Langton Capital – 2019-10-11 – PREMIUM – Food costs, obesity, DART Group, TCG shops etc.:
Food costs, obesity, DART Group, TCG shops etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Here’s a test for you; do you know what make of car, laptop, cooker, fridge, kettle or microwave you have?
Because I know the first one and then I struggle.
But I wouldn’t claim to be immune to branding because I know what watch I’ve got (provided I’m wearing the Fitbit and not the other one, because I don’t know what that is) and I generally know what kind of shoes I’m wearing (Clark’s, occasionally Church’s and frequently ASDA’s finest flipflops) but, frankly, I’m more influenced by branding when it comes to things that I consume rather than durable goods.
But even here, the track record is patchy. We don’t buy branded bread, for example, but I for one would find supermarket own-label chocolates, beers and soft drinks a little hard to buy.
Anyway, there’s probably a book could be written there but, with a rather wet and cool weekend to look forward to, it’s time to move on to the news:
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CORPORATE FAILURE: SORTING THE SYMPTOMS FROM DISEASE. NEVER EASY, OFTEN IMPOSSIBLE: It’s never this simple but here’s a look at what are the causes, symptoms and results of failure. 11 Oct 2019:
o There are lots of December 2018 year end results still being lodged with Companies House (now 10dys late) and we’ll cover more later.
o However, today, a quick ramble on the causes and effects of corporate collapses, looking at the causes from the symptoms and the end result.
Not as easy as it sounds:
• Ingesting poison (cause) may lead to heart failure (symptom) and death (result) but, in the corporate world (and to be fair in the medical world too) things are rarely that simple.
• Hence, in the F&B market, slack demand, oversupply, corporate entitlement, greed, laziness, fraud, arrogance, discounting and me-tooism are all associated with corporate failure – but are these simply associated with failure (i.e. there is a correlation) or did they cause it (there is causality)?
• There are no definitive answers but we would suggest that many of the factors above are associated with each other, you rarely get one on its own leading to a collapse, and there is a degree of sequencing – i.e. some of the above come before the others.
A simple model:
• If a theory fits the facts, then it may be (but isn’t necessarily) correct.
• Hence if the political response to the credit crunch was QE and cheap money, it should have been no surprise that this depressed yields.
• Low yields on money typically lead to a flight from cash and into ‘earning assets’ (i.e. a frantic search for yield).
• Enter property speculation.
• Available capital arguably let to more building activity, which made restaurants 9i.e. the breezeblock shells that will become restaurants) more easily available and, as entrepreneurs could also access cash more readily, more restaurants were opened.
• But the market does not have a braking mechanism. It has a crashing mechanism.
• In common with democracy (which gave us Boaty McBoatface, the Birdy Song and latterly Brexit), it works well most of the time but is capable of suboptimal decision making at times.
• Introduce slack demand (say Brexit uncertainty, trade issues etc.) and there isn’t enough business to go around.
• You would expect to see – and we have seen – discounting.
• But this is a beggar-my-neighbour strategy. CVAs followed.
• Some capacity then begins to leave the market but, as Restaurant Group recently said, over the last five years, perhaps 25% new capacity has gone on and now only around 1% has come out.
• There is no reason to think this is the end of the story. It’s just brought us up to date.
• In the same way that there is no reason why a line on a graph should stop just because that’s where we’ve drawn the axis, just because the market is here today, doesn’t preclude it from being somewhere else tomorrow.
• More CVAs – and more specifically more net closures – may be necessary to get the market back into alignment with demand.
• If (a long shot at the moment) interest rates begin to go up, then the financial bar for returns will be raised and the process could go further than might be strictly necessary.
• A wild card re the above is fraud, incompetence and entitlement etc. which we have seen at Patisserie Valerie and elsewhere.
• The discovery thereof (though not necessarily the commission) is likely to be negatively correlated to performance because, as Mr Buffett says, when the sea goes out, you can see who’s swimming naked.
• Making a sensible comment about the past is much easier than is predicting the future.
• The next cycle – and this one is far from over yet – could see new operators constructing new ways to achieve their own destruction but, on the other hand, some things are unlikely to change.
• Discounting, CVAs, closures, fraud and incompetence are more likely to feature in a tough market than they are in an upturn.
GENERAL NEWS – PUBS & RESTAURANTS:
• The latest CGA Prestige pricing study reports that fish prices have spiked. It puts this down to a change to Icelandic fishing quotas.
• More generally, Prestige says ‘recent announcements of price increases from major supermarkets are now starting to show through in the Index, with Consumer Price Index (CPI)’s year-on-year inflation now higher than FPI in four out of ten categories.’
• It says soft drink prices are also rising and says that, ‘with the Brexit deadline approaching fast, it is essential that businesses remain vigilant to changes in the supply market and continue to dialogue with suppliers to ensuring risks are managed effectively.’
• CGA says ‘we are seeing major changes in the non-alcoholic drinks market, with CGA research showing that more and more consumers are seeking out premium and healthy options—a trend boosted by the government’s sugar tax. With the terms of Brexit and its impact on the foodservice sector still so unclear we can expect more turbulence in prices over the rest of 2019, and intelligent market analysis and contingency planning are going to be vital.’
• Fleurets gives its take on the UK leisure market in Q3 this year saying ‘the leisure market has been active in the last quarter highlighting a trend of investment in resorts.’
• It says both Park Holiday and Bourne Leisure are expanding with sales and capex rising.
• Fleurets says ‘within the restaurant sector, expansion plans outside of London are delivering on targeted growth, after reporting large increases in sales notably from Franco Manca and Five Guys JV.’
• Fleurets says, however, that ‘the latest insight from GGA and AlexPartners’ Market Growth Monitor states that UK-wide restaurant numbers have decreased over the last 18 months, with many closures coming from independent operators.’ Restaurant Group recently said that, whilst 25% capacity had gone into the market over the last five years or so, only around 1% has recently come out.
• NRN in the US reports that LfL sales are slowing with a decline of 0.4% across US restaurants in Q3 this year. It quotes TDn2K as saying that the data that it process from 31,000 locations representing 170+ brands and $72 billion in annual revenues, points to further sluggish sales.
• TDn2K says of the US that industry faced ‘the underlying relentless erosion of guest counts and the fact that the industry was headed toward tougher previous-year sales comparisons as we went into the second half of 2019.’
• Rather disturbingly, TD2nK says that footfall fell by around 3.5%, the worst result in the last two years.
• The Food & Drink Federation’s Head of UK Diet and Health Policy, Kate Halliwell commented: ‘UK food and drink manufacturers are working hard to implement what has already been asked of them by Government in three chapters of a Childhood Obesity Plan published in just three years. FDF member companies are committing time and resource to deliver the Government’s various reformulation programmes – cutting salt, sugars and calories. In fact, FDF members are selling 57.3 million fewer kilograms of sugars and 1 trillion fewer calories than they were back in 2015’.
• Greene King rejoins the BBPA, with CEO Nick Mackenzie to sit on the board of the trade association. Brigid Simmonds, CEO of the BBPA, said ‘As passionate supporters of the beer and pub trade, I know Greene King will play a key role in helping us campaign for the wellbeing of the sector.’
• Joint guidance from UKHospitality and the Tourism Alliance advises their members on issues including the potential economic impact of leaving the EU without a deal, the impact on the UK’s hospitality and tourism workforce and potential disruption to supply chains including tariffs.
• Fuller, Smith and Turner will sponsor the Bocuse d’Or UK Academy, the organisation set up to represent Team UK in the global cooking competition Bocuse d’Or.
• Lidl’s £70m Eurocentral, Motherwell warehouse is its largest in the UK to date at around 58,000m2. Around 600 existing Lidl employees have been relocated to the centre from Livingston.
• Canadian music mogul Doug Putman, the rescuer of HMV, is today opening the Vault, a 25,000 sq ft vinyl mega-store in Birmingham.
• The Campaign for Real Ale has requested the BBC stops using images of cask ales to illustrate stories of binge drinking. This seems like a fair shout.
• The Campari Group has taken a controlling stake in two spirits companies, Casa Montelobos and Licorera Ancho Reyes for a total consideration of $35.7m. CEO Bob Kunze-Concewitz commented: ‘They give us the opportunity to add a unique and versatile liqueur with a strong international potential, riding the very positive mixology trend, as well as to enter the premium and high performing mezcal category’.
HOLIDAYS & LEISURE TRAVEL:
• DART Group (Jet2) has updated on trading saying ‘we have continued to receive encouraging levels of later season bookings, with overall demand for both our Flight-Only offering and Package Holiday products continuing to strengthen.’
• DART says ‘we have also experienced increased levels of customer demand since Thomas Cook Group Plc entered into compulsory liquidation in late September 2019 and we continue to assess the impact this will have for our business in the coming months.’
• The group adds ‘given the strengthening booking trend, the Board now believes that current market expectations for Group profit before foreign exchange revaluations and taxation for the year ending 31 March 2020 will be exceeded. The Board will provide a further update on publication of its interim results on 21 November 2019.’
• The group adds ‘looking further ahead, our comments from the Annual General Meeting remain – given the cost pressures the Travel industry is facing in general, which will intensify given the weakness in sterling, plus the deepening Brexit uncertainty and the impact this may have on consumer confidence, we remain very cautious in our outlook.’
• This is a realistic update. DART should make and is making hay while the sun shines but the longer term outlook is perhaps clouded.
• Tui has responded to the collapse of Thomas Cook by upping its capacity for summer 2020 by 2m seats. UK and Ireland managing director Andrew Flintham said: ‘We’re committed to offering outstanding holidays, flown from local airports to popular holiday hotspots. We understand the importance of providing great flexibility and choice, and recognise the need for customers to spread the cost of their holidays with zero deposit and direct debit payments’.
• More evidence here that capacity does not disappear from the tour operating market for long. It tends to be fluid. If TUI is able to take over hotel contracts in resort and get access to TCG’s planes (or other ‘lift’) then supply will very quickly rise again to equal (or in a tough market exceed) demand.
• We would expect that super-normal profits will be fleeting.
• The Local Data Company suggests that around 10% of the Thomas Cook stores snapped up by Hays Travel are actually within 100m of an existing Hays shop. It would be very surprising if there were not a material number of closures. The continued growth of the internet has reduced the need for most operators (or agents) to have a High Street presence.
• The Unite Union has announced it will offer advice to former Thomas Cook workers based at East Midlands airport in a special meeting today.
• Thomas Cook chief executive Peter Fankhauser has described the liquidation of the group as ‘devastating’ after ‘working round the clock’ and exploring every option for survival since May.
• The Ritz in Piccadilly, London, could be put up for sale, The Telegraph has reported. The price tag is expected to be in the region of £800m, pricing its at £6.1m a bedroom.
• UKinbound warns proposed post-Brexit immigration reforms could ‘severely destabilise’ the UK tourism industry, with nearly one-third of businesses reported that EU workers made up more than half their workforce.
• The survey, conducted by the tourism trade association and Canterbury Christ Church University, found that 65% said that the proposals would impact negatively on their ability to continue to operate, 71% believe that the proposals would impact negatively on their ability to expand and 75% believe that the proposals would impact negatively on their ability to remain competitive.
• LXI REIT acquires a Premier Inn in Romford, East London, as part of a £23m trio of deals.
• Research from Savills shows investment into UK hotels has reached £3.22b in the first three quarters of the year. This year has seen 97 deals take place according to the firm, a decrease of 49% from the 190 that took place in the same period in 2018.
• Talash Hotels has put 9 hotels on the market with a guide price in excess of £29.5m for the portfolio. The group to be sold comprises a total of 661 bedrooms and includes flagship hotel, the 97-bedroom Stoke Rochford Hall, near Grantham, Lincolnshire.
• Kempinski Hotels signs €500m partnership with 12.18. Group to launch luxury lifestyle concept 7Pine Kempinski.
• STR reports US hotel occupancy down 3.9% to 68.1% in the week to 5 October. ADR was down 3.8% to $129.21, with RevPAR down 7.5% to $88.
FINANCE & ECONOMICS:
• The ONS reports that the UK economy shrank by 0.1% in August. June and July were a little stronger than expected but September was weak. Manufacturing shrank by 0.7%. Economists still believe that the UK will avoid a technical recession.
• The NIESR says the UK economy could have grown by 0.5 per cent in Q3 and should expand by 0.3 per cent in Q4. It says growth for the year as a whole could be around 1.3 per cent, down slightly from 1.4 per cent in 2018 and 1.9 per cent in 2017.
• The NIESR says ‘the underlying pace of growth in the United Kingdom is slow. The strongest source of private sector demand is household consumption, driven by real wage growth, but this is not sustainable without a pick-up in productivity growth, and this seems unlikely in the near term.’
• Sterling stronger on Brexit news at $1.2454 and €1.1302. Oil up at $59.51. UK 10yr gilt yield sharply higher at up 14bps at 0.60%. World markets higher yesterday, Far East up today.
• Politics & Brexit:
o PMs Johnson & Varadkar believe that there could be a pathway to a deal. Brexit secretary Stephen Barclay will see officials in Brussels today.
o There is thought to be a move towards a ‘pared down free trade agreement’.
o Brexit supporter Sir James Dyson has scrapped plans to design (in the UK) and build (in Singapore) an electric car.
o Brexit supporters the Barclay twins are said to be considering selling one of their major UK assets, The Ritz Hotel, for up to £800m.
o Nissan has said that a no-deal Brexit could make its European business model unsustainable.
START THE DAY WITH A SONG:
Let’s start the song up again, today who sang:
“Outside there’s a box car waiting,
Outside the family stew
Out by the fire breathing
Outside we wait ’til face turns blue”
RETAIL WITH NICK BUBB:
• QUIZ: The trading update from the struggling fashion chain QUIZ today for the six months to end Sept is pretty mixed, with Online sales up 7% LFL and Store sales down 11%, but the message is that “Overall, the group’s trading has been broadly in line with the Board’s expectations against the backdrop of a difficult UK retail environment”.
• Today’s Press and News: We have been trying to ignore all the Brexit drama this week, but, for what it’s worth, sterling jumped to $1.25 yesterday and the front page headline of the FT is “Johnson and Varadkar see Brexit deal ‘pathway’ as talks shift mood”. In terms of Retail news, the main focus is on the contrast between the badly received Dunelm update and the well-received N Brown results. Lombard column in the FT concentrates on Dunelm and highlights that the warning of slower trading in September prompted profit taking in the shares. Lombard column also mocks the prediction by Superdry founder Julian Dunkerton that Christmas will be better for the business this year (”Bad news for fathers the world over…yes, you’re getting another overly tight T-shirt for Christmas”). The FT also flags that HMV has said it will return to profit this year and that it aimed to open new stores in
• BDO High Street Sales Tracker: We flagged on Wednesday that the John Lewis sales figures for last week were very good, because of big Sale promotions, but today’s BDO High Street Sales Tracker for medium-sized Non-Food chains (which has been reporting suspiciously good progress in recent weeks and may be over-weighting Online sales) is also pretty good, although in this case the arrival of Chinese tourists for “Golden Week” gets the blame…In w/e Sunday Oct 6th, BDO Fashion sales were up by 10.2% LFL (including Online)…And total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as Fashion) were up by 7.8% last week (up 3.1% in Store sales, but up by 21.5% in Online sales).
• Trade Press (1): The front cover of Drapers magazine today is a photo of Mint Velvet co-founder and CEO Liz Houghton, who talks frankly in the feature interview about the ups and downs of growing it into a £100m womenswear brand. Drapers also look at why mental health problems are so prevalent in the fashion industry and analyse the new merged structure of John Lewis and Waitrose, whilst Drapers also have features on Paris Fashion Week and its new “Guide to Growth” business advice portal.
• Trade Press (2): The front cover of Retail Week magazine today features photos of Dave Lewis, John Rogers and Rob Collins and is headlined “Grocery’s big checkout”, to flag up the main feature on “What the leadership exodus means for Tesco, Sainsbury’s Argos and JLP”. The Editor focuses in his column on the JLP move to integrate Waitrose and John Lewis and thunders that “Mayfield’s JLP gamble brigs massive risk”. RW also have a feature article on “Restyling Karen Millen” (“Can Boohoo repeat Nasty Gal’s success with Karen Millen?”).
• News Flow Next Week: The Carpetright EGM is on Monday. The latest Kantar/Nielsen grocery sales figures are out on Tuesday morning. The ASOS finals are on Wednesday. The WH Smith finals are on Thursday, along with the ONS Retail Sales figures for September and the Watches of Switzerland AGM.