Langton Capital – 2020-03-25 – PREMIUM – SSP, Stock Spirits, C19 impact(s), temporary vs longer-lasting etc.:
SSP, Stock Spirits, C19 impact(s), temporary vs longer-lasting etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
In common no doubt with many other people, I’ve been looking out over the garden in the last few days thinking that, at some point, I’m going to have to try to mow that blooming swamp.
And that will be about as easy as it sounds because the land in the Vale of York, surprise, surprise, is flat and boggy – it’s a valley, see- and, though it may be heaven for newts or salamanders or for some other slimy creature that slide around on its belly, it’s not made for mowing – at least not when nature has had a bit of a laugh and proved to all of us how much of a fiction man-made geography really is.
Hence, we’ve got re-emerging tussock grass, hummocks, humps and bumps all over the place. And every miniature valley is full of water or, where its ‘dried,’ of some foul-smelling sludge. The fact that these are almost perfect examples of the medieval ridge and furrow farming system prevalent in the North East of England and the Low Countries from the fourteenth century is lost on my mower and it’s beginning to look like a two-day job.
Anyway, there are still some RNSs creeping out so let’s move on to the news:
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DELIVERY – WHERE IS IT WHEN YOU NEED IT? Although restaurants are allowed to continue with their delivery (and takeaway) business, many have decided not to bother. 25 March 2020:
The current situation:
• A number of major brands, which could have stayed open, are closing. Takeaway initially and then delivery could have kept sales going but McDonald’s, Burger King, Pret, Gregg’s, Nando’s, Caffe Nero, Crussh and others have completely shut their doors.
• Some other operators are staying open for a little while in order to cook and give away food to blue light services and the NHS (Franco Manca), with a little bit of delivery going on in addition.
• CGA comments ‘hot food delivery services from restaurants and takeaways are set to have an increasingly important role in keeping the nation fed.’ It says ‘research from CGA showed that just over half (53%) of the public are either currently using, or planning to use, delivery as an alternative during the current crisis, with 13% getting delivery from a restaurant or takeaway either for the first time, or more often than usual, in the last two weeks.’
Will much of this stick?
• How much of this behaviour will stick when we return to normal (or a ‘new normal’) is uncertain. CGA says only 36% of customers have used or will use click and collect.
• CGA says ‘local operators who are able to keep their kitchens open for delivery could play a vital role in taking the strain off of the supermarkets.’ This smacks a little of making a virtue out of a necessity – but that does not mean that it is necessarily wrong.
• The demand for delivery is greatest amongst the young and in urban areas. Reasons given by people not using delivery ‘are around cost and trust, and the fact that many want to cook for themselves.’ There are some concerns over food quality (half an hour on the back of a moped will not improve many dishes) and there may be a need to communicate ‘your commitment to exemplary food hygiene principles and product quality.’
The new normal?
• Tenzo shows an increase of 51% in delivery demand between the third week of February and the third week this month.
• Tenzo goes on to say that 62% of the sites it surveys have closed altogether. More are likely to follow as they may find they have little or no walk-in trade.
• Sales for units still operating were down around 60% last week but, as the lockdown has intensified, falls may be greater than that this week
• Most of the sites surveyed are around London. Tenzo says a number of businesses tried to make the best out of a difficult situation but it adds ‘it does look like most locations will now close following Boris’ address to the nation last night although operators are not clear what the guidance is – are they allowed to stay open for deliveries?’
So why have some operators given up on delivery?
• Despite the above, many operators have decided to close completely. We consider just why?
• To spoil the punchline, this must, presumably, be because delivery may be a useful adjunct to the sit-down restaurant, but it isn’t seen as a replacement thereof.
• Pubs don’t seem to be too interested in offering take-out if they can’t remain open to dine and drink-in customers.
Splitting delivery from takeaway.
• Though both remain exempt from the shutdown orders, these are two different markets.
• Many casual diners have taken the decision not to keep units open for click and collect, takeaway or delivery and even grab and go operators seem to have come to the same conclusion.
• Stating the obvious, this may be because they need customers and the customers aren’t there (at the shops or offices that surround the food outlets).
• Dedicated delivery operators such as Domino’s and Papa John’s remain open perhaps because they do not feel the need to educate would-be customers as to what they do.
• Journal Big Hospitality suggests that staff in some units did not wish to stay open due to a perceived stigma or even to the danger or catching the virus.
• And there are practical problems regarding distancing between staff and customers and between one member of staff and another.
COVID-19 HAS RAISED A FEW MORE ISSUES: How stable is employment in the gig economy, where are your friends when you need them, were securitisations ever a good idea etc. 25 March 2020:
Agency work, working for cash & gig workers vs PAYE staff:
• The 80% wage cover promise for furloughed worker promised by the government has put into harsh focus just what the differences are between being self-employed or working through an agency or for cash are compared with being fully employed.
• The agency staff may earn more on an hour-by-hour basis – but there is a downside. Protection levels are much lower and, when a ‘black swan’ event such as Covid-19 comes along, such staff find themselves in a much weaker position than employees.
• The building industry put its chippies, sparks and brickie workers on a self-employed basis a generation ago and the NIC people have been carping about it ever since. This kind of move has also been a feature back of house for restaurants.
The benefits of a mutually supportive relationship with suppliers:
• Some drinks producers have suggested that they may have an issue with bad debts. And this may well be the case as on-trade customers will be pouring beer down the drain (literally) and, as many work on a negative working capital basis, they may not be able to pay for it.
• Heineken UK on-trade director Stephen Watt has written to customers saying that the situation is uncertain but says ‘Heineken UK will continue to support you through this.’ Mr Watt says ‘we know that all of you will have draught beer on your premises which you now cannot sell. We intend to collect any unopened kegs that will go out of date replacing it with fresh stock at no cost to you when you reopen your pub or bar.’
• Heineken says ‘this is a logistical challenge, but one we’re up for and will be in touch over the next few days on how this will be managed.’
• This kind of behaviour should pay dividends in the coming months. Operators who may have thought they were being smart by playing one supplier off against another, by stretching payment terms and by going back on promises or near-promises may not find their suppliers to helpful.
• These were all the rage in the run up to the 2008-09 financial crisis. Many of them run for another 10yrs or 15yrs.
• They have various terms and conditions that did not anticipate the current shutdown and some companies that have securitisations could find that, technically at least, their bondholders could seize assets.
• As the government is moving to stop landlords from taking back leases and seems to be willing to put other standstill agreements in place, it is hopefully unlikely – but not impossible – that any of this will actually happen
Black swans, reading the small print etc.
• Proving a black swan does not exist is not possible. And financial black swans do happen but it would not be possible for even the most voluminous small print in a contract to cover every eventuality
• Hence, in a situation like the Covid-19 outbreak, there may be unintended consequences
• Closed units having to board themselves up is one-such. And, though expensive, this may be a good idea. But bondholders’ seizing assets held by pub companies in securitisations is surely less helpful.
• If there are clauses that say that units can be taken back if they are not traded, then the current situation was not the one that was envisaged
Starting up again:
• There will be logistical issues. On-trade outlets could be boarded up, they will not have food or drink to hand, they may have struggled to pay for food and drink that they have had to throw away and they may have no staff.
• Heineken says ‘when your doors do re-open, we think people will come out in force to support the On Trade. We’re already thinking about what ‘the other side’ might look like, and how we will hit the ground running to help stimulate revenues, including logistics of getting started again as well as marketing investment.’
• A note of caution. Customers may wish to support the On Trade but, if they have taken an earnings hit themselves, they may struggle to do so.
THE CORONAVIRUS OUTBREAK & THE ON-TRADE.
Practicalities re financial help – helicopter money:
• The government seems to genuinely want the taxpayer to pick up the bill for staff, rents and some other costs.
• Rates have been scrapped for middle-sized sites and the ‘helicopter money’ £10k per site to very small sites and £25k per site for intermediate sites will help. It should cover the rent bill, in both cases, for between 6mths and a year.
• But how can you get this money? Langton is a small business. We are due £10k. The government says go to your Local Authority but the LA’s phones (where most staff are working from home) are ringing off the hook.
• Emails elicit automated replies saying a variation of ‘if your enquiry is regarding the recent measures announced by the Government to assist businesses during the COVID 19 pandemic please visit our website for further details.
• there isn’t anything on the website except a comment saying ‘at this point we are awaiting confirmation from central Government on exactly how the reliefs will be applied. The website will be updated when further details are available.’
Practicalities re financial help – 80% wages back:
• It appears here that you have to get the approval of your staff to ‘furlough’ them.
• They must then do no work for you. That bit’s easy but, you then have to pay them and hope to get 80% of the money back somewhere down the line.
Practicalities re financial help – access to borrowings:
• There’s talk here of a) new relationships with loss-making companies being denied, b) personal guarantees being required for small loans and c) PGs and debentures being required for larger loans.
• And have you tried to get hold of a solicitor to check a debenture or a PG mandate at short notice in this market?
Practicalities re financial help – no beer duty deferral:
• The Society of Independent Brewers has expressed extreme disappointment at the Chancellor’s decision to collect March’s Beer Duty payments. Brewers had been calling on the Chancellor to unilaterally cancel the payment, due to be debited from bank accounts tomorrow.
• The BBPA has expressed similar disappointment saying ‘we urged the Chancellor to cancel the imminent Beer Duty bill, to allow businesses to use funds to invest in their survival. The decision not to act on duty is extremely disappointing. Make no mistake, this is a huge blow to Britain’s world class brewing industry that has been devastated in the last week.’
• Considering the mental and physical health of furloughed hospitality industry workers, some suppliers alongside Think Hospitality and Flow Hospitality have come together to create HospoLive, a free live content stream keeping hospitality workers connected, upskilled and inspired during coronavirus isolation. The content covers a broad range of topics, including: yoga, fitness, wellness, hospitality training sessions interviews with inspirational hospitality figures, and live cooking segments.
Practicalities re financial help – conclusion:
• Telling a drowning man that there’s plenty of oxygen six feet above his head isn’t much use.
• You can say you helped. You made the tools available but, when the drowned body washes up somewhere, you may as well not have bothered.
Longer term implications:
• There may be a move towards turnover rents. Landlords want a minimum level of rent written into these contracts whilst operators would rather that they were not there.
OTHER PUB & RESTAURANT NEWS:
• SSP Group has today updated on trading and announced that it is to raise something in the region of £200m in new equity.
• SSP says ‘in our recent update on 26 February 2020, we indicated that we had seen sharp declines in passenger numbers across the Asia Pacific regions (which account for approximately 8% of SSP’s Group revenue) in February. Since that update, SSP has seen an unprecedented and rapidly escalating impact of the COVID-19 virus on the travel operating environment, particularly in airports.’
• SSP says LfL revenues are running down by 80% to 85% in the UK & Europe and they are down by around 80% in the US. March total revenues will be down by around 45%. April is likely to be worse.
• SSP says it is cutting costs, closing units and reducing hours. It says that most of its rent is ‘fully variable’ and is based on sales. Capex has been cut to around £10m in H2 of this financial year. The group has suspended its share buybacks and will not pay a H1 dividend this year. The group will benefit from the government’s support schemes and says it is ‘already well advanced in preparations and discussions with HM Treasury and the Bank of England to access the scheme.’
• Re the outlook, SSP says its ‘central planning assumption is that recent trading conditions seen through March 2020 will likely deteriorate further.’ It says that it has considered ‘a very pessimistic scenario assuming an almost total shutdown of the travel market for the whole of the second half of the financial year’ and is thus increasing its bank facilities by up to £112.5m and is to place 19.99% of its issued share capital in new shares to raise in the region of £200m – depending on the price at which the shares are placed.
• SSP says ‘the global travel industry is facing unprecedented disruption on a scale never before seen due to the impact of COVID-19 and the government implemented travel bans.’ CEO Simon Smith says ‘these are hugely challenging times’ and adds ‘we’ve had to take significant action to reduce our costs while doing everything we can to limit the impact of this on our colleagues.’ The placing will be conducted through an accelerated book-building process.’ It says ‘the net proceeds of the Placing will be used to strengthen the Company’s balance sheet, working capital and liquidity position during this period of unprecedented disruption in the global travel market as a result of the COVID-19 outbreak.’
• Stock Spirits has announced that it ‘has started manufacturing hand sanitiser at its production facility in the Czech Republic, in order to lend its help to mitigating the spread of the ongoing COVID-19 outbreak.’
• Tim Martin has been reported as saying that laid-off JDW workers could get jobs at Tesco. Although the words sound harsh, Mr Martin was expressing sympathy with his workers saying that he quite understood if they did not stick around to see if or when the government would come up with the funds to pay their salaries at a time when Tesco, the other supermarkets, Amazon and others are offering jobs.
• The owners of a hotel and brasserie in Shropshire have reported that their unit was broken into and had food and drink stolen. Some insurers have insisted that empty units be boarded up.
• Pizza Express is reported to have ramped up its production of supermarket pizzas as its restaurants are now closed.
• EAT has now permanently closed its UK business after 24yrs of trading.
• Caffe Nero is to close all of its stores from tomorrow.
• The contactless limit is to rise from £30 to £45 from 1 April. The move should help limit physical contact in shops.
• Bloomberg has suggested that large swathes of the restaurant industry in the US are facing ‘weeks, or perhaps months, with reduced or non-existent revenue.’ It says, when over-expansion and rising wages are added to the mix, there could be something of a ‘shake-out’. Bloomberg Intelligence opines ‘you’re going to see a lot of bankruptcies. You’re going to see more chains go under.’ The news agency’s intelligence unit believes that smaller operators are most at risk.
• Mindful Chef in the UK says that its food delivery service has increased its customer base by 452 per cent.
• Aldi and Lidl are cutting opening hours to allowed extended periods of re-stocking reports The Grocer.
• Many supermarkets are now enforcing one-in, one-out rules in order to keep customers 2m apart. Aldi has said that it will give its staff a 10% bonus to reflect their hard work in keeping shelves stacked.
HOLIDAYS & LEISURE TRAVEL:
• Whitbread yesterday updated on trading saying that trading since its end-February year end ‘has been materially adversely impacted by COVID-19.’ Its pub restaurants all closed from 20 March.
• Whitbread says ‘we are expecting to begin the process of temporarily closing all our Premier Inn hotels in the UK with immediate effect. Our hotels in Germany will also close. We are in discussions with the UK Government regarding the use of some hotels, in locations near hospitals, to support front-line key workers.’
• WTB says ‘it is not possible to predict the full extent of the market down-turn and the impact on the business’s revenues. Whitbread entered the year with a strong balance sheet and access to significant liquidity. There is material headroom on our funding facilities, and we will be paying all our rent payments this quarter.’ ETB says it will not pay a final dividend for the year just ended.
• WTB, in common with other operators, has paused all capex and is limiting staff training, marketing and other costs. The group is ‘planning to place a significant number of our site teams on a temporary furlough. All employees remain on full pay, and we are working through the details of the recently announced Government support package, which should pay up to 80% of the salaries of those furloughed employees.’
• Kuoni parent Der Touristik UK is retaining its staff during the coronavirus crisis thanks to the government’s furloughed worker scheme. The operator made 70 people redundant last week. These people will now be kept on.
• The Chancellor has warned UK airlines that the government will only support them as a ‘last resort’. Sky says the Chancellor has written to them saying that ‘the array of aid schemes announced by the Treasury in the last 10 days – including VAT deferrals and grants to cover employees’ salaries – would provide significant assistance to cash-strapped airlines’ already.
• IATA has said that airline incomes could drop by around $252bn this year on last.
• The CDC in the US has suggested that the coronavirus lived for up to 17dys on the Diamond Princess after passengers had disembarked in Japan last month. The CDC says that 712 of the passengers and crew tested positive but says that around half were asymptomatic at the time of testing.
• Sandals Resorts International will close its properties in the Caribbean on March 30th until at least May 15th
• Ryanair is to stop flying until June.
• Heathrow is stepping up its cargo capacity as a result of both a reduction in passenger numbers and increased demand for freight.
• Hoteliers have accused OTAs of changing their terms and conditions to oblige hoteliers to drop cancellation charges.
• The 2020 Tokyo Olympics will be held in 2021.
• Facebook has seen the use of its platform’s video calls surge by more than 1,000% in the last month in Italy following its lockdown.
FINANCE & ECONOMICS:
• Deloitte’s latest insights webinar said that the Coronavirus pandemic was a massive shock to the world’s economic system. It says a ‘very sharp contraction in economic activity is in prospect’.
• HIS Markit has produced flash PMIs for the Eurozone and for the UK for the month of March.
• Markit says ‘the COVID-19 outbreak has already dealt the UK economy a more severe blow than at any time since comparable figures were first available over 20 years ago.’ The UK Flash UK Composite PMI was compiled between 12-20 March 2020 meaning that any current number could be worse.
• The UK composite PMI fell to 37.1 from 53.0 in February. This ‘signalled the fastest downturn in private sector business activity since the series began in January 1998.’
• The manufacturing PMI fell to 44.3. Markit says ‘the flash PMI signalled a fall in employment across the manufacturing and services to an extent not seen since July 2009.’ The much larger services PMI was 44.3 down from 53.2 in February. Any number below 50.0 implies contraction. Markit says ‘the surveys highlight how the COVID-19 outbreak has already dealt the UK economy an initial blow even greater than that seen at the height of the global financial crisis.’
• Numbers in the Eurozone, where lockdowns were beginning to happen two weeks or more before those in the UK, were even worse. The Eurozone Composite PMI was 31.2 with manufacturing at 39.5 and Services at 28.4.
• Weekly numbers for US unemployment will be released on Thursday.
• The World Health Organisation has said that the United States could become the global epicentre of the coronavirus outbreak as its measures have been lagging those taken elsewhere in the world.
• The FT is suggesting that the Brexit timetable is likely to slip.
• President Donald Trump has said he wants the US economy running again by Easter and has warned again that the coronavirus “cure is worse than the problem”.
• A study undertaken by the University of Oxford suggests that Covid-19 may already have infected up to half the people in the UK. If this is the case, then the death rate of the disease would be far lower than that currently speculated. It could lead to calls to unwind the various lockdowns across the world sooner than had been previously imagined.
• The above has led to further calls for widespread testing.
• Sterling stronger at $1,1833 and €1.0942. Oil lower at $27.88. UK 10yr gilt yield up 3bps at 0.45%. World stock markets surged yesterday (and Far East is up in Wednesday trading) on the back of the US’s $2 trillion stimulus package.
START THE DAY WITH A SONG:
Yesterday’s song was similar to a 13wk lockdown in a one-roomed flat. It was Grounds for Divorce by Elbow. Today, who sang?
I met her in a Kingstown bar,
We fell in love. I knew it had to end,
We took what we had and we ripped it apart,
Now here I am down in Kingstown again
• Langton is fishing for its own £10,000 grant. Check with Gov. Advice, ring council. Ring council 4x. Engaged. Email council. Automated reply says it’s ‘awaiting confirmation from central Government on exactly how the reliefs will be applied.’
• There some companies in pretty dire straits. This £10,000 grant alongside 80% wages cash-back needs to change hands quickly. Rent for Q2 it tomorrow. Like, tomorrow and the wage bill is the day after. Get a move on dot org.
• There’s a blizzard of chaff out there but what can we hang on to? Gov wants to help re wages, rents & interest. The ‘how’ will take time. Question is, do we have it?
• There’s ‘cash in the system’ but telling a drowning man there’s plenty of oxygen 6 feet above his head isn’t much help. Get the delivery mechanism sorted, like, quick
• DIY sites to remain open? Well, yes. But mind you don’t go running to the NHS if you cut your thumb off. Ditto any rock-climbing or mountain biking idiots out there.
• Spare a thought for the landlord? They’re just an intermediary in this ‘poo rolling downhill’ circus. The gov (i.e. we taxpayers) will need to bail them out, too. But first things first…put on your own facemask before you try to help your neighbour?
• Millions of quid’s worth of perishables rotting as we speak on restaurant shelves. Some given away, more eaten but, sadly, plenty will go in the bin
• Beer pipes and the like will need cleaning. Perhaps once on shut down and once again on re-opening (see Cask Marque for advice)
• Shuttering sites has led insurance companies in some cases to insist that, after a period of time, they be boarded up. See Soho (that is if you can legitimately travel there). This costs a blooming fortune
RETAIL WITH NICK BUBB:
• Today’s Market: After the strong rally yesterday, the FTSE 100 index is expected to edge higher this morning (according to the Proactive private investor website), after Wall Street ended the day no less than 11.4% up, on reports that Congress had at last agreed the fiscal stimulus package, with Asian markets surging as well (the Nikkei jumped by 8% overnight). The spread-betting firms expect the FTSE 100 to open c50 points up at around the 5450 mark, although there are more gloomy corporate updates out this morning and more share placings (eg from the catering giant SSP)…
• Today’s Retail News: As well as all the news yesterday morning, there were also updates from Howden and French Connection during the day, confirming store closures, dividend suspensions etc etc. This morning has brought an update from Halfords, revealing that although recent trading has actually been quite strong (with cycle shops still allowed to remain open by the Government) it expects business to drop away sharply and is taking the usual measures to slash costs and conserve cash. And the usually bullish DFS has put out a sober announcement to say that it is closing its factories, as well as its stores, and suspending deliveries, warning that it may face a working capital outflow given its reliance on customer order deposits…
• News Flow This Week: Tomorrow brings the belated ONS Retail Sales figures for February, plus the Signet Q4 results (in the US), whilst the Irish-based motorway service station operator Applegreen has its finals on Friday.