Langton Capital – 2019-10-03 – PREMIUM – Questions & answers, NLW, Deliveroo, TCG etc.:
Questions & answers, NLW, Deliveroo, TCG etc.:
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A DAY IN THE LIFE:
I know they say that empty vessels clatter loudest but is it also true that there’s an inverse relationship between the success of a company and the volume of its press releases, its RNSs and its ‘media moments’.
Because, when you see the amount of noise that (occasionally grubby) oil E&P, mining minnows or even small consumer-facing companies make about themselves (compared, say, to Unilever), you must wonder whether they’ll be lining up next to tell the world that they’ve switched the office lights on this morning, they’ve opened a letter or that they’ve made a pot of tea.
But perhaps that’s a little harsh. They’re not widely-followed and, if they don’t tell anyone what they’re doing, then there won’t be many ripples on the pond. On to the news:
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QUESTIONS, QUESTIONS: Sometimes it pays to looks at our industry, any industry, with a fresh eye. This can mean asking some questions that look, at first glance, a little naïve. We ran a number of these last year, but they remain topical. Here are some of them. 3 Oct 2019:
Are LfLs driven by price increases rather than volumes sustainable?
o Langton has paid more than £6 per pint recently. That’s an irritant and, we would suggest, if London pub companies are driving 3% to 5% LfL growth then a chunk of this is coming from pricing. This is arguably not sustainable. Margin expansion, as well as annoying customers, is finite. Drop us a line if you would like us to add further comment. And name names.
Do restaurant closures help the survivors?
o Are restaurant closures good for remaining restaurants, good for the industry as a whole? Well yes and no. Yes, because they remove capacity – and every little helps – but less good because they are often accompanied by a pre-pack of some description, which will reduce rents and other costs for the ‘failed’ group’s remaining units. This ‘reward for failure’ is an unintended consequence of the restructuring process which, in part, is intended to look after jobs.
Footfall on retail parks still heading down?
o There have been a number of high-profile closures and the internet isn’t going away. The closure of anchor tenants such as Toys R Us is bad news for restaurants that operate on retail parks. It certainly isn’t good news and we can’t see many sizable retail rollouts to fill the gaps. Any move that reduces footfall will be negative as far as operators such as Restaurant Group are concerned. RTN reports full year numbers next Wednesday.
Weather comes & goes. Snow, rain and shine…
o Weather comes and goes. We said re the Beast from the East that it’s the reverse of playing your joker in that, if you’re going to have snow, it’s better to have it in February than April or, heavens forbid, the second half of December. Money lost to the on-trade in this situation is pretty much permanently lost. More positively, sun can be good for business. But, at the end of the day, bottle-fatigue or wallet-fatigue will set in and consumers have only so much to spend.
High Street: Is it healthy, sick or dying?
o We think you can rule out ‘healthy’, so, is it sick or dying? As ‘dying’ is an absolute, we’ll plump for ‘sick’. But it needs to improve if sickness isn’t to proceed to death. High (and upward only) rents (along with wages etc.) mean that costs are sticky on the way down. In fact, let’s keep it simple, they don’t go down. But, with a CVA, they suddenly do. So, are CVAs more or less likely to proliferate? That’s an easy one.
From the operators’ point of view, when is it your problem, and when is it mine?
o For example, the sugar tax was passed on by producers but, ultimately, it takes money out of the consumers’ pockets and will impact demand. And there are unintended (or perhaps only vaguely perceived) consequences in that taxes can change behaviour and this is not always predictable (except with the benefit of hindsight).
Why are fast food brands longer lived than casual diners?
o Why are the fast food brands that were around when Langton was in short pants still with us, while casual diners seem to be short-dated? McDonald’s, Burger King, KFC etc. are 50, 60, 70yrs old but casual dining brands tend to sprout, grow and then wilt. Are they less mature as a genre? Maybe but remaining relevant seems to be tough. Where are Golden Egg, Pizzaland etc.? Resuscitating brands may be a struggle (or a mug’s game). Conclusion: Maybe fast food is ‘simpler’ with less to go wrong, less to date. Punters aren’t making a fashion statement when they grab a burger etc. For the casual diners, this is not the case.
Why do operators take such a long time to dump bad ideas:
o Why do people rarely see what they’re doing (or who they are) as a part of the problem, not a part of the solution? Brands continue to expand after they have passed their sell-by date and operators point towards saturation without seeing that their own new openings are adding to overcapacity. In more general terms, doggedness can also be bull-headedness, being focused means being blinkered. Conclusion: If you can’t see the problem in the room then you (or the way that you are doing business) could actually be the problem in the room.
Has too much money been spent on adding casual dining capacity?
o When we first posed this question, perhaps 3-4yrs ago, the answer was ‘possibly’. The answer now, with assets being ‘abandoned’ in CVA’d units, it’s got to be a ‘yes’. : We asked is there simply too much choice in F&B? Whoever said ‘build it and they will come’ has a lot to answer for. For every speculative builder who made money, there may be 100 who lost out but, optimism lives eternal and, with the cost of money so low, it is not surprising that there were 8, 10 or 12 food outlets being built on every new retail park. Conclusion: There is no guarantee that the ‘market’ will get it right. There may be no ‘braking’ mechanism. The only way to slow down might be to crash.
Where does value accrue? Is it in the brand or is it in the physical contact with the customer?
o If you allow Deliveroo (or Uber or Amazon Restaurants) direct access to your customers, are you letting the fox into the henhouse? And if the answer isn’t ‘yes’ then what makes this scenario different to pretty much every other one that we can bring to mind. Put another way, is a 50-strong me-too restaurant chain likely to set up a massive delivery operation? Or is a massive delivery operation likely to organise its own dark kitchens, ultimately brand itself and leave you out in the cold? Langton’s money is on the latter. Delivery-only restaurants will be less-expensively located. And the fact that they don’t brand presently is no guarantee that they never will.
GENERAL NEWS – PUBS & RESTAURANTS:
o Star Pubs & Bars has launched a buying club, which could help its average pub tenant save up to £7,000 each year in reduced costs. Star says it will not receive any financial benefit from the scheme itself. The group is moving here to increase tenants’ margins and the introduction of the scheme is in line with moves made by Punch, Enterprise, Marston’s and other operators.
o Deliveroo has reported results to end-December 2018 saying that sales rose by 72% to £476m with growth driven by both an expansion in the UK and a movement into new markets overseas. Deliveroo entered the Taiwanese and Kuwaiti markets last year but withdrew from the Germany market earlier this year.
o Deliveroo’s losses have widened. The group lost £232m in calendar 2018, up from £199m in the year earlier.
o Deliveroo founder & CEO Will Shu has said the business has ‘continued to invest heavily in expansion, technology and new products.’
o Deliveroo secured US$575m in additional funding earlier this year in a round that saw Amazon take a material stake. Competition authorities have told both companies not to integrate their systems while it considers whether competition could be eroded should a merger take place.
o Deliveroo says ‘we’re focused on our mission of becoming the definitive food company, and we’ve continued to invest heavily in expansion, technology, and new products to meet this ambition. We are leading the field in innovation in food delivery, helping our restaurant partners to boost their sales and providing more well-paid work for riders.’
o National Living Wage. Consequences of an increase. As mentioned yesterday, the proposed £10.50 by 2024 is not quite as radical as it sounds – but there are some other considerations:
o On the positive side, how much of the increase in wage packets across the economy will end up in the tills of the country’s pubs and restaurants?
o On a negative note, with the Tory’s promise lead to a leapfrogging in commitments? Will labour offer £11.00 in 2023, for example.
o Does it bake in inflation? At the moment, pricing power is weak but, if that changes, operators will push through price increases in the blink of an eye.
o Does this raise the bar (barrier to entry) for operators? Yes, it does. As it’s not an option to leave a pub unstaffed with nobody in the kitchen and an honesty box on the bar, costs will rise. The average weekly revenue at which it will be worth managing a pub will increase.
o This is part of an ongoing trend. Around the millennium, a bottle of beer in the on-trade was perhaps twice as expensive as it was in the supermarket next door. It’s now 4-5x as much. This has to be finite.
o A study for NHS Scotland has found that alcohol sales have jumped by up to 40% in English supermarkets close to the Scottish border following the introduction of minimum pricing per unit in Scotland.
o Beveragedaily.com has reported that demand for low and no-alcohol products is increasing, albeit from a low base. Low and no takes around 1.3% of the UK beverage market and only around 0.5% in the US. The journal says ‘the UK has done a good job of raising awareness of the category with new products and innovations’ but ‘the US will need to build up the sector and educate consumers if it’s to see the same level of success.’
o Beveragedaily.com says ‘while it’s millennials that are supporting this trend, other demographic segments are also taking part in both short and long-term abstinence from drinking, largely the Dry January and other health and wellness social experiments.’
o A tweet by Burger King was held to be ‘irresponsible’ by the Advertising Standards Authority as it seemed to encourage customers to throw milkshakes at Brexit party leader Nigel Farage. Burger King said that the tweet was intended to be tongue in cheek.
o Brewdog is to launch a vegan bar in Dalston, east London. All of the pub’s food and drink will be plant-based. The venue will open on 14 October.
o AB InBev’s Asia-Pacific unit, which underwent an IPO in Hong Kong last month, has sold an additional $750m in shares after raising an initial $5bn. Budweiser Brewing Company APAC reports that its bankers had fully exercised a so-called over-allotment option, often referred to as a greenshoe, to sell an additional 217.8m shares, or 15 per cent of the initial float.
o Ed Sheeran has opened a pub in West London with his manager, Stuart Camp. Bertie Blossoms, on Portobello Road, Notting Hill, is open from Tuesday to Sunday.
o Pernod Ricard is set to merge its two French businesses, Ricard and Pernod, next year. The strategic move could cut up to 280 jobs as group sales in France have fallen by €60 million in the past two years.
o Technomic and the US National Restaurant Association have reported that consumers say c60% of their dining occasions are takeout from restaurants as they shift from dining inside the units to eating in the office or at home. The report says ‘it‘s quite clear that the proportion of occasions, traffic, orders that are off-premises-driven continues to grow. Particularly among the younger age cohorts. Their perception is there’s nothing more convenient than having the restaurant come to them.’
o The World Health Organisation (WHO) reports alcohol consumption in Russia has fallen by 43% since 2003. Between 2003 and 2018, all-cause mortality dropped by 39% in men and by 36% in women, according to the report. The WHO credits Russian president Vladimir Putin for initiatives such as ‘restrictions on alcohol sales & promotion of healthy lifestyles, as well as excises on wine, beer and spirits.’
o In the US, Quality Restaurant Group acquires 27 Arby’s restaurants from Bentley-Miller Group for an undisclosed sum. Quality Restaurant Group formed last year after buying more than 200 Pizza Hut locations.
HOLIDAYS & LEISURE TRAVEL:
o Clive Jacobs, who owns Travel Weekly parent Jacobs Media Group, has said regarding the Thomas Cook collapse ‘it’s a travesty to see a company with a legacy of more than 100 years vanish through bad management and bad decisions. It’s tragic for the employees, for all the businesses and for suppliers, and it need not have happened.’ Jacobs and former Thomas Cook executive Terry Fisher approached the company in 2011 regarding a takeover.
o Hong Kong inbound visitor numbers are down 4.8% in the year to July on the back of street protests and disturbances. The decline could have been much worse. Visitor numbers from mainland China are down by 5.5%.
o The CAA claims it has ‘no intention’ of raising the £2.50 Atol Protection Contribution (APC) on holiday bookings following Thomas Cook’s collapse. CAA chair Dame Deidre Hutton has said the repatriation and refund of Cook customers will ‘clean out the trust’.
o The union representing Thomas Cook staff in the UK, The Transport Salaried Staffs’ Association, has told the government that former Thomas Cook employees must be paid ‘in full and without delay’.
o TripAdvisor is ending sales of attractions featuring captive cetaceans – whales, dolphins and porpoises – but the new policy will not apply to seaside sanctuaries that provide care to cetaceans already in captivity.
o Uber is launching an app this week in the US that will match up temporary workers with businesses looking to fill short term gaps in their labour rosters. The new business, to be called Uber Works, has been kept under wraps and will be launched in Chicago. CEO Dara Khosrowshahi has previously said that he wanted the company’s app to become ‘a one-click gateway to everything that Uber can offer.’
o Flutter, which owns Paddy Power, and PokerStars have agreed to combine their businesses in a deal to create a UK company worth about £10bn and with annual revenues c£3.8bn.
o Flutter is to buy Canada’s Stars Group in an all-share deal. The combine will be the largest online betting operator in the world by revenue. Flutter shareholders will own 55% of the new company.
o Flutter CEO Peter Jackson says the deal ‘will give us a much bigger platform to operate from. When you are very small in a market you don’t have anything that differentiates you and you become a bit of a commodity player.’ Stars’ CEO Rafi Ashkenazi will become chief operating officer.
o Stars is reported to be six times larger than Flutter in markets outside Europe, Australia and the US.
FINANCE & ECONOMICS:
• The IHS Markit UK Construction PMI for September shoes that ‘the UK construction sector remained firmly stuck in a downturn at the end of the third quarter.’ The measure came in at 43.3 in September vs 45.0 in August ‘thereby signalling a more severe downturn in building activity across the UK.’
• Markit says ‘the UK construction sector remained mired in a downturn at the end of the third quarter, according to the latest PMI data. Activity is being pulled down at its second-fastest clip for over a decade as firms are buffeted by client hesitancy, heightened Brexit uncertainty and a weak outlook for the UK economy.’
• The much larger Services PMI is announced at 9.30am today. Markit says ‘overall, the performance of the UK economy once again hinges on the service sector showing a marked degree of resilience to offset the weakness seen in construction and manufacturing.’
• The Bank of England has reported that lending to British consumers slowed to its weakest rate in more than five years in August.
• The Bank of England also says that the rate of growth of lending to small businesses also slowed in August. Lending is still up 0.7% y-o-y.
• The US is to impose tariffs on $7.5bn of imports from the EU in an ongoing battle over state subsidies to Airbus.
• The UK FTSE 100 fell over 3% yesterday, the largest drop since January 2016. The falls came on the back of trade worries, a poor Construction PMI and the belief that a no-deal Brexit was becoming more likely. European bourses also registered material falls.
• Sterling mixed at $1.2304 and €1.1226. Oil down at $57.72. UK 10yr gilt yield down 2bps at 0.49%. World markets sharply lower yesterday with Far East down in Thursday trade.
• Brexit & politics:
o HMG has proposed that Northern Ireland remain in the single market for goods but leave the customs union. PM Boris Johnson has said that the only alternative to such a proposal will be no deal.
o The above comment notwithstanding the fact that the Benn Act requires Mr Johnson to ask for a Brexit extension if he is unable to agree a deal with the EU and get it through the Houses of Parliament.
o The Northern Irish Assembly (when reconvened) would have the chance to vote on the proposals every four years. This does not satisfy the EU demand that there should be no time limitation on proposals, be they the backstop or otherwise.
o FT says Mr Johnson’s plans are a fusion of cynical opportunism and whimsical nostalgia.
o The EU has said it will examine the proposals ‘objectively’.
o The FT says that ‘Berlin and Paris consider the UK’s proposals, in their present form, to be poorly designed & impractical’.
START THE DAY WITH A SONG:
• Training courses intruding. Back soon.
RETAIL WITH NICK BUBB:
• Mr Bubb is taking a well-earned, short break. Back on Monday.