Langton Capital – 2020-03-09 – PREMIUM – Coronavirus, business confidence & trading, new openings etc.
Coronavirus, business confidence & trading, new openings etc.
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Langton spent the weekend alternately stoically not getting into punch-ups over toilet rolls and trying to get the corporate lawnmower going.
The latter not because we had any realistic ambition of mowing the swamp any time soon, but rather because last year we left it a bit late, it wouldn’t start, we were one of a million others with a lawnmower crisis in April, couldn’t get the attention we needed for two months and had to sit back while the garden reverted to its natural state of boggy, knee high grassland, before we had the chance to attack it with bladed instruments.
And, no small triumph this for a person unable to unscrew a bottle without advice, we got it started. Flat tyres, flat batteries, jammed on handbrakes and all the rest, it really did, it started. On to the news:
LANGTON 240-PAGE PREMIUM COMPENDIUM, £300 PLUS VAT:
Langton’s Premium Email launched around 12mths ago and, during its first year in operation, it has comprised a body of research & published opinion on a wide range of topics.
Here, we have curated a large number of those articles in order to logically sequence the major issues that are currently impacting the hospitality subsector or the wider leisure sector. The piece is available now. Please drop us a line.
ADVERTISE WITH US:
Langton’s free email now carries adverts. See front page of website for today’s copy & contact us for further details.
COVID-19 – IMPACT ON THE UK LEISURE SECTOR: Big and not good. 9 March 2020:
Where are we at?
• The numbers are tiny – but that needn’t remain the case.
• And the mortality rate is not very high – but that may not matter.
• Because nobody wants to be an unlucky statistic and the virus will change (and is changing) consumer behaviour
Leisure in context:
• Macro points.
• Leisure is not a necessity and it frequently involves travel and / or rubbing shoulders with strangers.
• Hence, it isn’t wonderfully positioned (in the way that the manufacturers and retailers of necessities, such as toilet-paper, are) when it comes to withstanding the impact of Covid-19.
• At the micro level.
• Operators are frequently highly operationally geared. Holiday companies (if they have airlines) have substantial fixed costs. Bars & restaurants have high fixed costs in rents, rates, indispensable labour costs etc.
• Many are also financially geared.
• There’s little to be gained by having the best burger in town if nobody is coming to town.
• That said, a knockout product can’t hurt and operators can and will cut costs, shed labour etc.
Passing the buck:
• Bad stuff rolls downhill. Operators may want to speak to staff (pay freezes, cuts, redundancies, short hours etc) and to landlords (rental holidays) and to banks (easier terms, amortisation holidays) and to local and national government (business rates holidays, VAT cuts, extended payment terms etc).
• The disruption – and the actual negotiations as to who takes what hit – will be hugely distracting at the very least and it will be an existential threat at worst
Some micro problems:
• Do operators cut all staff a bit or a few staff completely?
• At what point will quality and service be negatively impacted?
• Can landlords afford to forego rent? Intu might struggle.
• Ditto the banks re interest payments.
• Regarding companies specifically, all will be suffering (though some more than others).
• In terms of reporting timetables, Cineworld updates this Thursday and Everyman on Thursday week. JDW has H1 numbers a week Friday.
• In the same way that all costs are variable in the long run, they are all variable in the short run in extremis.
• Because, though rent is ‘fixed’, how about this? I can’t pay.
• And the same goes for bank interest. There may need to be some adjustments to what landlords, banks and even staff thought that they were contractually entitled to.
• And staff that are laid off will not sit around waiting to be taken back on. The disruption involved in firing and (hopefully) re-hiring will be substantial.
• Overall, and this will not come as new news, the coronavirus outbreak is extremely bad news for the hospitality industry (and its landlords and its banks and its shareholders and its staff and its suppliers etc etc)
• It would appear we like experts now. Chris Whitty doing a great job. Credible and honest. So not-a-politician. Unfortunately, he is now of the view that the chances of avoiding a pandemic are ‘slim to zero’.
• Italy has effectively locked down the northern part of the country in saying that people living in Lombardy and 14 other central and northern provinces now need special permission to travel.
• Exports from China have declined by 17.2% in the first two months of this year versus the same period last year.
• At some cost to civil liberties, China has done a great job is slowing the spread (internally at least) of Covid-19. It is now in danger of wash-backs from Chinese visitors to other countries returning home.
• Moody’s reports that ‘the global spread of the coronavirus is resulting in simultaneous supply and demand shocks.’ It says ‘we expect these shocks to materially slow economic activity, particularly in the first half of this year.’ And not in a good way, we would assume.
Bars, pubs & restaurants:
• Whether it should or not is beside the point, concerns over Covid-19 will depress attendances at out-of-home venues.
• The Guardian reports that a number of hotel, nightclub, bar and restaurant businesses are calling on the government for emergency assistance in the face of a ‘wave of customers cancel bookings as a precaution against contracting coronavirus.’
• UK Hospitality reports sales in restaurants and bars in London were down 7% last week on the same week last year.
• Some venues are suggesting up to 30% no-shows for events that have already been paid for against a more normal 10%.
• UK Hospitality reports ‘there has been a significant drop in casual trade and footfall in city centres.’ CEO Kate Nicholls suggests that bookings for hotels and big events could be down by as much as 50%.
• The Night-time Industries Association estimates advance bookings are running down by 20% to 30% with London more heavily impacted by lower levels of interest from tourists.
• Co-founder of London Union (Dinerama, Giant Robot etc) Jonathan Downey has said ‘there is no doubt that this is going to decimate the night-time economy.’
• Dinerama welcomed 600 visitors last Thursday against a more normal 1,600. Mr Downey tweeted ‘the absolute BEST hospitality businesses in London, the rare ones we all admire, are already down 20%. They’ll struggle through.’ Mr Downey goes on to say that it is the others – the good and the everyday operators – who will struggle most.
• UK Hospitality says ‘this is life and death for businesses if they have a downturn in bookings.’ It is calling for immediate measures such as VAT cuts and business rates holidays.
• US food delivery companies including DoorDash Inc and Instacart reported to be in discussions to compensate delivery personnel affected by the novel coronavirus. It’s not clear how Deliveroo & Uber Eats intend to treat their drivers in the UK.
• McDonald’s has cancelled its biennial convention for franchisees due to the coronavirus outbreak. The four-day event was scheduled to be held in Florida in April.
Leisure travel & holidays:
• The World Tourism Organization now expects the impact of coronavirus to lead to a 3% negative growth in international tourist arrivals in 2020, down from a negative 1%. This is a moving feast. It would not be surprising to see the negative numbers get larger.
• Searches for summer sun destinations have ‘begun to recover’ after being down 20% a week ago says Icelolly.com. This is somewhat hard to believe.
• Lufthansa is cutting capacity by a half for the short term. This on the back or a ‘drastic decline’ in bookings and ‘numerous cancellations’ caused by coronavirus fears.
• Pope Francis has cancelled his regular appearances in public to stop crowds gathering. He will keep in touch over the Internet.
• The global cruise line body CLIA says that any regulatory moves to discourage cruising is ‘unwarranted.’ Perhaps they have a vested interest. VP Pence says old people should use ‘common sense and caution’ when deciding whether to take a cruise or not.
• Despite the above, the US government has warned Americans with underlying health conditions to avoid taking cruises amid efforts to contain coronavirus. As cruise passengers are often older people, this may have a material impact.
• Around 142 Britons are thought to be among the c2,000 passengers and crew now being quarantined on a cruise ship off the coast of California.
• Hotels group Meininger has halted preparations to list its shares on AIM.
• Travelodge is offering 10% off bookings on Vouchercodes.co.uk.
• Please feel free to let us know, confidentially, just how the virus is affecting your trade. At present, we hear that:
• Some hotels in London have seen occupancy down by c30%. Associated restaurants are down by around as much.
• Some airport venues are down by 50%. Air passenger numbers are more robust but passengers are lingering less.
• Events companies are hurting. We hear of one that lost a £50,000 booking with only a few hours’ notice. The venue kept the £10,000 deposit but was left with rent, staff and other costs still to pay.
• Major restaurant chain. Down 10% last week – but the numbers were getting sequentially worse as the week progressed.
• One major chain held LfL losses to less than 3% with some days in line with last year. This is not the norm.
• Posh and even mainstream casual diners ‘down between 15% and 20%.’
• Some redundancies to commence today. Others now quite pleased that they were understaffed (albeit this was earlier seen as a problem).
• Companies are in survival mode. They are not keen to refund bookings or even allow credits for later in the year.
• Deals in progress (either for sites or for companies or for IPOs) are being chipped, delayed or cancelled.
• See Premium Email for Langton comment.
CGA CONFIDENCE SURVEY:
This represents a complete 180 on earlier professed improved levels of confidence.
• CGA and Fourth have updated on hospitality sector confidence saying that it has fallen sharply in the last few days.
• The two parties updated as recently as last Thursday, saying that confidence had risen – though they did make clear that feedback was solicited in early February.
Tighter immigration proposals and, above all, the coronavirus, have changed attitudes markedly.
• A lot has changed since then and Friday’s update clarifies the position saying that ‘confidence among the bosses of Britain’s pub and restaurant groups has been fractured by the double whammy of coronavirus and the Government’s new immigration policy.’
• The new poll finds ‘85% of senior executives across the out-of-home food and drink market said they were now “concerned” about the threat of coronavirus to their business, with 58% of leaders “very concerned”’
A big hit on sales and profitability.
• CGA says ‘the majority are expecting a hit on sales, with 42% suggesting it will have an “extremely negative” impact and 51% saying it will be “quite negative”’
• CGA says a poll of consumers also found ‘57% of consumers predicting that they will eat and drink out as much over the next three months as they currently do’
• Hospitality businesses are introducing hand sanitisers and instructing staff on how to self-isolate etc.
• CGA finds 47% of employers saying they will pay staff who self-isolate. Actions, however, will speak louder than words.
PUBS & RESTAURANTS:
• Admittedly before concerns about the coronavirus struck, CGA has reported that pub, bar and restaurant closures have slowed to their lowest rate since early 2018. It says the new Market Growth Monitor from CGA and AlixPartners ‘shows dip in numbers of community pubs and licensed premises in seaside towns, but positive news for group restaurants and regional operators.’
• The Growth Monitor shows that the number of restaurants, pubs, bars and other licensed premises fell by 1.8% in the 12 months to December 2019. This is the lowest rate of year-on-year decline for nearly two years. There were 116,203 licensed premises at December 2019. This represents an average net closure rate of six sites a day over the last 12 months.
• Pub & bar numbers fell by 2.0% ‘with food-led sites holding up better than community and drink-led locals.’ Although the best that can be achieved, these are backward looking numbers. With what is going on in UK town centres and gathering points at present, the numbers could be different this year.
• CGA says ‘while the licensed sector continues to contract, our latest Market Growth Monitor also shows reasons to be optimistic about prospects for 2020.’ This may have been overtaken by events. CGA goes on to say ‘we are still seeing unsustainable pubs close, but collectively the rate of net number of pub, bar and restaurants closing is slowing.’
• AlixPartners says ‘overall, the eating and drinking out market remains dynamic and attractive to investors, with this very much in evidence across last year where pubs and experiential businesses took up the slack in investment activity from the more subdued restaurant sector.’ At Langton we believe that, amongst investors and at the very least, there may now be a pause for reflection. CGA does end by saying ‘investors will be looking carefully at what the impact on trading will be from the recent coronavirus outbreak.’
• Sir Charles Dunstone is to take full control of the loss-making start-up MOD Pizza in the UK reports Propel.
• Starbucks has stopped accepting reusable cups and thermos flasks from customers in Europe, the Middle East and Africa to prevent the spread of coronavirus.
• Per Big Hospitality, the first international Hawksmoor site it set to open in New York.
• MCA Insight’s Operator Data Index indicates Coco di Mama will open seven sites in 2020, mostly through POD re-brandings.
• OISOI Gathering, an Asian restaurant, has launched on the first floor of the £66m New Era Square development at St Mary’s Gate, Sheffield.
• BDO High St Tracker last week, see Nick Bubb, Friday. Non-food down ‘only’ 0.9%. But masks minus 6.1% in store and plus 15.9% online. Hardly helpful for co-located restaurants.
• Discounts. Prezzo 40% off mains and Pizza Express 25% off food not a shock. But Travelodge offering 10% off bookings. Pretty obvious why.
• Former CEO and Chairman of Nandos, Andrew Lynch, has stepped down from the business.
• Pret A Manger spent £20m last year on anti-allergy measures, with the company expecting the measures to cost £10m a year going forwards. As a result, Pret has raised the prices of some of its products.
• Suntory warns the coronavirus outbreak is hitting alcohol consumption. CEO Takeshi Niinami said ‘When I look around hotels, a lot of space is available. At restaurants, very few tables are occupied, and at bars, there’s almost nobody’.
• In the US, Black Box Intelligence reports restaurant growth of 0.3% in February, down from January’s 2.2%.
• Tesco has announced that it has agreed to sell its businesses in Thailand and Malaysia. The enterprise value will be £8.2bn and some £5.0bn will be returned to shareholders in the UK. CEO Dave Lewis says the disposal is following ‘inbound interest’.
HOLIDAYS & LEISURE TRAVEL:
• An industry poll reports 44% of British consumers would book a holiday if a good deal was available despite concerns over coronavirus.
• Royal Caribbean will give guests greater control over their vacation decisions, allowing guests to cancel cruises as late as two days before departure due to the ongoing COVID-19 outbreak.
• Whitbread has opened more than 1,000 new hotel rooms in the first two months of 2020, adding to the company’s network of over 76,000 Premier Inn and hub by Premier Inn bedrooms across the UK and Ireland.
• EasyHotel shares rose 10p or 14% on Friday against a falling market on news that majority shareholder Icamap proposed to put in a further £11m to the company at 95p per share.
• Cineworld claims moviegoers have failed to be deterred by coronavirus despite fears of COVID-19 and the release of the latest James Bond film being pushed back to November. Some film industry analysts have reportedly estimated the outbreak could wipe £3.9bn off the global box office.
• F45 Training, a gym co-owned by Mark Wahlberg, is set to open a site in Chelsea at 370 King’s Road.
• Facebook is closing its three London offices and telling staff to work from home after an employee was diagnosed with COVID-19.
FINANCE & ECONOMICS:
• Brexit planning has so far cost £4.4bn says the National Audit Office. Bloomberg economics says that it has cost £130bn in lost output to date. This figure is expected to rise to £200bn by the end of the year.
• Sterling up vs dollar but down vs Euro at $1.3049 and €1.1463 respectively. Oil down very sharply at $33.28 and UK 10yr gilt yield down a full 11bps at 0.24% on coronavirus fears. World markets lower Friday, Far East down in Monday trade & UK FTSE100 due to open up down as much as 400pts or 6%.
START THE DAY WITH A SONG:
Last Friday’s song was Sit Down by James. Today, who sang:
I thought I was a fool for no one,
Oh baby, I’m a fool for you,
You’re the queen of the superficial,
And how long before you tell the truth?
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): Despite the big late rally on Wall Street on Friday afternoon, the Saturday papers were full of doom and gloom about the global stockmarket slump and the impact on society of the spread of the coronavirus. The Daily Mail front page headline was “Millions told: Work at home to fight virus”, whilst, poignantly, the Telegraph went with “”Visit elderly relatives before they must isolate”” and the FT ran with “Investors rush to bond safety for fear of global recession” (noting that coronavirus deaths have soared in Italy and Iran and that the oil price crashed by 9% on Friday after OPEC talks on production cutbacks collapsed, whilst more and more London companies are closing offices). The main Business story in the Times was headlined “”Pure fear” grips global markets” and the FT had an interesting article about the impact of Spanish flu in 1918 (eg “Millions
• Saturday’s Press and News (2): The FT also had an interesting article about the impact of panic buying on supermarkets (“Hoarders clear shelves as Online orders rise”) , whilst the FT’s stockmarket correspondent penned a thoughtful column querying the logic of Food Retailers becoming the defensive hedge on the spread of coronavirus and the FT also noted the “big corona trade” in the US, with “makers of soups, disinfectants and video games” bucking the overall slump in share prices on Wall Street. On a slightly happier note, the Retail correspondent of the Times interviewed and profiled the new Romanian head of Avon, Angela Cretu, highlighting her plans for a radical makeover of “the venerable cosmetics company”. Finally, the Guardian looked at the imminent closure of the Palmers department store in Great Yarmouth, highlighting the role of punitive Business Rates in its demise and
• Sunday’s Press and News (1): The Sunday papers turned their attention to what the Budget on Wednesday will do to help the economy and the new embattled Chancellor, Rishi Sunak, broke his purdah to boast to the Sunday Telegraph that “I will not let the virus cripple the economy” (as per its front page headline). The Sunday Times Business section focused on what the Budget will do to help small businesses survive the current crisis, whilst the pre-Budget column by its Economics correspondent David Smith was headlined “Get businesses to invest or you can forget about levelling up”. Interestingly, the adjacent column about American business by Irwin Stelzer highlighted that “Trump’s handling of the coronavirus has so far been a study in ineptitude”…
• Sunday’s Press and News (2): In other news, the column by the Sunday Times Business Editor, Oliver Shah, turned its guns on the people responsible for the collapse in the share price of Intu Properties to just 5p, thundering that the main shareholder John Whittaker is partly to blame: “His refusal to acknowledge the changing nature of retail is part of what has driven Intu to the edge of the abyss”. The Questor investment column in the Sunday Telegraph focused on the outlook for Ocado (“Ocado is a stock that divides opinion. We like it for its tech and growth prospects”) and concluded that the shares are a “Risky Buy”. The Business Leader column in the Observer looked at the problems of the John Lewis Partnership, noting that the new Chairman of JLP, Sharon White, has been quick to grasp the issues at hand (including the need to amend the “Never Knowingly Undersold” price pledge), even
• Tesco: You might have thought that the spread of the coronavirus in Asia might have undermined the planned sale of the lucrative Tesco supermarket business in Thailand, but not a bit of it, as Tesco has announced today that it has agreed an £8.2bn deal (an EV/EBITDA multiple of 12.5x) with the local CP Group, subject to local regulatory approval. The proceeds will be used to inject £2.5bn into the pension fund and return £5bn to shareholders, in the form of a special dividend.
• Today’s Press and News: The front page headline in the FT today is “Italy quarantines vast parts of the rich north as virus cases surge”, but it also flags that the oil price has plunged, after a row between Saudi Arabia and Russia and on the back of that double-whammy, with the Nikkei index in Japan closing 5% down overnight, the UK stockmarket is expected to slump this morning, with the FTSE 100 index over 400 points down…
• News Flow This Week: Notwithstanding the Budget on Wednesday lunchtime, the big event for many people this week will be the annual 4-day Cheltenham horse-racing Festival, which starts tomorrow afternoon, with our alter ego “Honest Nick” set to bring you his Tips every day. Otherwise, the week kicks off first thing tomorrow with the BRC-KPMG Retail Sales figures for February, closely followed by the DFS interims and the French Connection finals. Wednesday then brings the Dignity finals and the Lookers finals. On Thursday we get the delayed Intu Properties finals and the much respected “Retail Week” Awards are being announced on Thursday evening.