Langton Capital – 2019-12-03 – PREMIUM – Discounts, New River, markets, Cineworld & other:
Discounts, New River, markets, Cineworld & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Markets may be great, but they’re not perfect.
And, as we mentioned yesterday, there may be any number of equilibria in a market with the choice as to which is ‘best’ left to politicians, sociologists and the rest to decide.
I mean take US healthcare.
We may get a much closer look at this model post-Brexit and it’s worrying to see that, despite the fact that the US spends c17% of GDP on healthcare (UK c10%, Germany c11%), its stats re longevity, child mortality and the rest are no better than they are in Europe and, re legally prescribed opiate addiction, bankruptcies and mental health stresses post ‘treatment’ etc., they are much worse.
Indeed the ‘market’ in the US has a major part of some TV ad slots filled by shiny-toothed doctors hosting tablet ads. You know, those with the garbled caveats mumbled at the end and satirised by The Simpsons and others (often including longer words meaning ‘may not work, may leave you addicted and / or may kill you’) and ambulances picking up patients will negotiate on route as to which hospital to deliver the ‘customer’ to (at least if they have insurance).
So, when a market is in equilibrium, even if you like to have a moan about it from time to time, it’s worth considering whether an alternative would be better or, perhaps, worse. There’d be an active trade in hitmen, for example, if only the market could be left to its own devices. On to the news:
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CHASING THE DISCOUNT DRAGON: Langton has been reporting on discounting for several years. Tedious, perhaps, but it remains on of the biggest obvious symptoms of the overcapacity still blighting the casual dining market. 3 Dec 2019:
Discounting in context:
• Discounting can be a useful tool in a retailer’s armoury.
• However, it is arguably contagious and, if it becomes endemic, then margins across a whole industry can be dragged down.
At what point is it a worry?
• If discounting helps a retailer to shift slow-moving stock, then it serves a purpose. This is less apparent in the F&B industry.
• If discounts smooth out shoulder periods, for example a quiet November or January, or in the aftermath of a sporting event or similar, then they similarly serve a purpose. They get customers out of their houses and keep them in the habit of eating out.
• Below we report that CDG owned Bella Italia is offering second meals for £1 (equivalent to perhaps 45% off food) right up until Christmas Eve. This is not particularly either normal or helpful.
Some of the causes:
• Discounts can be either a cause of the misery faced by some operators or a symptom of it.
• And they are often both and, at the end of the day, it arguably matters little to the retailer why the discounts that threatened his or her business came about in the first place.
• We would suggest that the cheap money that persists in the wake of QE led to a quest for yield. This led to overbuilding by landlords and, when this met the optimism (or greed) that is often a feature across entrepreneurs, more restaurants than were arguably needed, were built.
• Restaurant Group suggests that capacity rose by around 25% (and some would say more) in the five years or so up to around a year ago. M&B says that around 3.5% of capacity has since come off.
• Demand has been subdued as consumer confidence has waned due to the slowing economy and Brexit and political uncertainty.
• Choice (a.k.a. overcapacity) in F&B increases the need to stand out from the crowd
• Offering discounts is a quick (and ugly) fix.
• As suggested, we believe it is infectious & others have to offer discounts to keep up
Where are we now?
• Margins are under pressure as selling prices are impacted by discounts and costs have risen – particularly labour and property costs and, as the pound weakened after the Brexit referendum, there was a step increase in the price of food and drink
• Not only can these costs not be passed on due to overcapacity but selling prices are being cut via discounting
• Observers such as Peter Backman suggested that discounting took a step up by perhaps 20-30% around two years ago – and it doesn’t look to have come down.
What does it mean?
• Restaurants on death row will offer last gasp discounts damaging the rest of the sector.
• The next step may be a CVA or administration, and there are a few of them around now, too
• Discounts can be embarrassing to use, and infuriating if you see other using them and you are paying full price
• It’s a potential lose-lose-lose situation & is a short-term solution to a long-term term issue
• In many cases, units could be over-rented. CVAs may tilt the playing field but at least they are addressing this issue
• Even the major discounts coming out of the larger casual dining operators such as Pizza Express & Prezzo only makes them as cheap as smaller nimbler operators such as Franco Manca or Pizza Union.
• Yesterday we suggested that markets are capable of settling at any one of a number of equilibria – and this is a case in point.
• It could take a positive jolt to the market to move the industry back to full pricing – or it could be that today’s prices are as near to ‘full’ as we are likely to get
PUBS & RESTAURANTS:
• New River has announced that it has purchased community pub company Bravo Inns Limited for £17.9 million ‘representing an EBITDA multiple of 6.8x. The transaction is expected to generate annualised outlet EBITDA of £2.6 million, equating to a yield on cost of 14%, which excludes £0.3 million of synergies expected to be realised through the transfer of Bravo Inns to the Hawthorn Leisure platform.’
• New River points out that Bravo owns 44 wet-led community pubs, predominantly located in North West England. New River CFO Mark Davies says ‘the UK pub sector has experienced a recent revival in transaction activity and, as an early investor into community pubs, we have been tracking the success of Bravo Inns for some time. The transaction will increase our portfolio weighting in community pubs and demonstrates the value of our Hawthorn Leisure platform in identifying acquisitions that can deliver higher yielding sustainable cashflows with scale driven synergies. A further attraction of this acquisition is the quality of the pub estate and the pub partners. We look forward to welcoming Bravo Inns and its pub partners to Hawthorn Leisure.’
• A report by accountant Deloitte and commissioned by Uber Eats has suggested that food delivery across Europe has grown rapidly, driven by services provided by Deliveroo, Takeaway.com, Just Eat and now Uber Eats itself.
• Deloitte suggests that the share of restaurants that reported an increase in sales after joining the Uber Eats was 69% in London, 74% in Paris, 67% in Warsaw and 59% in Madrid. There is no comment on margin as an element of the uplift will be paid to the delivery company. Nor are there any easy stats on potential cannibalisation.
• Uber Eats says that 60,000 restaurants across Europe have joined its platform in 250 cities in just a little over three years. It says ‘we were hoping to see top line and bottom line growth, that means that restaurants generate not only more revenue thanks to food delivery but also more profit.’
• Uber Eats suggests that delivery services have been responsible for raising restaurant revenues by as much as £323m per annum in London alone. Meal numbers rose by 4.7% in Paris and by 1.5% in Madrid. Uber says ‘we are still in front of a big business opportunity. We still have a lot of markets where delivery is not mature where we need to invest.’
• The Telegraph reports that a major shareholder in Just Eat, Cat Rock Capital Management, is demanding a £1.5bn sweetener before it will consider accepting the rival bid from South African company Prosus.
• Discounts available. Prezzo offering 2-for-1 on mains, Domino’s Pizza 35% off deliveries over £30. Pizza Express 25% off food and Bella Italia offering second meals for £1 right up to 24 December.
• CGA has reported that craft beer sales have dropped in volume terms by 1% in the year to October. It says packaged sales have fallen whilst sales to the on-trade have remained in growth.
• CGA says ‘draught is still in growth, driven by new distribution points but rate of sale is actually in decline.’ It says ‘packaged craft dropped by 9% and this trend is driven by both losing stockists and rate of sale decline. Packaged has actually been in volume decline for a little while but was being propped up slightly by increasing distribution, however with the distribution now in slight decline, volume declines have accelerated to the point that the whole category is now in decline.’
• Wadworth has announced that it is to build a new brewery in Devizes, on either a green or a brown-field site. There are two sites up for consideration and, as a part of the move, the existing site will be sold off. CEO Chris Welham says ‘in this modern world we need to be ever more flexible as a brewer to meet changing market demand and also ensure that we are geared up for the long term development of the company.’
• Imbiba-funded bar group Darwin & Wallace has reported full year numbers to 26 May 2019 to Companies’ House. The group reports that revenues increased from £11.2m to £14.1m. The loss before tax widened to £627k from £496k in 2018.
• Darwin & Wallace reports that ‘due to uncertainty in the market place affecting consumer confidence and the lack of clarity around Brexit, the year was challenging, but all sites generated positive cash flow.’ The company reports that site EBITDA was £2.2m, up from £2.1m in the prior year.
• The Inn Collection Group has reported the opening of a 30-bedroom pub in Ambleside. MD Sean Donkin says ‘the opening of The Ambleside Inn in one of the best addresses in the Lake District marks the end of a long chapter searching for the right unit in a winning location to add to our estate.’ The Alchemy-backed chain now comprises ten pubs with rooms in Northumberland, County Durham and Yorkshire.
• Foodservice Equipment Journal, which pays attention to these things, has reported that Nando’s spent nearly £90m setting up and fitting out new restaurants last year.
• Casual Dining Group-owned Las Iguanas is to push ahead with around five openings per year reports The Times.
• The latest BRC-KPMH retail survey has suggested that Black Friday helped UK High Streets to increase sales by 1% in November. The survey says sales were up by 0.4% on a LfL basis. The BRC says UK consumers had spent a little more ‘as the spectre of a no-deal Brexit has been pushed back to after Christmas.’
HOLIDAYS & LEISURE TRAVEL:
• Tourism Ireland has launched a new campaign, Fill Your Heart with Ireland, which it believes will increase tourist numbers by 7% to 12 million by 2022.
• PPHE Hotel Group has announced the purchase of the freehold interest in a site located in London SE1 ‘with a view to developing the Site into a hotel, subject to planning permission being obtained.’ PPHE paid £12 million for the site, which is situated near to Park Plaza London Waterloo.
• The Tory Party reports that it is to introduce a US-ESTA-style visa system for visitors to the UK post Brexit.
• Profit warning from Cineworld.
• Cineworld has updated on trading to 1 Dec saying that ‘given weaker box office, partially offset by strong execution of synergies and revenue initiatives, trading for the full year is expected to be slightly below management’s expectations.’
• Cineworld says total revenue for the first 11mths of the year is down by 9.7% (down by 8.5% in constant currency terms). The company says ‘our integration plans for Regal have progressed well.’
• The company says ‘as anticipated, the box office performance for the reported period was slower than the comparative period in 2018 reflecting the phasing of major releases and postponement of some highly anticipated movies to 2020.’ Re the outlook, the company says ‘despite a challenging comparative period, Group performance has been resilient across the portfolio. We remain focused on operational performance, cash flow generation and de-leveraging which will be achieved within our current capital allocation framework with no change to the dividend policy.’
• Cineworld concludes ‘the weaker full year box office, partially offset by strong execution of synergies and revenue initiatives, management expects trading for the full year to be slightly below management’s expectations.’ CEO Mooky Greidinger says he nonetheless remains confident ‘both about the future of the theatrical business as a whole and most importantly our ability to be a leader in it.’
• The Gym Group updates on trading ahead of an analysts’ visit today saying it is to push on with ‘small box’ openings. It will open 5-8 next year.
FINANCE & ECONOMICS:
• The November IHS Markit PMI for UK manufacturing came in at 48.9, down from 49.6 in October. Markit suggests that jobs are being cut at the fastest rate since 2012. It says ‘output, new orders and employment all fell, while destocking activity resumed as firms depleted buffers built-up in advance of the postponed exit date.’
• The Trump administration yesterday proposed imposing 100% tariffs on up to $2.4bn of French goods exported to the country (including champagne) after deciding that the country’s digital services tax unfairly discriminated against US tech companies.
• Sterling up vs dollar at $1.2941 but down vs Euro at €1.1685. Oil lower at $61.10. UK 10yr gilt yield up 3bps at 0.74%. World markets down yesterday and lower in the Far East this morning.
• Brexit & politics:
o A new ICM poll has suggested that the Tory lead over Labour has narrowed to 7pts. This poll, which would point to a hung parliament. is a bit of an outlier at present.
o Three polls published over the weekend suggested that the Tory lead had narrowed, whilst one had it widening and another suggested that it was unchanged.
START THE DAY WITH A SONG:
• Taking a break due to exam commitments. Back middle of next week.
RETAIL WITH NICK BUBB:
• Boohoo: The Boohoo share price was down sharply yesterday, as if somebody thought that Black Friday had not gone well, but today’s unscheduled trading update is reassuring, flagging “a record performance across the Black Friday weekend” and that “both warehouses have had a strong operational performance” and that “the group continues to trade comfortably in line with market expectations”.
• BRC-KPMG Retail Sales for November (the 4 weeks to Nov 23rd): We flagged yesterday that the overnight BRC-KPMG Retail Sales survey (which remains the most reliable guide to monthly High Street trends for major retailers) was likely to look very weak because of the shift of Black Friday and the reported fall of 4.9% LFL was very much what we had expected, on a line through the John Lewis weekly figures. Enterprisingly, however, the BRC-KPMG came up with an adjustment for the shift of Black Friday to be a week later this year and Paul Martin, UK Head of Retail at KPMG, said “At first glance, November’s decline in LFL retail sales of -4.9% will leave retailers reaching for the smelling salts, but context is key. If adjusted for the later timing of Black Friday and Cyber Monday, sales are more likely to have increased by a more palatable 0.4% LFL”. The exact Food/Non-Food LFL sales split
• News Flow This Week: The struggling fashion chain QUIZ has interims tomorrow morning and the latest quarterly FTSE Index review is out tomorrow evening (based on tonight’s closing prices). The Joules pre-close is on Thursday and the jeweller Signet also has its Q3 in the US that day. Friday then brings us the ABF (Primark) AGM update.
• Ocado: The hyper-active Ocado received criticism in some quarters yesterday for raising money for yet more unproven expansion, despite the huge cash amount received from M&S for a half-share in the Retail business, but bond investors were unconcerned and the company announced last night that the mooted £500m bond issue had been increased to £600m “on the back of strong investor demand”. The terms of the 2025 Convertible Bond offering were not overly attractive (a coupon of only 0.875% and a conversion premium of 45%), but maybe the bond markets have more money than sense…