October 2018, though this was arguably due to a lack of competence and surfeit of dishonesty rather than tough trading.
A big operator falls
• In May 2019, Jamie’s Italian goes into administration with 22 restaurants closing and 1,000 jobs being lost. It seems as though exiting its worst sites through a CVA was not enough for the operator.
The disruptors are here to stay
• Amazon exits its own delivery company and instead elects to lead a $575m investment round in Deliveroo.
• Uber Eats continues to compete against its rival. Delivery continues to impact operators’ margins.
What does the future hold?
• What’s here to stay and what is transient? The cost pressures on the industry show no sign of letting up.
• Add to that the uncertainty around Brexit and consequently exchange rates and you get a potentially toxic mix.
• However, capacity seems to be coming out of the market, through CVAs or full blown administrations.
• There is still scope for winners in this market, operators who are able to negotiate competitive leases as capacity comes off could find themselves well positioned for the future.
• We accept that these, wise-after-the-event pieces can be irritating. But we have many, many, many Langton pieces dating back to 2007 covering cheap money, overbuilding, overcapacity, lack of trade competence, overoptimism and discounting.
Below are a number of press headlines with dates attached:
• 02/10/2015 – Private equity feasts on restaurant sector
• 24/11/2015 – Food delivery app Deliveroo raises $100m to expand beyond Europe
• 07/09/2016 – Amazon moves into takeaway food delivery
• 28/09/2016 – Uber launches global assault on takeaway meals market
• 05/12/2016 – Brexit: Over 5,500 restaurants at risk of closing down
• 26/09/2017 – Restaurant discounting on the rise as owners feel the bite from rising costs
• 05/03/2018 – One in three of the UK’s top 100 restaurant groups are not making a profit
• 02/07/2018 – Restaurant brands undergoing CVAs up 143%
• 16/12/2018 – UK restaurant closures surge as consumers lose appetite to spend
• 17/12/2018 – Restaurant insolvencies jump as diners stay at home
• 25/02/2019 – Casual dining bubble bursts as number of restaurants falls
• 17/05/2019 – Amazon invests in Deliveroo food courier
MARSTON’S Q3 UPDATE:
Marston’s has this morning reported its Q3 and year to date numbers and our comments thereon are set out below:
Trading – Managed & Franchised Pubs:
• LfL sales are up by 0.5% in the year to date (week 42).
• They were up 2.2% at week 26 implying a LfL sales fall of c2% in the last 16wks of the period
• The bulk of the recent shortfall is as a result of difficult weather comparatives and the World Cup last year
• Margins, though down, are in line with expectations
• There is no new guidance as to costs
• Destination pub LfLs are up 0.1% at week 42 versus +1.2% at week 26
• LfL sales here are down 1.5% in the last 16wks
Trading – Taverns:
• Taverns LfL sales are up 1.1% at week 42 versus 3.9% at week 26
• Sales in the last 16wks of the period are down 3%
Trading – Beer Company:
• Brewing volumes are now level with last year having been up 4% at week 26
• Beer volumes are down 5% or so over the last 16wks
• The shortfall is mostly as a result of reduced lager sales (Estrella Damm) into the off-trade. The boost provided by the World Cup and continued hot weather last year was not repeated
Balance Sheet, Cash Flow & Debt:
• Marston’s is to halt its new-build programme for the next three years
• Some £25m p.a. had been earmarked for spending here. Around £10m of this will be spent (per annum for three years) on organic capex
• The return on the latter is around 2x that on the former suggesting that earnings will be protected whilst they paydown of debt can be accelerated
• An incremental £40m to £50m should be paid off debt over the next three years
Conclusion & Outlook:
• Numbers are likely to edge back by £2m to £3m this year and by a similar amount next.
• There is no negative read-across for the dividend
• Shareholders have made plain their desire to see debts reduced
• The ongoing purchase of EI Group by Stonegate has arguably put a new valuation on some leased and tenanted assets (perhaps 11-12x)
• CEO Ralph Findlay says ‘we have achieved modest growth during the 42 weeks to date continuing the long term positive LFL sales trend despite May and June being hampered by relatively poor weather.’
• Mr Findlay adds ‘we have a high-quality, balanced pub estate and a highly disciplined approach to preserving margin, together with a leading beer business which continues to perform well leveraging our outstanding brand portfolio and increasing our market share.’
• Marston’s says ‘having made good progress with our cash generation and debt reduction plans, we have subsequently decided to accelerate our efforts in this context and defer our remaining new-build plans.’
• The group concluded ‘we believe that this focus will further enhance our returns from our existing pub business and reduce our debt at an even greater pace.’
• Marston’s strong performance in Q1 and Q2 has not continued into Q3 but, given the weather and World Cup comps, this is not surprising.
• The group benefitted from the recovery in wet-sales across the country in the spring but tough comps mean that LfL sales, though still running ahead in cumulative terms, have been negative in recent weeks.
• There will be modest downgrades on the back of today’s numbers as trading, the very recent hot weather notwithstanding, has been less buoyant.
• Marston’s shares have been strong recently and, given their performance and the tone of today’s statement, some profit taking is likely.
• The shares are nonetheless not expensive and, with debt coming down and a yield of 6% plus to support them, downside should be limited.
• Marston’s retains an estate of well-managed and well-maintained, largely freehold properties. It is selling product that the consumer would like to buy at a price they are prepared to pay.
• Lodges, craft brewing and food (in the longer term) remain growth areas. Marston’s is a major brewer and has a large wet-led element to its estate. Its managed houses are growing sales and holding margins. The group is well-placed to return to growth and to create further value for its shareholders.
GENERAL NEWS – PUBS & RESTAURANTS:
• Britvic has reported Q3 sales to July 2019 down 1.5% to £360.1m. Chief Executive, Simon Litherland stated: ‘Overall we have delivered a solid performance against a more challenging backdrop in quarter three. We remain confident of achieving market expectations for the full year, underpinned by the strength of our brand portfolio, exciting commercial plans and a tight focus on cost control’.
• Comptoir Group, the Lebanese and Eastern Mediterranean restaurants group has said its H1 sales ending 30 June 2019 were in line with management expectations and ahead of the same period last year.
• The BBPA has welcomed the UK Government’s commitment to reconsider alcohol-free descriptors. Chief Executive of the BBPA Brigid Simmonds said: ‘Changing the current definition of ‘alcohol free’ beer from 0.05% ABV to 0.5% ABV – as we have called for previously – will enable Britain’s brewers to create a wider choice of great tasting beers, reduce confusion for consumers and level the playing field with other European markets’.
• Fever-Tree saw its shares tumblelosing £30m in value after reporting that its revenue growth of 13% to £117m.
• Starbucks is partnering with Uber Eats in the US in order to offer its products for delivery. Brian Niccol, Chipotle CEO commented: ‘These strong results were delivered despite a tougher year over year comparison and benefited from better restaurant operations, more effective marketing and leveraging our digital make line to grow sales and expand access’.
• Coca-Cola’s shares have risen to a record high on the back of its earnings figures, with the group reporting post organic revenue growth of 5%.
• The Chinese e-commerce group Alibaba has enabled US sellers on its oldest platform, Alibaba.com.
• Molson Coors has taken a stake in Pardubicky Pivovar in Czechia and Hop Stuff Brewery in the UK. said Simon Cox, CEO of Molson Coors Europe commented: ‘Our goal is to layer on a strong craft portfolio to our current portfolio of traditional brands such as Staropramen, giving us a scaled operation with an enriched portfolio of regional and new-wave craft brands and new capabilities built into our current business’.
• A study by MoneySuperMarket has found that 22% of families aren’t planning a summer holiday this year, with nearly two-thirds (65%) giving cost as the main obstacle. It is hoped that this fall in overseas holidays could boost pub accommodation sales this summer.
• The Chief Executive of SIBA, James Calder commented on the publication of the Department of Health’s Advancing our health: prevention in the 2020s: ‘It is great to see that the Department of Health recognise that for the vast majority of people who drink, they do so responsibly. More needs to be done to help the small minority in society who drink to harmful levels and SIBA is keen to work with Government on this’.
• London Fields Brewery is to undergo a relaunch under the managing of head brewer Talfryn Provis-Evans and managing director Martin Entwistle.
• Chief Executive of UKHospitality, Kate Nicholls has commented on Boris Johnson’s appointment as Prime Minister: ‘The new Prime Minister has recently spoken about wishing to unite the country. If he is serious, he now has an opportunity to act positively, to provide our high streets, businesses and communities with a boost’.
• Research from Navitas Group has found that 60% of customers regard a 4-star hygiene rating as a minimum requirement in order for them to eat at an outlet.
• Gousto completes a £30m private placements with Zeus Capital acting as Financial Advisor. Gousto was founded in 2012 and has grown to become the UK’s leading supplier of subscription meal kits. The latest placement takes total funds raised to date to over £100m.
• The Food & Drink Federation has reminded incoming PM Boris Johnson that’the UK’s largest manufacturing sector, food and drink, is central to our critical national infrastructure. The industry employs more than 450,000 people across the nation. UK food and drink is globally renowned for its quality, provenance and taste.’
• It says ‘a no-deal Brexit would destroy that opportunity and much more. It will inflict serious and – in some cases mortal – damage on UK food and drink. Prices will rise, there will be significant shortages of some products, and disruption for shoppers and consumers will be far reaching.’
• Bodega Bay Hard Seltzer is to launch as the UK’s first premium Hard Seltzer brand. The company will launch with two products, both at 4% ABV. Founder Charlie Markland says ‘Hard Seltzer is the next generation of alcoholic drink and in bringing it to the UK we are filling a huge gap in the market.’
HOLIDAYS & LEISURE TRAVEL:
• UKinbound urges Prime Minister Boris Johnson to secure a consensus in parliament to avoid a no-deal Brexit scenario. UKinbound CEO Joss Croft said a no-deal scenario ‘could be very damaging for the tourism industry‘.
• A Post Office Travel Money study reports two-thirds of parents complained of feeling ripped off on their last trip abroad with the biggest complaint being the cost of paying by card when overseas.
• Malvern Group, owner of Super Break and LateRooms.com puts itself up for sale, appointing KPMG to undertake a review of its strategic options
• Getlink downgrades its annual profit projections to reflect a likely no-deal Brexit. The operator of the Channel Tunnel forecasts EBITDA of €575 million if the UK was to leave the European Union with an agreement but €560 million in the case of a no-deal.
• Tencent Games will work with The Pokemon Company on developing a new game, so far no specific details have been released.
FINANCE & ECONOMICS:
• The IMF has cut its growth forecasts for the global economy for this year and next to 3.2% in 2019 (was 3.3%) and 3.5% next year (was 3.6%). It says that growth ‘remains subdued’ as a result of trade and technology tensions.
• Sterling little changed on Boris Johnson’s election at $1.243 and €1.1153. Oil up a shade at $64 and UK 10yr gilt yields down 3bps at 0.69%. World markets up yesterday with Far East higher in Wednesday trade.
• HMRC has reported that the number of homes sold in the UK in June dropped by 16.5 per cent compared with the same month last year.
• Brexit & politics:
o Things you thought you would never say. Boris Johnson to take over as PM today.
o Iain Duncan Smith says ‘lots’ of MPs who didn’t support Boris Johnson are now vying for jobs. Whilst admittedly referring to the bubble of Tory MPs, he says ‘the general mood is really upbeat’.
o Boris Johnson maintains he does not want to hold an early election says Nicky Morgan.
o Mr Johnson has appointed Andrew Griffith, currently COO at Sky, as his business advisor.
START THE DAY WITH A SONG:
Yesterday’s song was The Look of Love by ABC. Today who sang:
One of these early mornings, oh, you gonna be wiping your weeping eyes
I bought you a brand new mustang ’bout nineteen sixty five
RETAIL WITH NICK BUBB:
B&M: The last time the discount chain B&M updated the market, with the finals, investors were spooked by unexpected problems in the German business, but in today’s Q1 trading update (for the 13 weeks to June 29th) it says that Germany has turned positive in LFL trading this month, on the back of the warmer weather, and that the core UK business did better than expected in Q1, with decent 3.9% LFL sales growth. Simon Arora, the CEO, says that “The group has made a solid start and we are on track with our plans for the year as a whole” and that should please the market ahead of the 8.30am analysts call.
Waitrose Watch: As the latest monthly Kantar/Nielsen grocery market share figures (for the 4/12 weeks to July 13th/14th) revealed yesterday, supermarkets have had a difficult time competing against the impact of the heatwave and the World Cup a year ago. And yesterday morning’s JLP weekly overview, for w/e July 20th, revealed that Waitrose saw another small dip in gross ex-petrol sales, of 0.7%, to continue the worryingly weak trend through Q2…A year ago LFL sales were c2.8% up last week, on the back of the continuing heatwave. That left the last 25 weeks down by 0.5% cumulatively, a shift down from the outcome in Q1, which saw gross sales up by 0.9%. Waitrose do not reveal weekly LFL sales information, but another 7 store closures on the way this autumn, on top of the 5 in June, we suspect that reduced space is starting to impact the top-line figures, so it will be interesting to hear
John Lewis Trading Watch: The comps were not that soft for John Lewis last week (only c1% down LFL a year ago, despite the heatwave, as the World Cup distractions faded) and gross sales were only up by 1.3%, in the last week of the summer Clearance Sale. Interestingly, given the debate about weaker Online sales growth, John Lewis reported that “We had a particularly strong Saturday in our shops”. In terms of sales mix, Fashion/Beauty sales were up by 3.8% in w/e July 20th and Home sales were up by 0.9% gross, but Electricals were down by 1.0% gross. There are no new stores in the figures, but overall John Lewis LFL sales, however, are still down over the last 25 weeks (down 1.3% gross, a slight improvement on the -3.1% gross seen in Q1).
News Flow This Week: Tomorrow brings the bringing the Inchcape interims, the Howden interims and the monthly CBI Distributive Trades survey. On Friday we then get the Bonmarche finals and the B&M AGM (and possibly the delayed Sports Direct finals).