Langton Capital – 2019-11-08 – PREMIUM – Big ticket, affordable treats, food trends, delivery etc.:
Big ticket or affordable treats, food trends, delivery etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Langton has finally, after about 40yrs, got around to reading The Selfish Gene by Richard Dawkins, in which the great man suggests that we, indeed all animals and plants, are little more than survival machines for our genes.
Well that’s not very flattering but, from the point of view of the sequence of DNA that become what we call genes, it makes pretty good sense. Because they build us, give us instincts and then let us get on with it and over 1bn, 2bn or 3bn years, evolution does the rest but, if nature is so perfect, why do rabbits have the white bums that make draw your eye to them and which make them so easy to follow?
I mean why not a bullseye? Or maybe they simply breed so quickly that this weakness is overcome by sheer numbers and the rabbit has little choice but to live fast and die young. Anyway, enough of that. We’d better read his views on religion next, maybe he’s a believer? On to the news:
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NOWHERE TO HIDE? BIG TICKET SPENDING VS AFFORDABLE TREATS: Will either in reality fare well if the consumer gets a wobble on? 8 Nov 2019:
o It’s simplistic but how about: 1. uncertainty => 2. business confidence => 3. hiring decisions => 4. consumer confidence => 5. consumer spending
The model in practise:
o Brexit uncertainty has impacted no1. Political uncertainty ditto.
o Business has hoarded supplies ahead of Brexit crunch dates at least twice and it is now, almost definitively (no2), not confident
o Re no3, there may be some ‘job hoarding’. Before a worker accrues rights, it’s cheaper to hire (and then perhaps fire) than it is to build a new factory, put in new plant etc.
o Uncertainty, in the very short term, can even protect jobs
o But there is some evidence from the latest PMIs and from the ONS’s comments on employment levels, that the jobs market is less buoyant
o Re no4, GfK on 31 October reported that the balance of consumer’s optimistic as opposed to pessimistic in the UK in October slipped from minus 12 to minus 14. It added that polling was taken before the latest Brexit slippage & General Election drama
o This is hitting consumer spending.
How is this manifesting itself?
o When or if a company tells you that it expects to perform positively in a recessionary environment, it’s probably safer to ignore them than it is to give them your money
o But it is true that spending on affordable treats can and does hold up better than that on big ticket items
o This for perhaps at least two reasons. Firstly, there’s the real (but rather reckless) ‘it’s not a big deal’ factor.
o And secondly, spending on a big-ticket capital good (such as an item of furniture or a car) can truly be deferred. You have a car already and you may just be pushing your replacement cycle out to six rather than four years. This isn’t true for a Friday night pizza or visit to the pub.
• Contactless spending has boomed and this, arguably, has had a positive impact on spending for F&B. It has certainly skewed reports coming out of Barclaycard, which on Monday this week said that spending on food and takeaways was up by 6.9% on the same month a year ago and that sales in pubs and clubs was +5.5%.
• This, frankly, isn’t true.
• Interestingly, Barclaycard says that ‘shoppers are also feeling cautious about their finances with many expecting to spend less than normal this Christmas.’
• It is possible that consumers view Christmas (with a capital C) as a big-ticket occasion – but they will likely view each spending-session within it as a small-ticket affordable treat. We will see.
• More realistically (at least in our opinion), the latest Coffer Peach Tracker (14 Oct and regarding September) said that spending in bars & restaurants was up 1.2% with drink-led outlets ‘boosted by warm weather.’
Disaggregating the various factors is difficult (a.k.a. impossible):
o Mothercare, Toys R Us & various fashion, white goods and electrical retailers have arguably been brought down by the Internet rather than by any wider consumer malaise
o Restaurants that have entered CVAs have likewise been brought down by overbuilding (in most cases) or by their own incompetence or dishonesty (Pat Val and some others) or by overborrowing (we shall see) rather than by the consumer’s reluctance to spend
o But Lookers and others have been hurt by the big-ticket go slow as, whilst many motor vehicles are thoroughly researched on the Internet, few are actually bought there
o There isn’t really a conclusion as this is all a continuum.
o That said, it’s worth noting Looker’s comments last Friday that ‘trading over recent weeks, since mid-September, has been much more challenging than expected.’
o The consumer, perhaps, is getting a bit wobbly. Not necessarily pleasant to talk about but it could be nonetheless dangerous to ignore.
GENERAL NEWS – PUBS & RESTAURANTS:
o UKHospitality Foodservice Market Report 2019 has found that meat-free/plant-based food has leapt up the agenda for foodservice firms, having been of little concern two years ago. As many as 70% of business leaders said that sustainability is now ‘critically important’ to their business, with 30% identifying it as important.
o Some 15% of 18-24 year-olds have classed themselves as teetotalers, according to research from CGA BrandTrack.
o Investors in JD Wetherspoon have been urged to reject the firm’s annual report over its failure to clear pro-Brexit spending. The call comes from influential shareholder group Pirc. The BBC reported that: ‘the move would be largely symbolic but would put pressure on the company’s board’.
o In November last year we comment on JDW’s Q1 trading update saying that ‘this is a short statement of 1,400 words with less than a couple of hundred relating to the group’s trading, balance sheet, margins, trading position, outlook etc. The remainder deal with the Chairman’s views on Brexit. If this ratio reflects the split of effort that is being put into the running of the company, then shareholders may have something to think about. It would appear as though Pirc is approaching the same issue from the direction of cost.
o In response to Pirc’s suggestion, Wetherspoon boss Tim Martin told the Guardian by text message ‘Pirc rhymes with berk.” He then said he would not comment further on the matter until after the AGM on 21 November.
o Push back against delivery costs? US restaurant chain Noodles & Co is to add 10% to the price of delivery orders in an attempt to recoup costs. CFO Ken Kuick says ‘we’re pleased with the results we’ve seen so far’ with COE Dave Boennighausen adding ‘there was very little reduction in sales’. Delivery sales have added volume for operators across the US and in the UK but this has come at a cost to margin. The scale of any cannibalisation is also hard to assess. Noodles & Co organises much of its own delivery and costs for other operators will be more substantial.
o NRN says that, in the US, it is ‘undeniable that the restaurant industry is experiencing a significant slowdown in same-store sales growth since the second quarter of the year.’ However, it says that it is too early to call a recession as ‘the industry was able to post its second consecutive month of small positive same-store sales growth at 0.1% in October.’
o This reverses the trend of negative year-over-year sales growth reported for July and August. TDn2K reports ‘what is even more encouraging for the industry is that this small positive growth during the last two months has been achieved despite the industry lapping over two months with relatively strong performance in 2018. Consumers have signalled they are willing and able to spend increasingly more every time they eat out.’
o Delivery is still reported to be fuelling growth in the US. TDn2K says the growth in delivery ‘has been one of the most persistent and important shifts that we are tracking. The norm for the industry is now declining dine-in sales growth offset by very strong to-go and other forms of off-premise sales.’ This will clearly have an impact on margins. Similar trends are to be seen in the UK.
o Research from CGA has found that 23% of customers are following a specific diet that restricts certain food groups. The report has stated that 20% of customers are following meat-free or partially meat-free diets, with 4% claiming to be vegan.
o CGA’s client director, food & retail, Fiona Speakman commented on the research: ‘It’s clear from our research that meat, fish and dairy reduction is becoming more prevalent – consumer consciousness is increasing both from an ethical and health perspective and it’s important that pub and restaurant operators cater effectively for this growing demand. Offering innovative dishes which cater for vegan diets will broaden the appeal of a menu and give vegan, and would-be vegan consumers additional choice and increased engagement’.
o BBPA chief executive, Emma McClarkin, responds to the Conservative commitment to review UK alcohol taxation, saying ‘Beer tax is a particular burden for pubs where 7 out of 10 alcoholic drinks sold are beer, a lower strength British made product. In fact, we pay 11 times more beer duty than in Spain and Germany.’
o The Government has announced proposals to extend the hours of trade for clubs, pubs and bars that are currently licenced until 11:00pm, on the weekend of the 8th/9th of May 2020, in order to celebrate the 75th anniversary of Victory in Europe (VE) Day.
o Heineken is phasing out plastic rings on millions of multipack cans and replacing them with cardboard.
o Chick-fil-A’s Macdonald Aviemore Resort site in Scotland is coming under pressure from a petition with over 1,000 signatures protesting against the site. The chain has been subject to a boycott in the US after chief executive Dan Cathy, son of founder Truett Cathy, expressed controversial views about same-sex marriage.
HOLIDAYS & LEISURE TRAVEL:
o Tui has added 400,000 extra seats to its winter 2020-21 programme, following the collapse of Thomas Cook. The operator has also added more than 1,000 hotels for summer 2021.
o Virgin Atlantic will add 30,000 seats from Manchester for winter 2019, and 43,000 additional seats for the coming summer season.
o The above two stories add weight to our suggestion that capacity post the collapse of Thomas Cook will not remain out of the market for long. Margins may by high at the moment but, next summer, it looks as though there will be no shortages of holidays. Indeed with TUI and Virgin both adding seats for this winter, the capacity may come on more rapidly than we had anticipated.
o If there is any overshoot (in capacity), then holidays may have to be discounted and margins could come under pressure.
o Tui announces the closure of 34 shops over the next 12 months, but will move all affected agents and invest in other premises which will open in new locations. Tui currently has 562 shops across the country.
o Sky News reports the British arm of Cox & Kings, the world’s oldest travel company, is trying to find new investors amid a funding crisis at its parent company. Cox & Kings UK has appointed KPMG to identify buyers for a stake in the business.
o US travel sites have been hit by a sell off in their shares after downbeat Q3 reports. Expedia and TripAdvisor cited weak online search and advertising trends as the reason for missing earnings reports. Expedia shares fell 25% on Wednesday, with TripAdvisor falling 20%.
o US hotel occupancy fell 0.3% to 62.7% for the week ending 2 November, with ADR up 0.6% to $126.04 and RevPAR up 0.3% to $79.05.
o Extended Stay America reports Q3 net income down 29.7% yoy to $53.2m, with RevPAR down 1.3% and total revenues of $332.7m. President and CEO Jonathan Halkyard said it was ‘a quarter which was characterized by slowing growth in the Economy and Mid-priced chain scales.’
o Park Hotels & Resorts reports Q3 comparable RevPAR up 1.9% with President and CEO Thomas J. Baltimore saying ‘the portfolio is still delivering margin growth due in part to relentless efforts from our aggressive asset management initiatives.’
o Disney reported a drop in profits for the final quarter of its financial year due partly to the costs of moving more towards online entertainment. EPS for the quarter was down 28% at 107c. This was, however, ahead of analysts’ expectations. Next week, Disney is to launch Disney+, a streaming service offering programming from its Marvel, Pixar and Star Wars franchises, for $7 a month.
o Gaming group Flutter (was Paddy Power) yesterday raised forecasts for its US sports betting and gaming business after higher-than-expected revenue growth.
o Games Workshop has updated on trading saying ‘following on from the Group’s update in September, trading to 3 November 2019 has continued well. Compared to the same period in the prior year, sales and profits are ahead. Royalties receivable are also significantly ahead of the prior year driven by the timing of guarantee income on signing new licences.’ The company says ‘our preliminary estimates of the results for the six months to 1 December 2019 are sales of not less than £140 million and profit before tax of not less than £55 million.’
o The Escapologist, a Yorkshire-based escape room business, has launched in four new locations, including two outside of the region, after securing a £65k package from HSBC.
o The Guardian reports the BBC and ITV’s ‘BritBox’ has formed programming and distribution deals with BT, Channel 4 and EE. ITV announced the official launch of the BritBox on Thursday, set to cost users £5.99 per month.
FINANCE & ECONOMICS:
o The Bank of England’s MPC has voted by a majority of 7–2 to maintain Bank Rate at 0.75%. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10bn and to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435bn.
o The Bank’s Monetary Policy Report says that PM Boris Johnson’s proposed Brexit deal could leave the economy slightly weaker than it previously forecast. It is now forecasting growth of 1.4% this year and 1.2% next with 1.8% growth in 2021.
o Chinese exports fell for the third month in a row in October (down by 0.9% in US$ terms) while imports fell by 6.4%.
o Sterling down at $1.281 and €1.1592. Oil up at $62.11. UK 10yr gilt yield up 4bps at 0.77%. World markets higher yesterday with Far East mixed in Friday trade.
o Brexit & politics.
o More mud slinging and bloated spending promises from both parties. IFS says the Tories’ promises would increase spending to ‘a level not sustained in the last 40yrs.’ Its promises are not yet costed. Nor are Labour’s though the party has promised to do so when it publishes its manifesto.
o The Liberal Democrats, Greens and Plaid Cymru have announced that they are to pull candidates in some 60 seats in order to give a single, pro-Remain candidate, the best chance of winning. The BBC’s analysis suggests that the cooperation would not have impacted any of the 60 results in the 2017 General Election.
o The Peoplesvote.com is to publish its strategic voting suggestions today.
START THE DAY WITH A SONG:
Yesterday’s song was More Than This by Roxy Music. Today, who sang:
“Have you seen her dressed in blue?
See the sky in front of you
And her face is like a sail
Speck of white so fair and pale”
RETAIL WITH NICK BUBB:
• Games Workshop: Out of the blue, mighty Games Workshop (which is now capitalised at nearly £1,5bn) has issued a brief trading statement, as is its habit. But the news is good and trading is going so well that the company is confident enough to forecast that for the six months to Dec 1st sales will be not less than £140m and PBT will be not less than £55m. It hasn’t bothered to say what it made in the same period a year ago, but we can report that PBT was just £41m on sales of £125m (the profit margins are “to die for”, as they say). So the “Warhammer” hobby is alive and well…
• Weather Watch: It has been wet and autumnal recently, which helped Fashion retailers (and even M&S) last month, but memories about “the weather” are always notoriously short-term and often too London-centric…so we turned to the Retail weather consultants Planalytics for their regular monthly overview of how last month’s weather “should” have affected trading on the High Street across Great Britain…And their overview for the calendar month of October was headlined “A Bit Colder Than Last Year”, flagging that although the month began with a warm spell it finished on a chilly note and for the month as a whole the average temperature of 10.4° C was 0.7° C below last year and 0.8° C below “normal”. It was the wettest October in Britain since 2013 and the wettest since 1987 for Cardiff and the wettest since 2000 for London. Overall, across the country, in terms of sales of key seasonal
• BDO High Street Sales Tracker: We noted on Wednesday that the John Lewis sales figures for last week were poor, as the recent discounting frenzy unwound, but today’s BDO High Street Sales Tracker for medium-sized Non-Food chains (which has been reporting surprisingly good progress in recent months, possibly by over-weighting Online sales) is not too bad…In w/e Sunday Nov 3rd, BDO Fashion sales were down by just 0.2% LFL (against a tough comp of +8.4%). And total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as Fashion) were up by 0.3% last week (down 0.2% in Store sales and up by 4.7% in Online sales).
• Trade Press (1): The front cover of Retail Week magazine today is a photo of the impressive new Adidas store on Oxford Street, to flag up the main feature on “Betting big on bricks and mortar” (which also highlights that Westﬁeld is defying the shopping centre downturn). RW also have features on the news that one in five consumers plan to spend less this festive season, Zalando has unveiled an ambitious sustainability plan and what to expect from the Black Friday promotional extravaganza (“Slack Friday?”). And in his column the Editor looks at the collapse of Mothercare UK, despite last year’s CVA boost, and asks “Will Mothercare’s demise be death knell for CVA’s?”
• Trade Press (2): In Drapers magazine today, the Editor looks in her column at the recent increase in discounting on the High Street and thunders that “A race to the bottom is not the solution”. In terms of News stories, Drapers highlight that Mothercare UK crash lays bare the limits of CVA’s and that Primark is stepping up its Christmas gifting presence. In terms of Features, Drapers look at the modest recovery of the struggling All Saints fashion chain and there is an interview with Leanne Cahill, the MD of the lingerie retailer Bravissimo, whilst Drapers also review the new-look M&S store just opened on the retail park in Fraddon in Cornwall and, ahead of the Purple Tuesday accessible shopping day next week, Drapers ask a disabled shopper to visit fashion retailers in High Wycombe’s Eden shopping centre. The main highlight, however, is the second first of the always excellent
• News Flow Next Week: There is again plenty going on in the Retail sector next week to distract us from all the Election campaigning…kicking off on Monday with the Dignity Q3 update. Tuesday then brings the B&M interims, the Land Secs interims and the latest Kantar/Nielsen grocery sales figures. On Wednesday we get the British Land interims. Then Thursday brings the Burberry interims, the ONS Retail Sales for October, the DFS AGM and the Walmart/Asda Q3 results.