Langton Capital – 2019-11-06 – PREMIUM – Alco-water, hidden costs, discounts, private brewers etc.:
Alco-water, hidden costs, discounts, private brewers etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
There have been various behavioural studies done into people’s reactions to both pleasant and unpleasant shocks.
And the conclusion seems to be that highs don’t last but, thankfully, nor do extreme lows such that unfortunate individuals who have had a physical, financial or emotional upset, seem to largely get over it even if they never get back (physically, financially or emotionally) to where they used to be.
This suggests that the phrase ‘time is a great healer’ is based on something tangible and we get used to things but, though it’s an irritant rather than a life-threatening car crash or whatever, I’ve never found it easy to adjust to commuting because, no matter how much you tell yourself you’ll read War and Peace or write your memoires, you still find yourself resenting the utter waste of time and wishing that the bloke next to you would take his rucksack off.
Or at least Langton does. On to the news:
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THE HIDDEN COSTS OF DOING BUSINESS: WASTAGE, SHRINKAGE & BREAKAGE. Models can only be relied upon for one thing, and that is to be wrong. A definitive margin thrown out by a spreadsheet is a hostage to fortune. 6 Nov 2019:
Models, spurious accuracy:
• It’s better to model than not to model.
• But, if food costs are £3.00, the retail price of a meal is £12 and VAT is 20%, it is still a little simplistic to model the gross margin as 70%
• Because what if one meal in twenty is sent back by customers? What if the waiter drops the odd plate full of food, the chef gets annoyed with another and throws it in the bin and persons unknown pilfer a bit of red meat every now and again?
• And what about sell-by dates etc.? Plenty of food gets thrown away without ever getting near a plate meaning that budgets, though useful, have to be treated somewhat warily.
The hidden costs of doing business;
• In addition to equipment costs, there are also wastage, shrinkage and breakage costs incurred from operating a restaurant.
• These are costs that will not necessarily be represented on a spreadsheet concerned only about profit margin of the product.
• But if ignored, these costs could seriously impact overall profitability of operations.
• There are two types of food wastage in a restaurant: pre-consumer waste (kitchen scraps, spoilage etc) and post-consumer waste (leftovers of dishes).
• Restaurants should be more concerned about the former rather than the latter as that is where costs can be cut.
• Whilst not perhaps socially responsible, if customers want to order and pay for a meal, only to throw it away, then they are perfectly entitled to do so
• The Guardian reports In the UK alone almost 900,000 perfectly edible, freshly prepared meals end up in the bin every day because they haven’t been sold in time by restaurants and cafes.
• You can’t insure against this.
• Investing in robust systems and technological solutions to prevent food waste would boost a restaurant’s profit.
• In fact, the World Resources Institute reported restaurants can make a profit of £7 for every £1 they invest in cutting food waste.
• Shrinkage is theft committed by employees, since managers will want to see the best in their employees it means these costs may not be fully anticipated.
• However, these costs are real and do happen, as such it will affect the profitability of your venue. There are not that many skinny waiters.
• Although not many industry reports on this matter exist, one from 2004 claimed that theft represented on average 4% of a restaurant’s total food costs.
• If gross margins are around 70%, that’s 13% of sales.
• A slightly tangential statistic from the United States Chamber of Commerce says that, in the US, 75% of employees have admitted stealing from their employers at least once, and 38% admit to stealing from employers at least twice.
• Another somewhat hidden cost of operating a restaurant is the cost of breakages, i.e. when a plate or glass is broken.
• Although this may be below the gross profit line, the cost of replacing equipment can be considerable, for this reason it might be prudent to invest in toughened materials.
Hidden costs & profitability
• The above are yet more hidden costs that might not be anticipated in a spreadsheet that only considers basic profit margins.
• As such, restaurants may run on higher operating costs than anticipated, negatively affecting profitability.
• More consideration and attention should be given to these elements when forecasting a restaurant’s performance.
• ‘Hedgehog’ graphs (where the good news is constantly pushed out to the right) are common, partly because of the hidden costs of doing business
GENERAL NEWS – PUBS & RESTAURANTS:
• Plenty of discounts still to be had. Prezzo 40% off mains, Bella Italia second main for £1, Giraffe 30% off mains, Pizza Express 25% off mains.
• IHS Markit services survey says October was ‘one of the worst service sector performances since 2011 as job creation became job cutting for the fifth time this year’.
• Spiked seltzer is taking sales from beer in the US. The drink is made from sparkling water, some cheap alcohol usually distilled from sugar and some fruit flavouring, in a brightly coloured can. Analysts at UBS expect spiked seltzer as a category to grow rapidly from $550m this year to reach $2.1bn in three years.
• NPD research shows almost 20% of American adults have tried CBD products (where they are legal), of which, 40% tried them for health reasons.
• Spanish secretary of state for tourism Isabel Oliver is confident of filling capacity lost in the Thomas Cook collapse for next year’s summer period. Oliver said €15m had been made available to tourism businesses in the Canary Islands, with €8m provided in the Balearics.
• UK visitors to Orlando were up 1.9% in 2018 to 1,039,000. UK visitor numbers to Orlando are currently up 2-3% between January and August this year.
• Choice Hotels reports Q3 net income of $76.2m, with EBITDA up 7% to $111.0m. During the quarter, the company continued to strengthen its presence in the higher growth and more revenue intense upscale, midscale and extended stay chain scale segments.
• Awaiting developments. Pizza Express refinancing (or not), Patisserie Valerie fraud trial (or not) etc.
• McDelivery has continued its expansion across the UK with 950 stores now offering the service, exclusively with UberEats.
• The White Brasserie has opened its 20th site in Cheltenham. The site has undergone extensive refurbishment and will have over 100 covers.
• Ei Publican Partnerships has jointly invested £180k into the The Chequers Inn, Fladbury, alongside the multi-site operator of of Sheldon Inns, Martin Cartwright.
• Household debt has increased by a third to record levels in the past decade, research from TUC has indicated. The average non-mortgage debt of a working family is £14,200.
• Cameron’s Brewery has reported results for the year to 5 May to Companies’ House saying that ‘the company has significantly invested (c£5.8m) across all of its divisions during the year resulting in a combined turnover of £84.1m, an increase of £10.1m (c14%) on the prior year’.
• Cameron’s reports operating profit down from £2.1m to £1.6m with PBT down from £1.2m to £0.4m. The company paid out £500k in dividends and its retained earnings fell from £10.8m to £10.5m.
• The Ossett Brewery has reported full year numbers to end-March to Companies’ House saying that ‘the directors are pleased with the growth in turnover during the year. Total group sales prior to consolidation adjustments…was £17.7m for the year.’ Ossett says ‘the marketplace continues to be very competitive but continuing supplier agreements have maintained gross profit margins.’
• Ossett reports ‘the group will continue to grow the freehold estate…and has already purchased one new site in May 2019.’
• Ossett Brewery reports turnover (net of intercompany sales) of £16.2m (2018: £14.6m) with PBT down from £1.4m to £338k. Although the group made a profit, retained earnings fell as the company paid a dividend. Retained earnings were £1.02m (2018: £1.05m) and shareholders’ funds were £3.7m.
• Walgreens, the US owner of Boots in the UK, is reported to be considering going private in what would be a $55bn deal.
• Accountants at least keeping their tills ringing. PwC has been appointed administrator to Mothercare.
• Transport hubs still working, high street tougher? Even in the US. US sandwich retailer Potbelly is evolving its business model. This year, it will exit more stores than it opens. CEO Adam Johnson told investors ‘the exceptions [to the closure schedule] would be where we need sites to further refine our Shop of the Future concept or we see opportunistic and highly profitable locations, like airports.’
HOLIDAYS & LEISURE TRAVEL:
• The head travel at Euromonitor, Caroline Bremner has warned that the UK could lose ten million outbound departures if the country leaves the EU without a trade deal.
• Jamaica has seen a 5% increase in UK visitors from January to September, to 168,269.
• Harry Theoharis, the new tourism minister for Greece, said investment in Greece and support given to hoteliers meant the country was geared up to withstand the fall-out of Cook’s failure in September. Greece is positioning Athens and Thessaloniki as winter city break destinations to entice UK holidaymakers.
• Sky News reports Kate Swann will become chairman of Secret Escapes, with speculation that the online travel group might IPO.
• OakNorth Bank has granted a £9m property development finance facility to Nine Group, with the money being used to convert the old Menzies Chequers Hotel in Horley, Surrey, into a 131-bed four-star Marriott.
• Jόsef Váradi, CEO of Wizz Air, claims Brexit is an opportunity for the market as the carrier strengthens its position in the UK. Váradi said ‘The aviation industry is affected by so many things. We will see more regulatory challenges and more political influences going forward’ but that ‘people are going to continue to fly.’
• Visit Florida will spend $1m in the English, Irish and Scottish markets by the end of June 2020. Dana Young, president and CEO of the organisation said ‘The UK might think they’ve seen Florida, but if you’ve only seen Miami and Orlando then there is so much more depth and diversity still to discover in the state’.
• South Western Railway trains could suffer up to 27dys of strike action next month.
• US health & fitness start-up Peloton is reported to have reduced its Q1 losses to $49.8m. The firm continues to target international growth.
FINANCE & ECONOMICS:
• The IHS Markit UK Services PMI for October came in at 50.0 (up from 49.5 in September) implying that the UK’s services industry is currently stagnant. Markit says some respondents hoped that Brexit would be resolved by month end ‘reducing uncertainty, but overall sentiment remained historically weak.’
• Markit says ‘service providers reported lower intakes of new business for the second month running in October.’
• The UK All Sector Output Index (a weighted average of the three individual indices) came in at 49.5 in October, up from 48.8 in September. It ‘remained below 50.0 for the third month running in October, the longest negative sequence for ten-and-a-half years and signalling a further contraction in total private sector output.’
• Markit says ‘the October reading is historically consistent with GDP declining at a quarterly rate of 0.1%, similar to the pace of contraction in GDP signalled by the surveys in the third quarter.’
• Sterling down at $1.2876 but up vs Euro at €1.1629. Oil up at $62.68. UK 10yr gilt yield up 6bps at 0.78%. World markets mostly higher.
• Brexit & politics:
o National Audit Office calls into question some government spending promises saying that the administrations of David Cameron, Theresa May and Boris Johnson have failed to deliver any of the starter homes promised four years ago under a £2.3bn funding commitment. The money allegedly committed was to support the building of the first 60,000 of 200,000 properties under the starter homes project. As mentioned, none have been built. The money, hopefully, is still within the system somewhere.
o Sajid Javid ticked off for attempting to use government money to trash Labour. Johnson says Corbyn is ‘like Stalin.’ Rees Mogg implies Grenfell victims didn’t behave sensibly. Labour points to evidence that Tories want to undermine NHS and euthanise the poor. All either 1) good, knockabout stuff or 2) rather depressing.
o Data from the IFS suggests that a no-deal Brexit would be worse for the UK economy than a Corbyn government. It goes on to say that Boris Johnson’s government is ‘adrift without any effective fiscal anchor’.
o Boris Johnson has said that he will be able to negotiate a free trade agreement with the EU by end-December next year. The Canadian partial free trade deal took 7yrs plus. The UK is due to enter a standstill agreement until end-December next year (2020).
START THE DAY WITH A SONG:
Yesterday’s song was Running Up That Hill by Kate Bush. Today, who sang:
“Gravity keeps my head down,
Or is it maybe shame
At being so young and being so vain”
RETAIL WITH NICK BUBB:
Marks & Spencer: The much-awaited Marks & Spencer interims are, breathlessly, headlined “Far Reaching Change – Delivered At Pace” and although adjusted PBT was 17% down at c£177m (which was not quite as bad as expected) the bulls will point to the news of an “improved sales performance in October in Clothing & Home, following a difficult first half”. The Q2 performance of Clothing & Home was poor, however, with LFL sales down by 5.7% and Online sales only flat, but Food is going well, with Q2 sales up by 1.4% LFL. It doesn’t look as if full-year profit guidance is changing, for what it’s worth, with more cost-cutting to offset more gross margin pressure in Clothing & Home, so much will depend on how management come across at the 9am analysts meeting.
John Lewis Trading Watch: The autumnal weather should again have helped John Lewis last week, but, as the recent discounting frenzy in Home and Fashion unwound, overall gross sales in w/e Nov 2nd fell back by as much as 10.4%, albeit the official excuse was that “we annualised against competitor promotions”…In terms of sales mix, Home sales were down by 14.1% gross and Fashion/Beauty sales were down by 16.6%, whilst Electricals were down by 2.5% gross. The new Cheltenham store opened in October 2018 is now LFL, so there is no new space in the current figures, but overall John Lewis LFL sales, however, are down by between 1.5% and 2.0% over the last 40 weeks, despite the jump in the first three weeks in October: gross sales are now running down by 1.2% cumulatively (the H1 LFL sales fall was 2.3%, with gross sales 1.8% down).
News Flow This Week: The Waitrose Annual “Food & Drink” Report is being officially launched tonight at the Waitrose Cookery Skool in King’s Cross. Tomorrow brings the Sainsbury interims, the Halfords interims, the Inchcape Q3 update, the Superdry pre-close, the Howden update and The Works’ pre-close update.