Langton Capital – 2020-01-09 – PREMIUM – M&B Xmas update, Nichols, Naked Wines, discounts etc.:
M&B Xmas update, Nichols, Naked Wines, discounts etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Here’s a brain teaser for you: whilst you get diphthongs and double-diphthongs and even triphthongs in various unintelligible languages, can you name an English word where there are five vowels on the trot?
There may be more than one such word but, as we’ve used the one we’re thinking of below in today’s email, that’s the one that’s stuck in Langton’s mind.
Anyway, diphthongs and triphthongs have four consonants in a row, so five vowels might not be too much of a stretch. After a bit of head-scratching. Let’s move on to the news:
ADVERTISE WITH US:
Langton’s free email now carries adverts. See front page of website for today’s copy & contact us for further details.
THE EVOLVING NATURE OF DISCOUNTS: Discounts have been with us for some time but the way in which consumers are being offered money off appears to be changing. 8 Jan 2020:
The casual dining industry
• The recent cycle of the casual dining industry started with the credit crunch and the quantitative easing that followed.
• 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.
• As far as the consumer is concerned, slack demand and low confidence in the wake of the Brexit referendum created a challenging environment for the restaurant industry.
• Some operators fell back on discounting to drum up demand, with observers such as Peter Backman suggesting that discounting took a step up by perhaps 20-30% around two years ago.
• The industry also suffered a rash of CVAs, notable CVAs included chains such as Jamie’s Italian (now collapsed), Byron, Prezzo and GBK, all shedding sites through the process.
• Overcapacity in the casual dining sector has been well reported, this has been one of the drivers leading to certain operators discounting.
• When was the last time the average consumer was unable to find a coffee shop, pizza restaurant or better burger site in his or her immediate vicinity?
• Sites sending discount vouchers to would-be customers’ in boxes now show certain brands offering as much as 40-50% off mains.
• Some operators have taken this a step further and offer 30% off the total bill.
Comparing apples with oranges, it is possible:
• Say you went to a restaurant and ordered a pizza for £10.50, a side of olives for £2.80, an orange juice for £2.70 and a pudding for £5.
• This adds up to £21. Hence, 40% off the main would save you £4.20 whereas 30% off the total would save you £6.30.
• This latter figure will rise further (and the discount from the ‘main’ or even from ‘food’ will not if the customer has a beer or a bottle of wine.
• Despite the discount from the ‘total bill’ advertising a lower headline discount figure, it represents a steeper discount.
• Extending a discount to drink, olives, bread etc. is effectively cutting the price of high margin products and it represents a mix-change.
• Overall margins will be lower as a result – both because the total revenue has fallen and the mix is different
• Discounting can be seen as a ‘quick fix’ but once an operator starts doing it, it can become contagious and endemic.
• It has the capacity to financially hurt the restaurant whilst making customers feel panicky to find vouchers and foolish if they don’t
Where does this lead?
• If more companies start discounting from the total bill, it would be reasonable to assume discounts are getting more competitive and margins are being squeezed harder.
• Also, it is often hard to row back from discounts (whatever their nature) as the customer begins to expect them.
• Furthermore, it has been reported that the industry is facing rising costs – particularly labour and property costs. This, paired with steepening discounts, paints a challenging picture for the discounting operators.
Who are the winners?
• We all suffer from the feeling that What You See Is All There Is.
• We often don’t notice what isn’t there. Hence, it is important to take note of who isn’t discounting in the industry.
• The lack of discounting suggests these operators do not need to entice customers as their concepts are already proving popular enough.
• Examples of these include chains such as Franco Manca and Wagamama. It is likely that the winners in the industry are to be found among those who are not discounting and therefore are not eroding their margins.
• Nando’s, McDonald’s (and admittedly most of the coffee shops) and other ‘winners’ also rarely discount.
PUBS & RESTAURANTS:
• M&B recovery showing signs of picking up pace. Christmas trading from the operators that have reported to date has been good.
• Mitchells & Butlers has updated on Q1 & Christmas trading (for the 14 weeks ended 4 January 2020) saying that ‘the group traded well over the core three-week festive period, with like-for-like sales growth of 5.6%, including strong performances on all of the key festive days.’
• M&B says ‘overall sales have strengthened over the period since our last update with like-for-like growth of 3.5%, with particularly strong food sales growth.’
• M&B is reporting food sales in the 7wks to 4 Jan up by 4.0% LfL with wet sales +2.7% over the same period. LfL sales for the 14wks to 4 Jan are up by 2.6% in total with food up 3.0% and drink sales +1.8%.
• M&B says ‘in the year to date we have already completed 81 conversions and remodels and opened 1 new site as we continue to improve amenity, and premiumise sites where possible.’ It says ‘we remain encouraged by the returns being generated.’
• CEO Phil Urban comments ‘we are pleased with our trading performance over the festive trading season against a strong set of results last year, again demonstrating the breadth of appeal of our brands for special occasions. We achieved record sales levels across the five key festive days at growth of 6.5%. This continued progress reflects the output of our Ignite initiatives which will continue to be our focus for the year ahead.’
• Nichols plc has updated on trading for the year ended 31 December 2019 saying ‘we are pleased to report that the Group’s revenue increased by 3.6% to £147.2m for the year. This performance was delivered across the Group with all three areas of the business showing growth, which once again reflects the benefits of our strong diversified operating model.’
• UK sales rose by 2.7% with international sales +7.5%. The company says ‘we currently anticipate full year Profit Before Tax to be in line with market expectations.’ It says ‘the outlook for 2020 remains in line with the Trading Update reported 23 December 2019.’
• Nichols’ chairman John Nichols says ‘we are pleased with the sales performance in 2019 reflecting growth across all three areas of our business. The Vimto brand has again performed very well in the UK, despite strong prior year comparatives.’ He concludes ‘underpinned by the Group’s diversified business model, strong brands and successful track record, the Board remains confident of Nichols Plc’s long-term progress.’
• Naked Wines has updated on trading and its board structure saying ‘as previously announced, with the sale of the Majestic businesses completed and Christmas trading behind us, Rowan Gormley, CEO, is retiring from the Group Board as of today. Nick Devlin will take over the Group Chief Executive role with immediate effect.’
• Naked says its ‘trading performance for the 10-week period ending 31 December 2019 was within the range of expectations, with underlying revenue for the continuing business up by 11% on the same period last year.’ The company says ‘investment in new customers for the year is expected to be at the lower end of the £20-25m range indicated with the interim results, reflecting disciplined investment to maintain payback at our target of 4x. The lower investment will flow through to higher profit in the year.’
• Per MA, this January’s ‘Support Your Local, Go TEA Total’ campaign is being backed by pubs to boost the quieter trading times by promoting Traditional English Ale (TEA) by Hogs Back Brewery..
• Low 2 No Bev has unsurprisingly suggested that now would be a good time for consumers to cut down on their booze intake. It says this (January) is therefore a ‘crucial trading period for the low to no industry.’ Re the idea of a dry January, it says ‘arguably, 31 days of total abstinence is a poor substitute for taking a healthier approach to alcohol intake on a longer-term basis. Still, given the growth in low & no year-round, it appears many shoppers are doing both. Which is undoubtedly good news.’ The Low2NoBev exhibition will take place at London’s Old Truman Brewery on 17-18 June 2020.’
• McDonald’s plans to nearly double the number of stores selling Beyond Meat burgers in Canada.
• Molson Coors will cease production at its Irwindale brewery in California by September 2020, the brewery has entered into an agreement with Pabst Brewing co. which gives it an option to purchase the facility.
• The British Retail Consortium reports a 0.1% fall in total retail sales last year, marking the first outright decline since the body began collecting figures in 1995. According to the Centre for Retail Research, during 2019 43 firms failed, with more than 2,000 stores and over 46,500 staff.
• Looking into why YUM Brands felt that it should pay $375m to enter the burger market via the purchase of Habit Burger, US journal NRN says that it was important for the company to get ‘instant access to a fast-growing counter-service chain that has embraced the convenience trend by adding drive-thru locations, delivery and self-ordering kiosks.’
• To many it seems an obvious gap (burger) that YUM has filled but NRN quotes observers in the US as saying it is more a move towards fast-casual as a market segment rather than to do with the product that Habit Burger sells. Habit Burger itself says ‘we’ve tried to become much more convenient across a lot of different platforms.’ Around 20% of the target’s units are drive-through sites.
• Chinese-state-owned Citic is reported set to sell its minority stake in McDonald’s China business to one of its private equity arms as part of efforts to lower its debt.
• Property agent Fleurets is to celebrate its 200th birthday this year.
• Journal National Restaurant News in the US points out that, though many restaurants see it as a corporate goal to connect with their customers through digital platforms, they ‘continue to wrestle with loyalty even while being in the consumers’ pockets.’ It points to a survey that suggests ‘a restaurant app does not replace the need to interact with staff.’ Whilst customers may not like queueing, particularly just to pay the bill, they do want some sort of interaction.
• The app boom may be waning, however. Analysts Peachtree report that 58% of consumers have downloaded restaurant-specific apps, down from 63% in the study a year before and up significantly from the 7% in 2017. NRN quotes observers as saying ‘Yelp and Trip Advisor are the most impactful to casual-dining-brand guests in terms of their likelihood to visit a particular restaurant.’
• Constellation Brands has reported Q3 (to end-Nov) earnings ahead of estimates at $2.14 per share (average Bloomberg estimate $1.84). Beer performed strongly with its Modelo brand boosting sales. Constellation has bought a stake in the world’s most valuable cannabis company, Canopy Growth Corporation, and has sold a part of its wine business in the last year. Constellation’s shares rose by around 4% in early New York trading.
• From January 20-26, NE1 will hold its 18th biannual Newcastle Restaurant Week, offering residents and visitors to dine out in Newcastle for £10 or £15 per head.
• A record of 39.7m tourists are expected to visit the country this year, with the Government’s tourism agency saying British pubs are set to benefit. ForwardKeys reports forward bookings to the UK from China and south Asia have risen by 33% and 22% respectively. Going to a pub is the third most popular activity for overseas visitors to the UK.
• Mothercare and Links of London are set to disappear from the highstreet this week with a combined 94 shops closing, resulting in 3,150 job losses. In addition to this, HMV will close three stores this month in Bury St Edmunds, Nuneaton and Fopp in Glasgow’s Byres Road.
HOLIDAYS & LEISURE TRAVEL:
• Despite growing US-Iran tensions, trading for summer 2020 is up year on year, with some agents reporting bookings on a par with January 2018. Alistair Rowland,chairman of Abta, said ‘We were all a bit hesitant after Christmas. Thus far, it’s looking quite good and margins are holding. There is a general feel-good factor.’
• On the other hand, the chairman of Aito, Derek Moore, says the threat of a new war in the Middle East could ‘wipe out travel bookings’. The Foreign Office this week warned that the security situation across 10 nations in the Middle East could worsen ‘with little warning’.
• Carnival will launch four new cruise ships in 2020, with Iona for P&O Cruises UK; Enchanted Princess for Princess Cruises; Mardi Gras for Carnival Cruise Line; and Costa Firenze for Italian brand Costa Cruises.
• TripAdvisor is telling Langton that ‘London hotel prices have been dropping for travel dates over the next month.’ Langton hasn’t stayed in a hotel in London for many years, so that’s a bit of a long shot. Maybe they always say that prices are falling but, with HVS saying that 2020 could be a challenging year, maybe not.
• Several High Street banks have stopped customers ordering foreign currency, following a ransomware cyber-attack on Travelex. Issues with Lloyds, Barclays and Royal Bank of Scotland follow disruption at supermarkets Sainsbury’s and Tesco. All get their foreign notes from Travelex. The latter’s computer system is down after hackers demanded $6m (£4.6m) in return for customer data.
• TripActions now has a valuation of $4bn after four years of trading. Last year the company secured one of the largest Series D funding rounds in 2019.
• In a move welcomed by UKHospitality, the Scottish Government announced measures to provide local authorities with the ability to implement a licensing scheme for short-term lets from spring 2021.
• The CMA reports fake and misleading online reviews are being combated by online companies, with Facebook removing 188 groups and disabling 24 user accounts – and eBay permanently banning 140 users. The action was in response to the CMA highlighting concerns that there was a ‘thriving marketplace’ for such reviews.
• Jet2.com and Jet2holidays expands its summer 2020 Greece programme by adding more than half a million seats. At peak times, Jet2 will operate more than 220 weekly flights, up more than 50% year on year.
• TikTok’s domestic Chinese version, Douyin, has reached 400 million daily active users, according to parent company ByteDance. Last year, Douyin had a reported 250 million daily active users.
• The English Football Association is under pressure from anti-gambling campaigners to cancel a deal that allows high-profile FA Cup matches to be viewed through betting company websites – but in many cases only after an account has been opened. In 2017, the FA signed a six-year media rights deal with sports agency IMG that included a provision to sell online streaming rights.
FINANCE & ECONOMICS:
• The World Bank has cautioned that global economic growth is likely to be only slightly faster this year than last. It says the world economy should expand by 2.5% in 2020, up from 2.4% last year. It sees slower growth in the United States and some other developing nations but a recovery elsewhere.
• Sterling unchanged vs dollar at $1.3115 but up vs Euro at €1.1795. Oil lower at $65.77 with UK 10yr gilt yield up 3bps at 0.82%. World markets higher yesterday with Far East up in Thursday trade.
• Brexit & politics:
o EU Commission president Ursula von der Leyen has said that it will not be possible to construct a comprehensive trade deal with the UK in the 9mths available from March to the end of the year.
o UK PM Johnson has said he will not extend the period. A simplistic deal is therefore likely.
o Ms von der Leyen told an audience at the LSE ‘with every choice comes a consequence.’ She says ‘without the free movement of people, you cannot have the free movement of capital, goods and services.’ She says, however, that, after end-January, ‘the United Kingdom and the European Union will still be the best of friends and partners.’
o A spokesman for PM Johnson says that the trade deal does not have to be agreed all at once. Britain reportedly does not want the European Union’s principle that “nothing is agreed until everything is agreed” to define future trade talks.
o The PM is reported to have told Ms von der Leyen that Britain would insist on ‘maintaining control of UK fishing waters’.
START THE DAY WITH A SONG:
Yesterday’s song was Shockwave by Liam Gallagher. Today who sang:
Oh, but it’s right hard to remember that
On a day like today
When you’re all argumentative
And you’ve got the face on
RETAIL WITH NICK BUBB:
Retail Sales Watch: The overnight BRC-KPMG Retail Sales survey for December (the 5 weeks to Dec 28th) is very distorted by the calendar shift of Black Friday into the period, but it is striking that overall LFL sales were still only 1.7% up, which is pretty subdued, given that November was 4.9% down LFL: the survey is headlined “Difficult ending to a tough year” and Paul Martin, the UK Head of Retail at KPMG, notes that looking at November and December combined, gross sales actually declined by 0.9% and that, again taking November and December combined, sales growth in Online Non-Food was very muted at only 2.6%. Disappointing Food sales were part of the December story, with overall Food LFL sales in Q4 overall only flat, but Non-Food was down 1.6% LFL in Q4 (despite surprisingly strong sales of Household Appliances).
Tesco: Today’s Q3 and Christmas update is headlined “Strong performance in a subdued UK market”, but UK sales were only up a tad (0.1%) over the last 6 weeks, so it wasn’t that strong (albeit Grocery was up 0.5%), but at least it outperformed Asda and Morrisons.
John Lewis Partnership Trading Watch: Ahead of today’s Christmas trading update from JLP (for the 7 weeks to Jan 4th), we flagged yesterday that we expected John Lewis to be nearly 2% down LFL over the period and Waitrose to be just about flat LFL. Well, we were bang on with John Lewis (-2.0% LFL, despite a good Black Friday), but Waitrose did slightly better, up by 0.4%. On this basis, Waitrose full-year profits are expected to be broadly in line with the previous year, but John Lewis profits will, as we expected, be well down. And the JLP statement ends with the bombshell that the John Lewis MD, Paula Nickolds, is to step down next month, rather than take on the onerous job of running the combined JLP, as had been planned! Having already lost Waitrose MD Rob Collins and with an unproven Sharon White about to takeover from Charlie Mayfield as Executive Chairman, this is not an ideal
Marks & Spencer: Today’s Q3 trading update (for the 13 weeks to Dec 28th) from M&S was expected to show modest Food LFL sales progress and only a modest Non-Food LFL sales decline, and that is pretty much the way of it, with Food up an impressive 1.4% LFL and Non-Food only down 1.7% LFL (despite Online growth of only 1.5%). On this basis, full-year profit guidance is unchanged. Conf call 8.30am.