Langton Capital – 2020-02-14 – PREMIUM – Costs, wages, Just Eat, Pernod, cruise holidays etc.:
Costs, wages, Just Eat, Pernod, cruise holidays etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
I heard a bird singing this morning on the way into the office.
Certainly, it was still dark. And the optimistic little thing wasn’t a nightingale strutting its stuff in Berkeley Square but rather it was some sort of mangy-looking blackbird grubbing around in the rubbish near Aldgate East – but it was certainly singing, and that must be good.
Because it means that either the days are getting longer, or my watch is running fast.
And, if we can get a little more daylight into us, it should help to lift the spirits, perhaps even those of the politicians (Leadsom, Javid, Liam Fox, Esther McVey, Theresa Villiers, James Cleverley etc.) who put their weight behind PM Boris Johnson and who now find themselves on the backbenches.
Anyway, with Mr Johnson apparently devoid of opposition and therefore determined to create it on his own benches, let’s move onto the news:
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COSTS: FOOD CHEAPER BUT WAGES UP: Does the suggestion that much of this will net off mean that it is not a problem? 14 Feb 2020:
• CGA & Prestige suggest that food costs are more benign than they have been for some time. Food may comprise around 25% to 30% of revenue at a casual diner.
• It’s widely known that the National Living Wage will rise by 6.2% in April. Wages also make up between 25% and 30% of revenues for casual diners.
• So does the suggestion that these two will net off to a figure approaching zero mean that everything’s fine?
• We would suggest not because these are apples and oranges. The one (food prices) can go down but may also go up in the future whilst wages only ever go up.
• They (wages) can’t be relied upon to fall when or if food prices rise again. And anything on an upward only ratchet like wages (think rents) must be treated with a degree of caution.
• The latest CGA Prestige Foodservice Price Index has suggested that there are ‘opportunities for operators to capitalise on month-on-month price reductions.’
• It says that ‘year-on-year inflation fell to half the 12-month average in December 2019.’
• It does not give an inflation figure but says that operators perhaps should, where they can, lock in prices.
• The price index says ‘the strong downward trend saw unseasonal month-on-month drops in inflation in seven of the ten categories in the Index.’
• This is good news indeed, but it can’t be relied upon to last.
• Rising labour costs are now being baked in by the government.
• There is some suggestion that the NLW could rise by 6% per annum for the next three years in order to reach the government’s promised £10.50 a year early
• If an employer were not able to put its prices up – and that is a more realistic assumption than it perhaps should be – then it would take a 25% of revenue labour cost up to 30% or a 30% share up to 36%.
• That’s 600bps off the profit margin. Of course there would be some price rises & other mitigation. But at the end of the day, the ultimate mitigant is to go out of business
• Although overtime may be cut in times of sluggish growth, basic hourly wages have very rarely fallen in the past and now, with the NMW and the NLW, there is a point below which they cannot fall under the law
• If a football team jacks the players’ wages because attendances are good, what will it do if attendances fall?
A further lack of symmetry:
• Not only can 1) food and labour costs not be relied upon to move by equal amounts in the opposite directions but 2) the impact of the move in these two large P&L items will be different depending on the type of company affected
• For some high margin companies (e.g. pizza retailers or coffee shops) will have a heavier labour cost versus food whilst some other companies (full service, high end steak restaurants or wine retailers) may have higher food & drink costs
• Added to which, some food categories may become more expensive (e.g. pork as a result of African Swine Flu) at a time when ‘food’ is meant to be getting cheaper
• A reduction in the price of fish isn’t much use to a pizza company and if the price of beetroot were to plummet, it wouldn’t make much of a splash
PUBS & RESTAURANTS:
• Fourth Hospitality has reported that hospitality wages spiked in January after the announcement that the National Living Wage was to increase by 6.2% on 1 April this year. It says that average wages rose by 2.5% in the month.
• Fourth reports that the rise came ‘after a period where wage rates remained relatively flat from April to December. During that period, the average hourly rate for workers over the age of 25 sat around £8.60, roughly 40p greater than the NLW threshold of £8.21 introduced in April 2019.’
• Fourth says ‘this is the first time in the four years we have been tracking these figures that the average wage of the industry was threatening to track under the new NLW rate, due to be introduced in April, until the average rates increased dramatically by nearly 3% solely in the month of January.’
• It says ‘historically, businesses have paid a premium above the NLW to attract and retain the best employees, and January’s rapid wage inflation shows that this is set to continue over the coming months, where it may well rise by a further 2-3% between now and April, as operators continue to seek the best staff.’
• Langton has commented on a number of occasions that the upcoming NLW hike is likely to cause problems for full-service operators if they are unable to cut labour or to pass cost increases on to customers.
• Fourth takes the same line saying ‘a 5-6% spike in the hourly wage rate over one quarter could be hugely impactful on overall net profit margins, reducing it by up to 1-2% in some cases, adding significant labour cost pressures on operators and squeezing already tight margins.’ Fourth says ‘to mitigate this, it’s imperative that operators look at measures to drive efficiency and productivity across the business utilising smart technology.’
• Just Eat Takeaway.com NV yesterday reported strong revenue growth and a small core profit for calendar 2019. The numbers do not include any benefits or costs associated with its now-subsidiary Just Eat PLC.
• The company saw net revenue surge by 79% to 415.9 million euros, fuelled by growth and its 930 million euro acquisition of Delivery Hero’s German operations in April last year.
• The company, which is still awaiting final approval of its Just Eat buy from Britain’s Competition and Markets Authority, said ‘we are very excited about the opportunities the combination makes possible and are looking forward to 2020.’
• Takeaway.com’s shares have risen by 19.5% in 2020 to date. A decision from the CMA is expected by around early March. Takeaway has said it is confident it will win approval.
• Pernod Ricard has warned that the coronavirus outbreak will lead to a 2% fall in its FY2020 sales. It seems a little early in the year to be quite that definitive. The group released historic numbers for calendar 2019 slightly ahead of analysts’ expectations.
• Pernod has been performing particularly well in China. In 2019 it grew sales by 11% in the region. The company has said that all on-trade outlets in China will close this month until the end of June in Hubei province.
• Hotel operator Accor is to partner with hospitality specialist SBE and real estate developer Simon to create C3 (short for Creating Culinary Communities), which they describe as a ‘first of its kind’ incubator of limited service culinary brands. SBE says ‘we are setting our sights on the future of how people choose to consume their food and are approaching food halls, ghost kitchens and mobile delivery in a unique fashion.’
• The BII has welcomed the announcement from Government of a 2 hour extension in trading hours for pubs to celebrate VE day. The BBPE is also pleased.
• The HMRC reports that British gin sales abroad, in 2019, were worth £672 million – up 9% on the previous year. Total sales of gin both in the UK and abroad total some £3.2bn. The WSTA has called on the Government to support British gin exporters.
• Bloomin’ Brands, which operates a number of casual dining brands in the US, has announced that Elizabeth Smith is stepping down as executive chairman of the board effective March 6, 2020.
• Marston’s has signed a 5-year extension to its distribution deal with Japanese beer maker Kirin. Sales of Kirin, which produces Kirin Ichiban, have grown since Marston’s took over the contract from Charles Wells Brewery.
• Majestic Wines has named Alex Jablonowski as its new CFO. Jablonowski has previously worked at Oasis, Hamleys, Tesco, and Costa Coffee.
• Nestle is to market a plant-based ‘tuna salad’ later this year as CEO Mark Schneider says ‘success in plant-based foods will be a once in a generation opportunity for us to regenerate.’ The company will launch meat free sausages in addition to its existing burgers, cheese & bacon.
• The FT points out that the share prices of Pepsi and Coke have risen by 33% and 20% respectively over the last 12mths. Pepsi is valued at 24x future earnings.
• Coco di Mama is to remove plastic water bottles from all of its shelves. It sells around 180k units per year.
• Chinese online retail giant Alibaba has said that the spread of the Covid-19 coronavirus has brought sales in China to a virtual standstill. Online should be holding up better than bricks and mortar but product delivery will be a problem. Alibaba expects its food delivery business to shrink in Q1 this year.
HOLIDAYS & LEISURE TRAVEL:
• Disease impact on cruise market. Likely (hopefully) to be short lived but being imprisoned on a ship with a bunch of sick people was never top of any cruise-goers ‘to do’ list.
• Carnival Corp. reports the coronavirus outbreak will have a ‘material impact’ on its financial results.
• Chinese outbound tourist numbers totalled around 150m foreign trips in 2019 with spend up to around $130bn annually. The coronavirus outbreak has hit numbers hard with anecdotal stories of empty hotels in the Far East, falling luxury goods sales in Paris and fewer Chinese tourists in other European hotspots.
• RCL underlines that it is not really possible, at this stage, to assess the impact of the coronavirus outbreak with much certainty.
• Royal Caribbean Cruises has updated on the Coronavirus outbreak saying ‘as has been widely reported, China and other countries are moving aggressively to contain the spread of the virus. The company…has implemented measures to protect our guests and crew. These include denying boarding to those that have travelled from, to or through mainland China or Hong Kong in the past 15 days and performing mandatory specialized health screenings on at-risk guests and crew.’
• RCL says ‘we have already taken aggressive steps to minimize risk through boarding restrictions and itinerary changes’ but it adds ‘as a result of the travel restrictions in place and related circumstances, the company has now cancelled a total of 18 sailings in Southeast Asia and has also modified several itineraries. Taken together, these measures have an estimated impact on the company’s financial performance for 2020 of approximately $0.65 per share. While not currently planned, if the company was to cancel all of its remaining sailings in Asia through the end of April, it would impact 2020 financial performance by an additional $0.55 per share.’
• Jet2holidays has put summer 2021 holidays on sale early from four UK airports with more than 3.85 million seats available from Manchester, a capacity rise of 5% over this year.
• American Airlines and United have become the latest airlines to announce they will be extending the suspension of their flights to and from mainland China and Hong Kong through April.
• China Grand Prix cancelled, new awaited on the Hong Kong Rugby 7s. This will be causing major damage to cashflows for the region’s hotels.
• The £20m Roomzzz Aparthotel on the riverside in York has closed just two months after it opened, due to flooding.
• John Morley, owner of the Cross Butts restaurant and hotel, has purchase Sneaton Castle, planning to turn the site into a new ‘luxury’ hotel and wedding venue.
• STR reports Europe’s hotel pipeline consisted of 1,654 projects as of the end of January, accounting for 210,075 rooms in construction, up 29.4% yoy.
• Wyndham reports RevPAR flat yoy at $40.92 for 2019, with RevPAR projected to be “flat to down 2%” in the new year.
• US hotel pipeline consisted of 208,807 rooms in construction as at the end of January, up 6.8% yoy.
• STR reports US hotel occupancy down 1.4% to 59% for the week ending 8 February, with ADR up 1.5% to $128.75 and RevPAR flat at $75.98.
• Vivendi plans to list Universal Music Group by early 2023 following a year of record profit for the division.
• ARTIQ, a London art rental consultancy, reports a record £3.1m secured orders in 2019.
• Tesla is to tap demand for its shares after the recent surge in its share price. The group is looking to raise some $2bn via the issue of new stock. CEO Elon Musk is to buy up to $10m in shares personally.
• Mark Zuckerberg has said that he accepts tech giants such as Facebook may have to pay more tax in Europe in future.
FINANCE & ECONOMICS:
• The RICS has said that house prices rose across the UK for the first time in one and a half years last month. Prices rose in London and the south-east, where they had been for most of the last 2-3yrs.
• Sterling up at $1.3042 and €1.2036. Oil higher at $56.39. UK 10yr gilt yield up 3bps at 0.65%. World markets lower yesterday with Far East mixed in Friday trade.
• Brexit & politics:
o Barclays seemed to suggest yesterday that a recession triggered by Brexit could be one of the major risks to its business. It says ‘the UK’s future relationship with the EU and its trading relationships with the rest of the world could take a number of years to resolve.’
o Just how the masterplan is mean to unfold remained unclear yesterday on the back of Chancellor Sajid Javid’s resignation. No11 is now set to be loaded with No10 and Dominic Cummings staffers.
o Javid says Johnson will still need advisers who are willing to proffer candid and sometimes unpopular advice.
o No10 spin has it that Johnson forced Javid’s resignation as the latter had refused to toe the party line.
o New chancellor Rishi Sunak will be presenting a Budget in around a month’s time.
o PM Boris Johnson is under some pressure to say who provided him with a £15k holiday to the West Indies over Christmas. Mr Johnson has said that it was businessman David Ross. Mr Ross has told the Daily Mail that he did not provide the villa.
START THE DAY WITH A SONG:
Yesterday’s song was Learn To Fly by Foo Fighters. Today, who sang:
“Stop and wait a sec,
Oh, when you look at me like that, my darling
What did you expect?
I probably still adore you with your hands around my neck
Or I did last time I checked”
RETAIL WITH NICK BUBB:
• Frasers Group: #MadMike has, wisely, been diplomatically silent on the subject of the CMA and JD Sports/Footasylum (no doubt because if JD is forced to sell the chain then Sports Direct probably won’t be allowed to buy it either), but Business Rates is a subject dear to his heart and so he has enlivened a dull news day by issuing one of his notorious “stream of consciousness” RNS announcements, headlined “Statement regarding Business Rates” and flagging that Frasers Group has backed the campaign by the BRC calling for the Government to take urgent action on Business Rates: “With the UK High Street on life support, the time for reform has long since passed. Transitional relief in particular is disastrous for a great many retailers…Within the Frasers Group itself we have some stores paying up to four times the rates bills they should be”.
• BDO High Street Sales Tracker: We highlighted on Wednesday that the John Lewis sales figures for last week (w/e Feb 8th) should have been reasonably steady, given the very weak comps, but today’s BDO High Street Sales Tracker for medium-sized Non-Food chains (which has been reporting surprisingly/suspiciously good progress in recent months) is a bit more subdued, as it picked up the Storm Ciara disruption on Sunday…In w/e Sunday Feb 9th, BDO Fashion sales were up by 1.6% LFL, but Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as Fashion retailers) were down by 0.8% last week (down 2.2% in Store sales and up by 2.7% in Online sales).
• Trade Press (1): The front cover of Retail Week magazine today is a photo of masked Chinese supermarket shoppers (“Retail on red alert”), to flag up the main feature on “How coronavirus is impacting the global supply chain”. RW also has features on Helmersson Takes Helm (“Where will H&M’s first woman chief executive take the business?”), Stronger Together (“Why retailers are choosing to team up with their rivals”) and Competition Clampdown (“Is CMA’s stance on retail mergers hurting the industry?”). And the new Editor thunders in his column that “Johnson and Javid must back Rates reform now”, noting that the Government should back “an industry that last year contributed £394bn to the UK economy and employed 2.9m people”.
• Trade Press (2): Drapers magazine today is a special Lingerie edition and there is an article about the what’s selling now (including “shapewear”), as well as a “Hit or Miss” survey of lingerie retailers in central London (M&S Marble Arch came top, with 17 points out of 20). In terms of News stories, Drapers flag that Northern independents were forced to shut up shop as Storm Ciara battered the country, luxury brands and retailers in the UK are bracing for a significant downturn in footfall and sales as the spread of coronavirus hits Chinese shopper traffic (with Bicester Village said to be empty), Simon Forster (the MD of Selfridges) has suddenly stepped down after just over one year at the helm and the industry thinks that John Lewis store closures are needed to future-proof the business. Drapers also look at how fashion retailers are reinventing their bricks-and-mortar stores to
• News Flow Next Week: The UK company news cupboard is pretty bare next week, although on Tuesday lunchtime the Asda PR team will be doing their best to spin their poor Q4 performance on the back of the WalMart final results that day. The Intu Properties finals/rights issue news look like being in the week after next, which just leaves the ONS Retail Sales figures for January on Thursday morning to distract us.